item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements incorporated reference indicated pages 1993 annual report shareholders 2 financial statement schedules report independent accountants financial statement schedules financial statement schedules read conjunction financial statements 1993 annual report shareholders schedules included financial statement schedules omitted applicable required information shown financial statements notes thereto 3 exhibits indicates management contract compensatory plan arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized hewlettpackard company craig nordlund date january 28 1994 craig nordlund associate general counsel secretary power attorney know persons presents person whose signature appears constitutes appoints craig nordlund ann baskins either attorneysinfact capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneys infact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent accountants financial statement schedules shareholders board directors hewlettpackard company audits consolidated financial statements referred report dated november 22 1993 appearing page 43 1993 annual report shareholders hewlettpackard company report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedules listed item 14a2 form 10k opinion financial statement schedules present fairly material respects information set forth therein read conjunction related consolidated financial statments price waterhouse san francisco california november 22 1993 hewlettpackard company subsidiaries schedule ii amounts receivable directors officers employees thousands yearend balance represents loans granted two officers company loan amounts 150000 111000 loans carry interest rate 403 mature 1994 b yearend balance represents us housing loan granted one employee officer director company loan carries interest rate 369 matures 1998 c yearend balance represents loan granted one officer company loan carried interest rate 46 matured 1993 yearend balance represents us housing loan granted one employee officer director company loan carried interest rate 0 matured 1993 e year ended october 31 1991 us housing loans officers repaid f yearend balance represents us housing loan granted one employee officer director company loan carried interest rate 0 matured 1992 s1 hewlettpackard company subsidiaries schedule v property plant equipment millions included additions cost year ended october 31 1993 3 million land 31 million buildings leasehold improvements 50 million machinery equipment acquired connection acquisition several companies none significant financial position company included additions cost year ended october 31 1992 2 million land 10 million buildings leasehold improvements 39 million machinery equipment acquired connection acquisition avantek inc colorado memory systems inc texas instruments incorporateds family commercial unixsystem based multiuser computers related systems s2 hewlettpackard company subsidiaries schedule vi accumulated depreciation amortization property plant equipment millions s3 hewlettpackard company subsidiaries schedule ix shortterm borrowings millions except interest rates notes payable shortterm borrowings companys consolidated balance sheet includes balances shown also current portion longterm debt amounting 20 million october 31 1993 36 million october 31 1992 24 million october 31 1991 b computation weighted average interest rate year based monthend balances interest rates schedule x supplementary income statement information millions s4 exhibit index indicates management contract compensatory plan arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k noneitem 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements incorporated reference indicated pages 1994 annual report shareholders 2 financial statement schedules none 3 exhibits indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints craig nordlund ann baskins either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated 59635439eus exhibit index exhibit number exhibit 1 applicable 2 none 3a registrants amended articles incorporation appear exhibit 3a registrants annual report form 10k fiscal year ended october 31 1988 exhibit incorporated herein reference 3b registrants amended bylaws appear exhibit 3b registrants annual report form 10k fiscal year ended october 31 1992 exhibit incorporated herein reference 4 none 58 applicable 9 none 10a registrants 1979 incentive stock option plan appears exhibit 10a registrants annual report form 10k fiscal year ended october 31 1983 exhibit incorporated herein reference 10b registrants 1979 incentive stock option plan agreements appear exhibit 10b registrants annual report form 10 k fiscal year ended october 31 1983 exhibit incorporated herein reference 10c letter dated september 24 1984 optionees advising amendment 1979 incentive stock option plan agreement exhibit 10b appears exhibit 10c registrants annual report form 10k fiscal year ended october 31 1984 exhibit incorporated herein reference 10d registrants 1983 officers early retirement plan amended restated january 1 1990 appears exhibit 10d registrants annual report form 10k fiscal year ended october 31 1990 exhibit incorporated herein reference 10e registrants 1985 incentive compensation plan appears exhibit 10e registrants annual report form 10k fiscal year ended october 31 1984 exhibit incorporated herein reference 10f registrants 1985 incentive compensation plan stock option agreements appear exhibit 10f registrants annual report form 10k fiscal year ended october 31 1984 exhibit incorporated herein reference 10g registrants excess benefit retirement plan amended restated november 1 1989 appears exhibit 10g registrants annual report form 10k fiscal year ended october 31 1990 exhibit incorporated herein reference exhibit number exhibit 10h registrants 1985 incentive compensation plan restricted stock agreements appear exhibit 10h registrants annual report form 10k fiscal year ended october 31 1985 exhibit incorporated herein reference 10i registrants 1987 director option plan appears appendix registrants proxy statement dated january 16 1987 appendix incorporated herein reference 10j registrants 1989 independent director deferred compensation program appears exhibit 10j registrants annual report form 10k fiscal year ended october 31 1989 exhibit incorporated herein reference 10k registrants 1990 incentive stock plan appears appendix registrants proxy statement dated january 11 1990 appendix incorporated herein reference 10l registrants 1990 incentive stock plan stock option restricted stock agreements appear exhibit 10l registrants annual report form 10k fiscal year ended october 31 1990 exhibit incorporated herein reference 10m resolution dated july 17 1991 adopting amendment registrants 1979 incentive stock option plan appears exhibit 10m registrants annual report form 10k fiscal year ended october 31 1991 exhibit incorporated herein reference 10n resolution dated july 17 1991 adopting amendment registrants 1985 incentive compensation plan appears exhibit 10n registrants annual report form 10k fiscal year ended october 31 1991 exhibit incorporated herein reference 10o resolution dated july 17 1991 adopting amendment registrants 1987 director option plan appears exhibit 10o registrants annual report form 10k fiscal year ended october 31 1991 exhibit incorporated herein reference 10p resolution dated july 17 1991 adopting amendment registrants 1990 incentive stock plan appears exhibit 10p registrants annual report form 10k fiscal year ended october 31 1991 exhibit incorporated herein reference 10q registrants 1995 incentive stock plan appears appendix registrants proxy statement dated january 13 1995 appendix incorporated herein reference 1112 none 13 pages 2345 excluding order data statement management responsibility 48 inside back cover registrants 1994 annual report shareholders 1417 applicable exhibit number exhibit 18 none 1920 applicable 21 subsidiaries registrant january 16 1995 22 none 23 consent independent accountants 24 powers attorney contained page 12 annual report form 10k incorporated herein reference 2526 applicable 27 financial data schedule 28 none 99 1994 employee stock purchase plan annual report form 11k exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filersitem 14 exhibits financial statement schedules reports form 8k athe following documents filed part report 1financial statements incorporated reference indicated pages companys 1995 annual report shareholders 2financial statement schedules none 3exhibits indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized hewlettpackard company date january 19 1996 craig nordlund craig nordlund associate general counsel secretary power attorney know persons presents person whose signature appears constitutes appoints craig nordlund ann baskins either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index indicates management contract compensatory plan contract arrangement graphics appendix list appendix following descriptions certain bar charts graphs companys 1995 annual report shareholders omitted edgar version specific respect actual numbers amounts percentages determinable bar charts graphs company submits specific descriptions purpose complying requirements transmitting annual report form 10k electronically via edgar specific descriptions intended way provide information additional information otherwise provided annual report edgar version page 25 bar chart entitled total orders millions bottom left page 25 1995 annual report shareholders shows fiscal years 1991 1992 1993 1994 1995 shown xaxis company total orders shown yaxis respective amounts provided table entitled selected financial data unaudited page 25 annual report bar chart entitled earnings operations millions bottom center page 25 1995 annual report shareholders shows fiscal years 1991 1992 1993 1994 1995 shown xaxis company earnings operations shown yaxis respective amounts provided table entitled selected financial data unaudited page 25 annual report bar chart entitled employees net revenue per employee thousands bottom right page 25 1995 annual report shareholders shows fiscal years 1991 1992 1993 1994 1995 shown xaxis company employees respective amounts shown yaxis provided table entitled selected financial data unaudited page 25 annual report addition graph shows fiscal years 1991 1992 1993 1994 1995 shown xaxis company net revenue per employee shown yaxis 160000 180800 215200 256900 314100 respectively edgar version page 27 graph entitled net revenue millions top right page 27 1995 annual report shareholders shows fiscal years 1991 1992 1993 1994 1995 shown xaxis company total net revenue shown yaxis respective amounts provided table entitled selected financial data unaudited page 25 annual report international net revenue 8104 million 9198 million 10971 million 13522 million 17556 million respectively addition graph shows fiscal years 1991 1992 shown xaxis company us net revenue shown yaxis 6390 million 7212 million respectively us net revenue fiscal years 1993 1994 1995 shown xaxis respective amounts shown yaxis provided section entitled geographic area information caption united states unaffiliated customer sales table page 44 annual report graph entitled us dollar relative major foreign currencies fiscal 1980 equals 100 bottom right page 27 1995 annual report shareholders shows months running consecutively november 1990 october 1995 shown xaxis us dollar equal shown yaxis 98 100 96 105 110 111 115 115113110 110 106 104 107 109 109106 104 99 98 99 104 111 112 114 117 113 115 119 120 116 118 121 122 121 119 118 116 113 112 109 111 113 112 111 107 106 105 107 108 106 respectively multiplied currencies following foreign countries varying weights assigned currencies austria belgium canada denmark finland france germany italy japan netherlands norway spain sweden switzerland united kingdom edgar version page 28 graph entitled costs expenses percentage net revenue top left page 28 1995 annual report shareholders shows fiscal years 1991 1992 shown xaxis company shown yaxis cost equipment sold services 542 558 respectively net revenue selling general administrative expenses 274 257 respectively net revenue research development expenses 101 99 respectively net revenue addition graph shows fiscal years 1993 1994 1995 shown xaxis company percentage net revenue shown yaxis cost equipment sold services selling general administrative expenses research development expenses respective amounts provided table top page 28 annual report bar chart entitled net earnings millions bottom left page 28 1995 annual report shareholders shows fiscal years 1991 1992 1993 1994 1995 shown xaxis company net earnings shown yaxis respective amounts provided table entitled selected financial data unaudited page 25 annual report edgar version page 29 bar chart entitled selected cash flows millions top right page 29 1995 annual report shareholders shows fiscal years 1991 1992 shown xaxis company cash flows operating activities shown yaxis 1552 million 1288 million respectively capital expenditures 862 million 1032 million respectively dividends paid 120 million 183 million respectively addition bar chart shows fiscal years 1993 1994 1995 shown xaxis company cash flows operating activities dividends paid shown yaxis respective amounts provided table entitled consolidated statement cash flows page 32 annual report finally bar chart shows fiscal years 1993 1994 1995 shown xaxis company capital expenditures shown yaxis respective amounts shown investment property plant equipment provided table entitled consolidated statement cash flows page 32 annual report graph entitled asset management percentage net revenue bottom right page 29 1995 annual report shareholders shows fiscal years 1991 1992 1993 1994 1995 shown xaxis company shown yaxis net property plant equipment 231 222 206 173 149 respectively net revenue accounts notes receivable 205 213 207 201 214 respectively net revenue inventories 157 159 182 171 191 respectively net revenue edgar version page 47 bar chart entitled net earnings per share dollars top right page 47 1995 annual report shareholders shows fiscal quarters years 1994 1995 shown xaxis company net earnings per share shown yaxis respective amounts provided table entitled quarterly summary unaudited page 47 annual report addition note bar chart states amounts restated effect 2 1 stock split 1995 bar chart entitled range common stock prices dollars per share bottom right page 47 1995 annual report shareholders shows fiscal quarters years 1994 1995 shown xaxis range stock prices shown yaxis respective amounts provided tables entitled quarterly summary unaudited page 47 annual report addition note bar chart states amounts restated effect 2 1 stock split 1995item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements incorporated reference indicated pages companys 1997 annual report shareholders excluding statement management responsibility page 54 2 financial statement schedules none 3 exhibits indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k october 9 1997 registrant filed report form 8k reported item 5 registrants offering 2 billion principal amount maturity 20year convertible zerocoupon subordinated notes due 2017 including 200 million face amount overallotment option issue placed pursuant rule 144a securities act 1933 neither notes shares hp common stock may issued upon conversion notes registered securities act may offered sold united states absent registration applicable exemption registration requirements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date january 27 1998 hewlettpackard company craig nordlund craig nordlund associate general counsel secretary power attorney know persons presents person whose signature appears constitutes appoints craig nordlund ann baskins either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index indicates management contract compensatory plan contract arrangementnanitem 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements following financial statements filed part report item 8 financial statements supplementary data 2 financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2001 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts 3 exhibits following exhibits filed herewith incorporated reference exhibits previously filed sec hp shall furnish copies exhibits reasonable fee covering expense furnishing copies upon request indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k august 16 2001 hp filed report form 8k reported item 5 issuance press release containing financial information third quarter first nine months fiscal year 2001 forwardlooking statements relating fourth quarter fiscal year 2001 september 4 2001 hp filed report form 8k reported item 5 1 declaration hps board directors august 31 2001 dividend one preferred share purchase right share common stock hp outstanding close business september 17 2001 2 issuance joint press release compaq computer corporation announcing execution definitive merger agreement two companies september 7 2001 hp filed report form 8k reported item 5 issuance press release september 6 2001 indigo nv announcing offer agreement two companies terms offer agreement hp commence exchange offer acquire outstanding common shares indigo nv stock already owned hp september 13 2001 hp filed report form 8ka amended form 8k filed september 4 2001 september 18 2001 hp filed report form 8k reported item 5 issuance press release september 17 2001 announcing resumed normal stock repurchase activities authorization approximately 18 billion available repurchase shares part share repurchase programs september 19 2001 hp filed report form 8ka amended form 8k filed september 7 2001 november 6 2001 hp filed report form 8k exhibit 31 correct clerical errors contained amended restated bylaws company attached exhibit registration statement form 8a filed company securities exchange commission september 4 2001 november 14 2001 hp filed report form 8k reported item 5 issuance press release announcing hps fourth quarter results dated november 14 2001 relating fiscal 2001 fourth quarter 2002 guidance november 16 2001 hp filed report form 8k reported item 5 filing securities exchange commission registration statement form s4 registration statement connection proposed business combination hp compaq computer corporation delaware corporation compaq means merger whollyowned subsidiary hp compaq merger risk factors relating merger combined company following merger unaudited pro forma financial information hp giving effect merger purchase compaq hp using purchase method accounting included registration statement attached exhibits incorporated reference form 8k november 30 2001 hp filed report form 8k relating proposed merger compaq computer corporation attached exhibits incorporated reference form 8k historical audited consolidated financial statements compaq including compaqs consolidated balance sheet december 31 2000 1999 consolidated statements income cash flows stockholders equity three years period ended december 31 2000 ii historical unaudited interim condensed consolidated financial statements compaq including compaqs condensed consolidated balance sheet september 30 2001 condensed consolidated statement income three nine months ended september 30 2001 2000 condensed consolidated statement cash flows nine months ended september 30 2001 2000 december 7 2001 hp filed report form 8k reported item 5 issuance 575 global notes due december 15 2006 report also filed form 575 global note underwriting agreement section 301 officers certificate respect thereto signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date january 29 2002 hewlettpackard company ann baskins ann baskins vice president general counsel secretary power attorney know persons presents person whose signature appears constitutes appoints ann baskins charles n charnas either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filersitem 14 controls procedures supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness design operation disclosure controls procedures defined rules 13a14c 15d14c securities exchange act 1934 within 90 days filing date report evaluation date based evaluation principal executive officer principal financial officer concluded evaluation date disclosure controls procedures effective material information required included securities exchange commission sec reports recorded processed summarized reported within time periods specified sec rules forms relating hp including consolidated subsidiaries made known others within entities particularly period report prepared addition significant changes internal controls factors could significantly affect controls subsequent evaluation date identified significant deficiencies material weaknesses internal controls therefore corrective actions taken part iv item 15item 14 principal auditor fees services information regarding principal auditor fees services set forth principal auditor fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal auditor fees services set forth principal accounting fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services set forth principal accounting fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services set forth principal accounting fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services set forth “principal accounting fees services” proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services set forth “audit mattersmanagement proposal 2 ratification independent registered public accounting firmprincipal accounting fees services” proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services set forth “audit mattersmanagement proposal 2 ratification independent registered public accounting firmprincipal accounting fees services” proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services set forth “audit mattersmanagement proposal 2 ratification independent registered public accounting firmprincipal accounting fees services” proxy statement information incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services set forth “audit mattersmanagement proposal 2 ratification independent registered public accounting firmprincipal accounting fees services” proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements incorporated reference indicated pages companys 1996 annual report shareholders 2 financial statement schedules none 3 exhibits indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized hewlettpackard company date january 28 1997 craig nordlund craig nordlund associate general counsel secretary power attorney know persons presents person whose signature appears constitutes appoints craig nordlund ann baskins either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated indicates management contract compensatory plan contract arrangementitem 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements incorporated reference indicated pages companys 1998 annual report stockholders excluding statement management responsibility page 62 2 financial statement schedules none 3 exhibits indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints craig nordlund ann baskins either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index indicates management contract compensatory plan contract arrangementitem 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements see consolidated financial statements notes thereto item 8 2 financial statement schedules none 3 exhibits indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers b reports form 8k march 2 1999 hp filed report form 8k reported item 5 board directors approved plans pursue strategic realignment would separate two independent companies hewlettpackard company agilent technologies inc signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints ann baskins charles n charnas either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index indicates management contract compensatory plan contract arrangementitem 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal auditor fees services set forth principal accountant fees services proxy statement information incorporated herein reference part iv item 15 item 7 managements discussion analysis financial condition results operations discussion companys financial condition changes financial condition results operations appears financial review found pages 2527 29 companys 1993 annual report shareholders pages incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations discussion companys financial condition changes financial condition results operations appears financial review found pages 2527 29 companys 1994 annual report shareholders pages incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations discussion companys financial condition changes financial condition results operations appears financial review found pages 2729 31 companys 1995 annual report shareholders pages excluding order data incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations discussion companys financial condition changes financial condition results operations appears financial review pages 3335 3739 companys 1997 annual report shareholders pages excluding order data incorporated herein reference item 7ananitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document consolidated financial statements periods present businesses agilent technologies discontinued operation spinoff date june 2 2000 unless otherwise indicated following discussion relates hps continuing operations results operations overview following summary operating results hp consolidated level discussion followed detailed discussion operating results segment product category fluctuations highlighted consolidated level fully explained segment discussion net revenue net revenue declined 7 fiscal 2001 452 billion following growth 15 fiscal 2000 us revenue 2001 declined 13 188 billion international revenue 2001 decreased 3 overall 264 billion global economic downturn contributed significantly decline us international revenue 2001 fiscal 2000 us revenue increased 14 international revenue increased 16 due largely economic improvement asia foreign currencyadjusted basis net revenue declined 3 year hp whole fiscal 2001 net revenue increased 17 foreign currencyadjusted basis fiscal 2000 majority foreign currency effect years due weakening euro partially offset strengthening japanese yen 2000 fiscal 2001 net revenue computing systems business segment decreased 14 declined 5 imaging printing systems segment net revenue services grew 6 2001 overall 7 net revenue decline fiscal 2001 weighted basis printer hardware represented 4 percentage points decline commercial pcs desktop pcs notebook pcs home pcs accounted approximately 15 percentage points decline decrease unixr pc servers revenue also contributed slightly yearoveryear revenue decline however decrease server revenue offset part revenue growth printer supplies declines printer hardware pc businesses due primarily decreases volume result economic slowdown fiscal 2001 shift sales mix sub150 printer market also contributed decrease printer hardware revenue addition ongoing competitive pricing pressures affected revenue performance many product categories particularly commercial home pcs printer hardware segment basis net revenue computing systems increased 19 fiscal 2000 revenue services grew 13 imaging printing systems grew 10 weighted basis home pcs printer supplies accounted 4 percentage points overall 15 increase commercial pcs represented 2 percentage points growth remainder increase fiscal 2000 revenue consisted growth across many product categories including imaging unixr pc servers customer support services outsourcing technology financing business growth pc business almost entirely attributable strong unit sales particularly home notebook pcs growth moderated competitive pricing environment unit growth home notebook pcs driven favorable acceptance new products including newly introduced retail notebook line increased volume printer supplies business fueled continued expansion printer hardware installed base hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued gross margin operating expenses earnings percentage net revenue follows years ended october 31 gross margin gross margin percentage net revenue 260 fiscal 2001 compared 283 fiscal 2000 295 fiscal 1999 23 percentage point decrease gross margin ratio fiscal 2001 resulted declines across hps business segments 12 percentage point decline fiscal 2000 mainly attributable decrease computing systems segment overall fiscal 2001 gross margins negatively impacted significant decline sales volumes across many product categories resulting global economic downturn increased inventoryrelated charges response downturn higher inventoryrelated charges represented 04 percentage points gross margin decline mainly impacted inkjet imaging personal appliances businesses perform detailed assessment inventory balance sheet date includes review among factors demand requirements product lifecycle product development plans quality issues based analysis record adjustments appropriate reflect inventory net realizable value 23 percentage point decline gross margin fiscal 2001 weighted basis printer hardware imaging accounted one percentage point decline addition gross margins unixr pc servers technology financing decreased slightly fiscal 2001 declines partially offset increase one percentage point printer supplies weighted basis printer hardware imaging unfavorably impacted continuing shift lowerpriced products response customer demand addition inventory writedowns discussed 12 percentage point decline gross margin fiscal 2000 home pcs commercial pcs main drivers although supplies experienced gross margin improvement gross margins pc business unfavorably impacted higher memory costs well mix shift lowermargin products ongoing competitive pricing pressures operating expenses research development research development expense percentage net revenue 59 fiscal 2001 compared 54 fiscal 2000 58 fiscal 1999 research development expense dollars grew 1 fiscal 2001 8 fiscal 2000 adjusting 35 million inprocess research development writeoffs related acquisitions recorded fiscal 2001 research development expense 2001 flat compared fiscal 2000 research development expense grew 10 computing systems segment reflecting investments related server software storage products however declines research development spending 8 services 3 imaging printing systems fully offset growth year result focused spending key areas expense reductions less strategic programs addition companywide actions taken management throughout year control expenses including restructuring hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued actions discussed moderated research development expense growth fiscal 2001 fiscal 2000 growth research development expense due primarily increase spending design development new technologies computing systems imaging printing systems segments selling general administrative selling general administrative expense percentage net revenue 161 fiscal 2001 compared 145 fiscal 2000 147 fiscal 1999 selling general administrative expense dollars increased 3 fiscal 2001 13 fiscal 2000 increase selling general administrative expense fiscal 2001 resulted substantially 172 million increase bad debt reserves writeoffs financing portfolio due weakened economic conditions evaluate collectibility trade financing receivables based combination factors become aware specific customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position record specific reserve bad debt reduce related receivable amount reasonably believe collectible also record reserves bad debt customers based variety factors including length time receivables past due historical experience circumstances related specific customers change estimates recoverability receivables could reduced overall companywide actions taken management throughout year control expenses including restructuring actions discussed moderated selling general administrative expense growth fiscal 2001 growth selling general administrative expense fiscal 2000 attributable increased selling costs support planned business expansion increased marketing expenses introduction new products support eservices strategy corporate branding initiative restructuring charges fiscal 2001 management approved restructuring actions respond global economic downturn improve cost structure streamlining operations prioritizing resources strategic areas business recorded restructuring charge 384 million reflect actions charge consisted severance employee benefits related planned termination approximately 7500 employees worldwide across many regions business functions job classes well costs related consolidation excess facilities included offset charge 38 million related net pension postretirement settlement curtailment gains october 31 2001 5700 employees terminated paid 238 million accrued costs also made additional payments 26 million fiscal 2001 related restructuring charges accrued fiscal 2000 expect pay remainder accrual fiscal 2002 workforce reduction programs expected result annualized cost savings approximately 500 million fiscal 2000 management approved enhanced early retirement eer program designed balance workforce based longterm business strategy offered approximately 2500 us employees opportunity retire early receive enhanced payout approximately 1300 employees accepted offer accordingly recorded restructuring charge 71 million consisting 100 million severance employee benefits offset 29 million related pension postretirement settlement curtailment gains addition eer program incurred 31 million restructuring charges fiscal 2000 related various site shutdowns resulting strategic management decisions fiscal 2000 made payments 98 million related restructuring charges accrued year 95 million paid hps pension plan based amendment plan hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued interest net interest net decreased 185 million fiscal 2001 increased 11 million fiscal 2000 decline interest net fiscal 2001 primarily attributable decrease interest income due lower interest rates cash investments lower average cash investment balances fiscal 2001 compared fiscal 2000 remainder decline due increase interest expense result higher average debt balances partially offset lower interest rates increase fiscal 2000 due mainly increase interest income due higher average cash investment balances fiscal 2000 compared fiscal 1999 net investment losses gains hp reported net investment losses 455 million fiscal 2001 compared net investment gains 41 million fiscal 2000 net investment gains 31 million fiscal 1999 investment portfolio includes equity debt investments public privatelyheld emerging technology companies many emerging technology companies still startup development stage investments companies inherently risky markets technologies products development typically early stages may never develop monitor investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined otherthantemporary impairment charge recorded new cost basis investment established fair values investments public companies determined using quoted market prices fair values investments privatelyheld companies estimated based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies order determine whether decline value otherthantemporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry intent ability retain investment period time sufficient allow anticipated recovery fair value due economic downturn decline value certain investments emerging technology companies determined otherthantemporary accordingly recorded impairment losses 471 million investments public private emerging technology companies fiscal 2001 amount offset 16 million realized gains sale equity securities october 31 2001 carrying value portion remaining investment portfolio related emerging technology companies 243 million depending market conditions may incur additional charges investment portfolio future fiscal 2000 hp recorded 41 million net gains investments representing gains sales equity investments 104 million partially offset impairment losses 63 million net investment gains 31 million fiscal 1999 resulted realized gains sale equity securities litigation settlement june 4 2001 hp pitney bowes inc pitney bowes announced entered agreements resolved pending patent litigation parties without admission infringement connection therewith hp paid pitney bowes 400 million cash june 7 2001 discussion regarding litigation see note 17 consolidated financial statements item 8 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued losses gains divestitures fiscal 2001 net loss divestitures 53 million consisting 131 million loss sale verifone inc subsidiary offset gain 78 million sale hps remaining interest joint venture joint owner fiscal 2000 net gain divestitures 203 million consisting gains sale nonstrategic businesses well gain sale part hps interest joint venture joint owner earnings continuing operations extraordinary item cumulative effect change accounting principle taxes reported earnings continuing operations extraordinary item cumulative effect change accounting principle taxes decreased 85 702 million 2001 compared 10 increase 46 billion fiscal 2000 percentage net revenue earnings continuing operations extraordinary item cumulative effect change accounting principle taxes 16 fiscal 2001 compared 95 fiscal 2000 99 fiscal 1999 significant decline 2001 driven global economic downturn well 384 million restructuring charges 455 million net investment losses 400 million charge litigation settlement 53 million net losses divestitures provision taxes hps effective tax rate continuing operations 11 fiscal 2001 23 fiscal 2000 26 fiscal 1999 yearoveryear decreases primarily result changes mix pretax earnings various tax jurisdictions throughout world mix pretax earnings fiscal 2001 significantly impacted 384 million restructuring charges 455 million net investment losses 400 million charge litigation settlement 53 million net losses divestitures pretax basis incurred primarily highertax jurisdictions net earnings discontinued operations net earnings discontinued operations 136 million fiscal 2000 second quarter fiscal 2000 cumulative net earnings agilent technologies since july 31 1999 measurement date began exceed total estimated net costs effect spinoff 136 million net earnings agilent technologies period july 31 1999 measurement date june 2 2000 spinoff date totaled 287 million net related tax expense 174 million net costs effect spinoff 151 million net related tax benefit 23 million net earnings discontinued operations 387 million fiscal 1999 consisted net earnings agilent technologies see note 5 consolidated financial statements item 8 discussion extraordinary item december 2000 board directors authorized repurchase program hps zerocoupon subordinated convertible notes repurchase program may repurchase notes time varying prices fiscal 2001 repurchased 12 billion face value notes book value 729 million resulting extraordinary gain early extinguishment debt 56 million net related taxes 33 million cumulative effect change accounting principle hp adopted securities exchange commission sec staff accounting bulletin 101 sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued 2000 accordingly restated consolidated results operations first three quarters fiscal 2001 including cumulative effect change accounting principle 272 million recorded reduction net income beginning first quarter fiscal 2001 sab 101 effective fiscal 2000 1999 pro forma results earnings per share would materially different previously reported results segment information following discussion operating results hps business segments description products services well financial data segment found note 18 consolidated financial statements item 8 financial data fiscal years 2000 1999 restated reflect changes organizational structure occurred fiscal 2001 changes fully described note 18 consolidated financial statements item 8 reportable segments disclosed document based management organizational structure october 31 2001 future changes organizational structure may result changes reportable segments disclosed imaging printing systems imaging printing systems net revenue declined 5 fiscal 2001 following growth 10 fiscal 2000 foreign currencyadjusted basis net revenue declined 2 2001 increased 11 2000 overall 5 net revenue decrease fiscal 2001 weighted basis inkjet laserjet printer hardware revenue represented 9 percentage points decline partially offset 3 percentage points growth printer supplies 1 percentage point growth imaging devices overall slowing markets across product categories geographic regions due economic downturn negatively impacted revenue 2001 segments overall 10 revenue increase fiscal 2000 weighted basis printer supplies contributed 8 percentage points imaging devices accounted 3 percentage points growth partially offset decline printer hardware sales 2 percentage points half printer hardware net revenue decline fiscal 2001 attributable decrease average selling prices driven continuing demand shift lowerpriced printer products particularly sub150 printer hardware market competitive pricing environment remainder printer hardware revenue decline reflected drop units approximately 10 due mainly softening consumer business markets partially offsetting decline printer hardware revenue growth printer supplies imaging products half net revenue growth printer supplies reflected rise volumes due continued expansion printer hardware installed base remaining growth resulted primarily higher average selling prices net revenue growth imaging driven primarily increase unit sales product category moderated growing demand lowerpriced products competitive pricing revenue growth supplies imaging devices fiscal 2001 dampened economic downturn net revenue growth printer supplies fiscal 2000 attributable increased volumes due mainly expansion printer hardware installed base revenue growth imaging devices fueled excellent unit growth newly introduced products within category partially offset planned pricing declines allin hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued one products shift sales mix lowerpriced scanners softening demand printer hardware market well shifts lowerpriced products category moderated segments net revenue growth 2000 earnings operations percentage net revenue 102 fiscal 2001 compared 130 fiscal 2000 127 fiscal 1999 decline gross margin accounted 25 points 28 percentage point decrease earnings operations ratio 2001 remaining decline due slight increase operating expenses percentage net revenue within 25 percentage point gross margin decline gross margins printer hardware imaging products collectively dropped 46 percentage points weighted basis majority gross margin decrease resulted continued shift sales mix lowerpriced products noted gross margins categories impacted unfavorably increase inventoryrelated reserves charges inkjet imaging businesses charges related cancellation planned production line expansion inkjet business occurred response weakened economic conditions incremental reserves charges totaled 214 million fiscal 2001 partially offsetting 46 point gross margin decline printer hardware imaging weighted basis gross margin improvements approximately 10 percentage point lower component costs due weaker japanese yen approximately 08 percentage points due supplies typically gross margins exceed segment average becoming larger portion segments product mix although operating expenses decreased total operating expense percentage net revenue segment increased 03 percentage points compared prior year decrease revenues exceeded rate decrease operating expenses fiscal 2000 increase 03 percentage points earnings operations ratio consisted 12 percentage point improvement operating expenses percentage net revenue partially offset 09 percentage point decline overall segment gross margin decline operating expense ratio reflected controlled expense management gross margin decline attributable shift toward lowerpriced printers imaging devices well higher component costs related stronger japanese yen factors unfavorably impacted gross margin 27 percentage points weighted basis offset part 20 percentage point margin improvement due economies scale increased production levels printer supplies computing systems computing systems net revenue declined 14 fiscal 2001 following 19 increase fiscal 2000 foreign currencyadjusted basis net revenue declined 10 2001 increased 22 2000 overall 14 revenue decrease fiscal 2001 weighted basis commercial desktop pc home pc revenues represented 4 percentage points decline unixr pc server revenues accounted 3 percentage points addition decline revenue workstations offset growth notebook pcs overall segment net revenue fiscal 2001 unfavorably impacted economic downturn resulting slowing markets across product categories geographic regions overall 19 net revenue growth fiscal 2000 weighted basis home pcs contributed 11 percentage points notebook pcs accounted 6 percentage points unixr server growth represented 3 percentage points growth moderated slightly decrease enterprise storage commercial desktop pc revenue fiscal 2001 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued 2000 net revenues pc business impacted declining average selling prices result decreasing component costs generally passed customer competitive pricing pressures decline fiscal 2001 net revenue within pc business resulted significant decreases commercial desktop pcs home pcs offset part growth notebook pcs revenue decline commercial desktop pcs almost equally reflected decrease volumes ongoing decrease average selling prices commercial desktop pc unit sales declined approximately 11 2001 average selling prices declined approximately 10 decrease volumes approximately 14 accounted home pc revenue decline approximate 4 decline average selling prices also contributed decrease product category decline unit sales commercial desktop pcs home pcs reflected effects economic slowdown fiscal 2001 addition continued shift toward mobile computing dampened growth commercial desktop pcs home pc revenue unfavorably impacted market saturation began late fiscal 2000 notebook pc revenue increased mainly result higher unit sales largely result previously noted shift toward mobile computing however growth moderated ongoing decline average selling prices threefourths decrease unixr server net revenue due primarily weakness midrange servers unfavorably impacted enterprise market slowdown competitive pricing pressures unixr server revenue decline also resulted decrease highend server revenue despite increasing sales new superdome server last half fiscal 2001 highend server net revenue fiscal year due slowdown enterprise capital spending superdome begin shipping volume january 2001 decline highend server revenue fiscal 2001 entirely offset growth lowend category pc server net revenue decline driven sales mix shift lowend products ongoing competitive pricing pressures delayed product launches 2001 revenue workstations decreased result decline spending overall weakness unixr sector fiscal 2000 home pc net revenue growth reflected strong unit sales moderated lower average selling prices home pc volumes increased approximately 97 average selling prices declined approximately 11 2000 unit growth home pcs driven favorable acceptance new products aided exit two major competitors retail market revenue growth notebook pcs due increase volumes slightly offset decrease average selling prices notebook pc unit sales increased approximately 199 average selling prices decreased approximately 18 notebook pc volumes 2000 benefited introduction retail notebook line well continued strong sales commercial portfolio growth lowend midrange unixr servers driven increased unit sales higher average selling prices resulted enhanced product offerings highend unixr servers however exhibited weakness 2000 primarily attributable customer anticipation new superdome server introduced fourth quarter 2000 net revenue growth segment fiscal 2000 unfavorably impacted product transitions resulting switch new enterprise storage partner revenue performance commercial desktop pcs declined due lower average selling prices partially offset increase unit sales earnings loss operations percentage net revenue 25 fiscal 2001 compared 49 fiscal 2000 57 fiscal 1999 increase operating expenses percentage net revenue accounted 53 74 percentage point decrease earnings operations ratio 2001 remaining 21 percentage points due decline gross margin increase operating expenses percentage net revenue mainly attributable lower revenue coupled slight increase operating expenses slight increase operating expenses reflected significant hiring sales organizations past year anticipation growth key areas particularly unixr servers software storage materialize due weakened economic conditions addition segment invested research development hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued activities server software storage products half gross margin decline caused decline pc server gross margin resulted lower average selling prices due shift toward lowermargin products competitive pricing pressures remainder gross margin decline segment reflected effect overall market slowdown commercial desktop pcs home pcs decrease earnings operations ratio fiscal 2000 08 percentage points attributable 26 percentage point decline gross margin partially offset 18 percentage point improvement operating expenses percentage net revenue decline gross margin driven mix shift within segment toward home pcs notebook pcs lowermargin products addition gross margin unfavorably impacted higher memory costs declining average selling prices across pc business margin declines partially offset shift highermargin unixr server enterprise storage products improvement operating expenses percentage net revenue due improved operational efficiencies services net revenue increased 6 fiscal 2001 following 13 increase fiscal 2000 foreign currencyadjusted basis net revenue increased 11 2001 17 2000 continued growth customer support consulting drove increase revenue fiscal 2001 category accounting 3 percentage points segments 6 revenue growth weighted basis fiscal 2001 net revenue also favorably impacted solid sales technology financing outsourcing offset revenue decline complementary thirdparty products delivered sales hp solutions overall customer support consulting technology financing net revenue growth fiscal 2001 moderated global economic downturn outsourcing business benefited slowdown companies reduced costs outsourcing functions segments overall 13 net revenue growth fiscal 2000 driven customer support contributed 4 percentage points weighted basis consulting technology financing represented approximately 3 percentage points total growth strength complementary products outsourcing businesses accounted remainder revenue growth fiscal 2000 customer support net revenue grew 6 fiscal 2001 twothirds attributable sales missioncritical networking services remaining increase due strength various support services growth consulting revenue 21 fueled ability pursue increased number well larger engagements result investment headcount fiscal 2000 consulting net revenue reflected strong demand financial services telecommunications industries contributed approximately onefourth increase consulting revenue 2001 remaining growth consulting attributable increase engagements manufacturing businesses well growth types consulting services revenue technology financing business favorably impacted fiscal 2001 mix shift portfolio toward operating leases net revenue growth outsourcing attributable larger comprehensive deals increased business companies reduced costs outsourcing functions moderating segments overall revenue growth fiscal 2001 decline sale complementary thirdparty products due refocusing business softened demand networking products fiscal year hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued fiscal 2000 customer support net revenue growth 8 half growth attributable missioncritical networking services another onethird due storage services support growth consulting resulted strong demand financial services manufacturing telecommunications industries net revenue financial services industry contributed onethird consulting revenue growth 2000 sales manufacturing businesses telecommunications industry accounted onefifth growth technology financing revenue benefited fiscal 2000 increase customer financing arrangements driven strong performance unixr product sales earnings operations percentage net revenue 45 fiscal 2001 compared 66 fiscal 2000 78 fiscal 1999 growth operating expenses percentage net revenue decline gross margin fiscal 2001 represented half 21 percentage point decrease earnings operations ratio segment growth operating expense ratio due substantially 172 million increase bad debt reserves writeoffs financing portfolio response weakened economic conditions one percentage point gross margin decline services driven primarily decrease gross margin related financing customer support businesses moderated gross margin improvement outsourcing consulting gross margin decline financing business due mix shift toward operating leases lower margins customer support gross margin negatively impacted increased costs support parts due unfavorable currency effects mix shift toward lowermargin services increase gross margin outsourcing reflected increased process standardization delivery efficiency gross margin improvement consulting resulted improved labor utilization overall engagement cost management 12 percentage point decrease earnings operations ratio fiscal 2000 attributable 16 percentage point increase operating expenses percentage revenue partially offset 04 percentage point improvement gross margin increase operating expense ratio due primarily increase bad debt writeoffs financing portfolio higher marketing expense support hps corporate branding initiative half segments 04 percentage point gross margin improvement driven optimization existing data centers outsourcing addition consulting gross margin positively impacted 2000 improved engagement cost management margin increases partially offset lower margins complementary products business increase hiring support business anticipation future growth liquidity capital resources financial position remained strong throughout fiscal 2001 despite economic downturn cash equivalents shortterm investments 43 billion october 31 2001 compared 40 billion october 31 2000 fiscal 2001 cash flows operating activities shortterm longterm borrowings used mainly fund purchases property plant equipment repurchases common stock repurchases zerocoupon subordinated convertible notes payments dividends cash flows operating activities 26 billion fiscal 2001 compared 37 billion fiscal 2000 31 billion fiscal 1999 decrease cash flows operating activities 2001 resulted primarily decline net earnings timing payments accounts payable partially offset decline receivables decrease inventory increase cash flows operating activities 2000 due mainly timing payments taxes accounts payable partially offset increases inventory assets trade current financing receivables percentage net revenue 148 175 october 31 2000 yearoveryear improvement ratio due primarily reduction number hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued days sales outstanding accounts receivable result increased effectiveness collection efforts inventory percentage net revenue 115 october 31 2001 compared 117 october 31 2000 slight decrease ratio year mainly attributable active inventory management capital expenditures fiscal 2001 15 billion compared 17 billion fiscal 2000 11 billion fiscal 1999 net property plant equipment percentage net revenue 97 october 31 2001 compared 92 october 31 2000 increase ratio due mainly decrease net revenue invest excess cash short longterm investments depending projected cash needs operations capital expenditures business purposes also supplement internally generated cash flow combination short longterm borrowings short longterm net borrowings fiscal 2001 generated cash 277 million shortterm longterm debt issuances including issuance 636 million based foreign exchange rate date issuance euro mediumterm notes july 2001 partially offset repurchases zerocoupon subordinated convertible notes payments longterm debt longterm debt totaling 290 million matured scheduled fiscal 2001 fiscal 2000 short longterm net borrowings generated cash 165 million due issuance 15 billion global notes june 2000 substantially offset payments short longterm debt longterm debt totaling 474 million matured scheduled fiscal 2000 october 31 2001 unused committed borrowing facility place totaling 10 billion december 2000 board directors authorized repurchase program hps zerocoupon subordinated convertible notes repurchase program may repurchase notes time varying prices fiscal 2001 repurchased notes book value 729 million aggregate price 640 million resulting extraordinary gain early extinguishment debt 56 million net related taxes 33 million november 1 2001 january 15 2002 repurchased additional zerocoupon subordinated convertible notes book value 42 million aggregate price 33 million resulting extraordinary gain early extinguishment debt 6 million net related taxes 3 million february 2000 filed shelf registration statement sec register 30 billion debt securities common stock preferred stock depositary shares warrants registration statement declared effective march 2000 june 2000 hp offered shelf registration statement 15 billion unsecured 715 global notes mature june 15 2005 unless previously redeemed may 2001 filed prospectus supplement registration statement allowed us offer time 15 billion mediumterm notes series due nine months date issue addition types securities described fiscal 2001 issued aggregate 210 million mediumterm notes weighted average interest rate 367 maturing 2003 2004 registration statement october 31 2001 remaining capacity issue approximately 13 billion securities shelf registration statement december 2001 offered march 2000 shelf registration statement 10 billion unsecured 575 global notes mature december 15 2006 unless previously redeemed net proceeds sale notes used general corporate purposes included repayment existing indebtedness capital expenditures working capital needs january 15 2002 remaining capacity issue 290 million securities shelf registration statement hp hewlettpackard finance company whollyowned subsidiary hp hpfc ability offer time 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange notes denominated currency including euro hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued however notes registered united states july 2001 750 million euro 636 million us dollars based exchange rate date issuance 525 mediumterm notes maturing july 5 2006 issued program october 31 2001 hp hpfc remaining capacity issue approximately 23 billion mediumterm notes program repurchase shares common stock systematic program manage dilution created shares issued employee stock plans separate incremental plan plans authorize purchases open market private transactions fiscal 2001 45036000 shares repurchased aggregate price 12 billion october 31 2001 authorization remaining future repurchases two programs 16 billion fiscal 2000 96978000 shares repurchased 56 billion 62084000 shares repurchased 26 billion fiscal 1999 june 4 2001 hp pitney bowes announced entered agreements resolved pending patent litigation parties without admission infringement connection therewith hp paid pitney bowes 400 million cash june 7 2001 payment material impact hps liquidity discussion regarding litigation see note 17 consolidated financial statements item 8 completed acquisitions divestitures fiscal 2001 acquired bluestone software inc consideration 531 million storageapps inc consideration 319 million case consideration consisted hp common stock issued options assumed well direct transaction costs transactions accounted purchase method accordingly results operations acquired companies included consolidated results operations date acquisition see note 6 consolidated financial statements item 8 additional information acquisitions fiscal 2001 net proceeds divestitures 117 million resulting sale verifone inc subsidiary sale hps remaining interest joint venture joint owner fiscal 2000 net proceeds divestitures 448 million resulting sale nonstrategic businesses well sale part hps interest joint venture joint owner pending acquisitions september 2001 signed definitive agreement compaq computer corporation compaq acquire outstanding stock compaq exchange 06325 shares hp common stock outstanding share compaq stock assumption options based exchange ratio estimated purchase price 24 billion includes estimated fair value hp common stock issued options assumed well estimated direct transaction costs estimate derived using average market price per share hp common stock 2092 based average closing prices range trading days august 30 august 31 september 4 september 5 2001 around announcement date september 3 2001 proposed merger final purchase price determined based upon number compaq shares options outstanding closing date compaq leading global provider enterprise technology solutions completion compaq merger subject customary closing conditions include among others receipt required approvals shareowners compaq shareowners receipt required regulatory approvals transaction expected close first half calendar year 2002 may completed conditions satisfied certain terms specified merger agreement hp compaq may terminate agreement result either hp compaq may required pay 675 million termination fee party certain circumstances unless otherwise indicated hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued discussions document relate hp standalone entity reflect impact pending business combination transaction compaq september 2001 signed definitive agreement indigo nv indigo commence exchange offer acquire outstanding shares indigo already owned hp shares exchange combination shares hps common stock nontransferable contingent value rights cvr entitling holder onetime contingent cash payment 450 per cvr based achievement indigo business cumulative revenue milestone threeyear postclosing period based terms agreement current assumptions quantity consideration alternative hps average closing share price 20day period ended december 31 2001 estimated consideration acquire shares approximately 720 million plus approximately 56 million cvrs 720 million consideration amount includes estimated fair value hp common stock issued options warrants assumed well estimated direct transaction costs future cash payout cvrs determined payable threeyear period commencing shortly closing exchange offer indigo leading provider high performance digital color printing completion transaction subject tender exchange number indigo shares added indigo shares currently owned hp constitute least 95 indigos outstanding shares receipt required regulatory approvals customary closing conditions transaction expected close first half calendar year 2002 may completed conditions satisfied factors could affect future results competitive pressures face could harm revenues gross margins prospects encounter aggressive competition numerous varied competitors areas business compete primarily basis technology performance price quality reliability brand distribution customer service support fail develop new products services support periodically enhance existing products services support otherwise compete successfully could harm operations prospects may continue lower prices many products services support stay competitive time trying maintain improve gross margins cannot proportionately decrease cost structure response competitive price pressures gross margins therefore profitability could adversely affected cannot continue develop manufacture market innovative products services rapidly meet customer requirements performance reliability may lose market share revenues may suffer process developing new high technology products services complex uncertain failure anticipate customers changing needs emerging technological trends accurately develop obtain appropriate intellectual property could significantly harm results operations must make longterm investments commit significant resources knowing whether predictions eventually result products market accept product developed must able manufacture sufficient volumes quickly low costs accomplish must accurately forecast volumes mix products configurations meet customer requirements may succeed effectively manage transition existing products new products revenues may suffer make effective transition existing products new products revenues may seriously harmed among factors make smooth transition current products new products difficult delays product development manufacturing variations product costs delays customer hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued purchases existing products anticipation new product introductions customer demand new product revenues gross margins also may suffer due timing product service introductions suppliers competitors especially challenging product short life cycle competitor introduces new product introduction furthermore sales new products may replace sales current products offsetting benefit even successful product introduction may also overlaps current products hp product portfolios acquired mergers acquisitions must managed given competitive nature industry incur delays new product introductions accurately estimate market effects new product introductions future demand products revenues may seriously harmed revenues selling general administrative expenses suffer cannot continue license enforce intellectual property rights business depends third parties assert violate intellectual property rights generally rely upon patent copyright trademark trade secret laws united states similar laws countries agreements employees customers partners parties establish maintain intellectual property rights technology products used operations however intellectual property rights could challenged invalidated circumvented intellectual property rights may provide competitive advantages could significantly harm business also rapid pace technological change information technology industry much business many products rely key technologies developed third parties may able obtain continue obtain licenses technologies third parties reasonable terms third parties also may claim infringing upon intellectual property rights even believe products business infringing upon third parties intellectual property rights claims timeconsuming costly defend divert managements attention resources away business claims intellectual property infringement also might require us enter costly settlement license agreements cannot license infringed technology reasonable terms substitute similar technology another source operations could suffer addition possible consequence mergers acquisitions intellectual property rights may licensed third party licensed prior transaction certain restrictions could imposed business imposed prior transaction consequently may lose competitive advantage respect intellectual property rights may required enter costly arrangements order terminate limit agreements fail manage distribution products services properly distributors financial condition operations weaken revenues gross margins could adversely affected use variety different distribution methods sell products services including thirdparty resellers distributors retail direct sales enterprise accounts consumers since distribution method distinct risks gross margins failure implement advantageous balance delivery model products services could adversely affect gross margins therefore profitability example continue increase commitment direct sales could risk alienating channel partners adversely affecting distribution model since direct sales may compete sales made thirdparty resellers distributors thirdparty resellers distributors may elect use suppliers directly sell products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued customers prefer seek purchase directly increase commitment direct sales order increase gross margins could alienate channel partners result may lose customers purchase thirdparty resellers distributors wholesale retail distributors may unable withstand changes business conditions wholesale retail distributors may insufficient financial resources may able withstand changes business conditions including recent economic downturn revenues indirect sales could suffer distributors financial condition operations weaken inventory management complex continue sell significant mix products distributors must manage inventory effectively particularly respect sales distributors may increase orders periods product shortages cancel orders inventory high delay orders anticipation new products distributors also may adjust orders response supply products competitors available distributor seasonal fluctuations enduser demand excess inventory may reduce prices write inventory turn could result lower gross margins depend third party suppliers revenues gross margins could adversely affected fail receive timely delivery quality components fail manage inventory levels properly manufacturing operations depend ability anticipate needs components products suppliers ability deliver quality components products time meet critical manufacturing distribution schedules given wide variety systems products services offer large number suppliers contract manufacturers dispersed across globe problems could arise planning production managing inventory levels could seriously harm us among problems could arise component shortages excess supply risks related fixedprice contracts would require us pay open market price supply shortages occasionally may experience short supply certain component parts result strong demand industry parts problems experienced suppliers shortages delays persist price components may increase components may available may able secure enough components reasonable prices acceptable quality build new products timely manner quantities configurations needed accordingly revenues gross margins could suffer sources developed oversupply order secure components production new products times may make advance payments suppliers may enter noncancelable purchase commitments vendors fail anticipate customer demand properly temporary oversupply parts could result excess obsolete components could adversely affect gross margins longterm pricing commitments result binding price purchase commitments vendors may obligated purchase components prices higher available current market event become committed purchase components prices excess current market price may disadvantage competitors access components lower prices gross margins could suffer hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued order successful must retain motivate key employees failure could seriously harm us order successful must retain motivate executives key employees including managerial technical marketing information technology support positions particular product generation efforts depend hiring retaining qualified engineers attracting retaining skilled solutions providers support business qualified sales representatives also critical future experienced management technical marketing support personnel information technology industry high demand competition talents intense particularly case silicon valley hps headquarters certain key research development facilities located loss key employees could significant impact operations also must continue motivate employees keep focused hps strategies goals may particularly difficult due morale challenges posed workforce reductions general uncertainty economic downturn could adversely affect revenues gross margins expenses revenues gross margins depend significantly overall demand computing imaging products services particularly product service segments compete softening demand products services caused ongoing economic downturn may result decreased revenues earnings levels growth rates problems saleability inventory realizability customer receivables global economy weakened market conditions continue challenging result individuals companies delaying reducing expenditures including information technology observed effects global economic downturn many areas business downturn contributed reported net revenue declines fiscal 2001 also experienced gross margin declines reflecting effect competitive pressures well inventory writedowns charges associated cancellation planned production line expansion selling general administrative expense also impacted due part increase bad debt writeoffs additions reserves receivables portfolio economic downturn also led restructuring actions contributed writedowns reflect impairment certain investments investment portfolio delays reductions information technology spending could material adverse effect demand products services consequently results operations prospects stock price due international nature business political economic changes could harm future revenues costs expenses financial condition sales outside united states make half revenues future revenues costs expenses financial condition could adversely affected variety international factors including changes countrys regions political economical conditions longer accounts receivable cycles trade protection measures import export licensing requirements overlap different corporate structures unexpected changes regulatory requirements differing technology standards andor customer requirements import export licensing requirements could affect ability obtain favorable terms components lead penalties restrictions hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued problems caused conversion various european currencies euro macroeconomic dislocations may result natural disasters portion product component manufacturing along key suppliers also located outside united states also could disrupted international factors described particular along pc vendors engaged manufacturers taiwan production notebook computers 1999 taiwan suffered major earthquake 2000 suffered typhoon resulted temporary communications supply disruptions addition procure components japan also suffers earthquakes periodically moreover process acquiring indigo nv research development manufacturing operations located israel may subject disruptions light recent world events impairment investment financing portfolios could harm net earnings investment portfolio includes minority equity debt investments financing purchase products services cases attempt reduce eliminate market exposure investments may incur losses related impairment investments therefore charges net earnings investments public privately held companies still startup development stage inherent risks markets technologies products development typically early stages may never develop furthermore values investments publiclytraded companies subject significant market price volatility investments technology companies often coupled strategic commercial relationship commercial agreements companies may sufficient allow us obtain integrate products technology product lines otherwise benefit relationship companies may subsequently acquired third parties including competitors moreover due economic downturn difficulties may faced companies supplied financing investment portfolio could impaired order manage portfolio products technology competitive objectives must successfully complete acquisitions alliances enhance strategic businesses product lines divest nonstrategic businesses product lines part business strategy frequently engage discussions third parties regarding enter agreements relating possible acquisitions strategic alliances joint ventures divestitures order manage product technology portfolios strategic objectives order pursue strategy successfully must identify suitable acquisition alliance divestiture candidates complete transactions may large complex integrate acquired companies integration risks acquisitions strategic alliances pronounced larger complicated transactions multiple acquisitions pursued simultaneously however fail identify complete transactions may required expend resources internally develop products technology may competitive disadvantage may adversely affected negative market perceptions may material effect revenues selling general administrative expenses integration issues complex timeconsuming expensive without proper planning implementation could significantly disrupt business challenges involved integration include demonstrating customers transaction result adverse changes client service standards business focus helping customers conduct business easily hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued consolidating rationalizing corporate administrative infrastructures consolidating manufacturing operations combining product offerings coordinating sales marketing efforts communicate capabilities effectively coordinating rationalizing research development activities enhance introduction new products technologies reduced cost preserving distribution marketing important relationships resolving potential conflicts may arise minimizing diversion management attention ongoing business concerns persuading employees business cultures compatible maintaining employee morale retaining key employees coordinating combining overseas operations relationships facilities may subject additional constraints imposed local laws regulations managing integration issues shortly pending completion independent reorganizations may successfully address integration challenges timely manner may realize anticipated benefits synergies transaction extent timeframe anticipated currently several acquisitions pending completion including proposed merger compaq recently completed still integrated addition pending compaq transaction pending proposed acquisition indigo nv leading commercial industrial printing systems company 2001 completed acquisitions storageapps inc provider storage virtualization solutions bluestone software inc became part middleware division number pending transactions size scope proposed merger compaq increase scope consequences ongoing integration risks even acquisition alliance successfully integrated may receive expected benefits transaction managing acquisitions alliances joint ventures divestitures requires varying levels management resources may divert attention business operations transactions also may result significant costs expenses charges earnings result completed pending future transactions may contribute financial results combined company differ investment communitys expectations given quarter terrorist acts war may seriously harm business revenues costs expenses financial condition terrorist acts war wherever located around world may cause damage disruption hp employees facilities partners suppliers distributors resellers customers could significantly impact revenues costs expenses financial condition terrorist attacks took place united states september 11 2001 unprecedented events created many economic political uncertainties may materially harm business results operations longterm effects business september 11 2001 attacks unknown potential future terrorist attacks national international responses terrorist attacks acts war hostility created many economic political uncertainties could adversely affect business results operations ways cannot hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued presently predicted addition major multinational company headquarters significant operations located united states may impacted actions united states predominantly uninsured losses interruptions caused terrorist acts war business disruptions could seriously harm future revenues financial condition increase costs expenses worldwide operations could subject natural disasters business disruptions could seriously harm revenues financial condition increase costs expenses corporate headquarters portion research development activities critical business operations suppliers located california near major earthquake faults ultimate impact us significant suppliers general infrastructure located near major earthquake faults unknown revenues financial condition costs expenses could significantly impacted event major earthquake addition areas including california experienced may continue experience ongoing power shortages resulted rolling blackouts could cause disruptions operations suppliers distributors resellers customers predominantly uninsured losses interruptions caused earthquakes power outages natural disasters revenues profitability operations historically varied revenues profit margins vary among products customer groups geographic markets revenue mix future periods different current revenue mix overall profitability given period dependent partially product customer geographic mix reflected periods net revenue therefore revenue gross margin trends cannot reliably predicted actual trends may cause us adjust operations could cause periodtoperiod fluctuations results operations failure execute planned cost reductions successfully could result total costs expenses greater expected historically undertaken restructuring plans bring operational expenses appropriate levels businesses simultaneously implementing extensive new companywide expensecontrol programs addition previously announced workforce reductions may additional workforce reductions future proposed merger compaq contemplates workforce reductions expected involve approximately 15000 employees combined company worldwide workforce reductions would also expected proposed merger completed significant risks associated actions may impair ability achieve anticipated cost reductions may otherwise harm business include delays implementation anticipated reductions force highly regulated locations outside united states particularly europe asia redundancies among restructuring programs failure meet operational targets due loss employees decreases employee morale hps stock price historically fluctuated may continue fluctuate hps stock price like technology companies volatile factors affect stock price announcement new products services technological innovations hp competitors quarterly increases decreases hps revenue earnings hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued changes quarterly revenue earnings estimates investment community speculation press investment community hps strategic position financial condition results operations business significant transactions general market conditions domestic international macroeconomic geopolitical factors unrelated hps performance also may affect hps stock price reasons investors rely recent trends predict future stock prices financial results addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources unforeseen environmental costs could impact future net earnings operations use substances regulated various federal state international laws governing environment could subject liability remediation handle substances compliance applicable laws policy apply strict standards environmental protection sites inside outside united states even subject local government regulations record liability environmental remediation related costs consider costs probable amount costs reasonably estimated incurred environmental costs presently material presently subject known environmental liabilities expect material antitakeover provisions contained hps certificate incorporation bylaws shareowner rights plan well provisions delaware law could impair takeover attempt hp provisions certificate incorporation bylaws could effect rendering difficult discouraging acquisition deemed undesirable hp board directors include provisions authorizing blank check preferred stock could issued voting liquidation dividend rights superior common stock limiting liability providing indemnification directors officers limiting ability hp shareowners call special meetings requiring advance notice shareowner proposals business conducted meetings hp shareowners nominations candidates election hp board directors controlling procedures conduct board shareowner meetings election removal directors specifying shareholders may take action duly called annual special meeting shareowners provisions alone together could deter delay hostile takeovers proxy contests changes control management hp addition hp adopted shareowner rights plan rights intended prevent takeover hp however rights may effect rendering difficult discouraging acquisition hp deemed undesirable hp board directors rights cause substantial dilution person group attempts acquire hp terms manner approved hp board directors except pursuant offer conditioned upon redemption rights hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued delaware corporation hp also subject provisions delaware law including section 203 delaware general corporation law prevents shareowner engaging certain business combinations without approval holders substantially hps outstanding common stock provision hps certificate incorporation bylaws hps shareowner rights plan delaware law effect delaying deterring change control could limit opportunity hp shareowner receive premium shares hp common stock could also affect price investors willing pay hp common stock hp faces numerous additional risks connection proposed transaction compaq may adversely affect results operations whether merger completed merger may completed timely basis response pending merger transaction involving compaq customers distributors hp may defer purchasing decisions elect switch suppliers due uncertainty direction product offerings following merger willingness support service existing products order address customer uncertainty may incur additional obligations uncertainty surrounding proposed transaction also may adverse effect employee morale retention result diversion management attention resources addition market values hp common stock compaq common stock continue vary prior completion merger transaction due changes business operations prospects hp compaq market assessments merger regulatory considerations market economic considerations factors however adjustment exchange ratio hp compaq shares connection merger parties right terminate merger agreement based upon changes market price either hp common stock compaq common stock completion merger also subject numerous risks uncertainties hp compaq may unable obtain regulatory shareowner approvals required complete merger timely manner order obtain regulatory approval may required comply material restrictions conditions could include complete partial license divestiture spinoff holding separate assets businesses hp compaq also required obtain separate shareowner approvals connection merger walter b hewlett eleanor hewlett limon mary hewlett gaffe william r hewlett revocable trust announced intend vote proposal approve issuance hp common stock connection compaq merger addition william flora hewlett foundation david lucite packard foundation announced intention vote proposal approve issuance hp common stock connection compaq merger mr hewlett cotrustee william r hewlett revocable trust chairman hewlett foundation edwin van pronghorns cotrustee william r hewlett revocable trust trustee certain hewlett family trusts william r hewlett revocable trust filed preliminary proxy statement securities exchange commission stating intend solicit proxies hp shareowner proposal approve issuance shares hp common stock connection compaq merger disseminated hp shareowner soliciting materials encouraging hp shareowner vote compaq merger completed price hp common stock may decline extent current market price hp common stock reflects market assumption merger completed moreover hp would derive strategic benefits expected result merger creating complete balanced product services portfolio providing economies scale businesses pcs addition business may harmed extent customers suppliers others believe cannot effectively compete marketplace without merger customer employee uncertainty surrounding future direction product service offerings strategy hp standalone basis also required pay significant costs incurred hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued connection merger including legal accounting portion financial advisory fees whether merger completed moreover specified circumstances hp may required pay compaq termination fee 675 million connection termination merger agreement merger completed continue face risks associated integration businesses operations hp compaq may realize anticipated benefits synergies merger primarily associated anticipated restructurings operational efficiencies extent timeframe anticipated addition integration risks previously discussed ability realize benefits synergies could impacted adversely practical legal constraints combining operations implementing workforce reductions addition costs expenses previously discussed required make payments executive officers key employees retention plan adopted connection merger also downgrade credit ratings associated merger could adversely affect ability borrow result restrictive borrowing terms including increased borrowing costs restrictive covenants extension less open credit turn could affect internal cost capital estimates therefore operational decisions addition effective tax rate hp following merger uncertain could exceed hps currently reported tax rate weighted average premerger tax rates hp compaq moreover charges earnings resulting application purchase method accounting may affect market value hps common stock adversely following merger hp incur additional depreciation amortization expense useful lives certain net tangible intangible assets acquired connection merger extent value goodwill intangible assets indefinite lives acquired connection merger becomes impaired hp may required incur material charges relating impairment assets foregoing risks described detail hps current report form 8k dated november 15 2001 incorporated reference herein adoption euro 1997 established dedicated task force address issues raised introduction european single currency euro euros initial implementation effective january 1 1999 transition period continued january 1 2002 euro adopted physical currency legal tender twelve european countries final step transition january 1 1999 began converting product prices local currencies euro required implemented system changes give multicurrency capability internal applications ensure external partners systems processing euro conversions compliant european council regulations addition implemented design changes support display printing euro character impacted hp products 2000 task force implemented comprehensive euro program manage changeover operational aspects business preparation final transition january 2002 experienced significant operational issues upon final implementation date introduction use euro material effect foreign exchange hedging activities use derivative instruments overall foreign currency risk presently expect material impact product pricing continue monitor aspect change going forward costs associated conversion euro expensed operations incurred continue evaluate impact euro time based currently available information believe use euro currency material adverse impact consolidated financial condition cash flows results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued recent accounting pronouncements july 2001 financial accounting standards board fasb issued statement financial accounting standards sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires business combinations accounted purchase method accounting changes criteria recognition intangible assets acquired business combination provisions sfas 141 apply business combinations initiated june 30 2001 expect adoption sfas 141 material effect consolidated financial position results operations sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized however assets must reviewed least annually impairment intangible assets finite useful lives continue amortized respective useful lives standard also establishes specific guidance testing impairment goodwill intangible assets indefinite useful lives provisions sfas 142 effective fiscal year 2003 early adoption permitted beginning fiscal year 2002 however goodwill intangible assets acquired june 30 2001 subject immediately nonamortization provisions sfas 142 currently process evaluating potential impact adoption sfas 142 consolidated financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 amends existing accounting guidance asset impairment provides single accounting model longlived assets disposed among provisions new rules change criteria classifying asset heldforsale standard also broadens scope businesses disposed qualify reporting discontinued operations changes timing recognizing losses operations provisions sfas 144 effective fiscal year 2003 applied prospectively currently process evaluating potential impact adoption sfas 144 consolidated financial position results operations item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document critical accounting policies estimates general managements discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenue expenses related disclosure contingent assets liabilities management bases estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors actual results may differ estimates different assumptions conditions management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements business combinations required allocate purchase price acquired companies tangible intangible assets acquired liabilities assumed well inprocess research development iprd based estimated fair values engage independent thirdparty appraisal firms assist us determining fair values assets acquired liabilities assumed valuations require management make significant estimates assumptions especially respect intangible assets significant purchased intangible assets recorded hp include customer contracts developed core technology compaq trade name fair values assigned identified intangible assets discussed detail note 3 consolidated financial statements item 8 critical estimates valuing certain intangible assets include limited future expected cash flows customer contracts customer lists distribution agreements acquired developed technologies patents expected costs develop iprd commercially viable products estimating cash flows projects completed compaq brand awareness market position well assumptions period time brand continue used hps product portfolio discount rates managements estimates fair value based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates associated accounting acquisitions may change additional information becomes available regarding assets acquired liabilities assumed fully discussed note 11 consolidated financial statements item 8 addition liabilities restructure preacquisition hp preacquisition compaq organizations including termination employees subject change management continues assessment operations executes approved plan description valuation assumptions estimates relating compaq acquisition certain acquisitions see notes 3 4 consolidated financial statements item 8 valuation longlived assets including goodwill purchased intangible assets review property plant equipment goodwill purchased intangible assets impairment whenever events changes circumstances indicate carrying value asset may recoverable asset impairment review assesses fair value assets based future cash flows assets expected generate impairment loss recognized estimated undiscounted future cash flows expected result use asset plus net proceeds expected disposition asset less carrying value asset approach uses estimates future market growth forecasted revenue costs expected periods assets utilized appropriate discount rates evaluations impairment longlived assets including goodwill purchased intangible assets integral part limited strategic reviews business operations performed conjunction restructuring actions impairment identified carrying amount asset reduced estimated fair value deterioration business geographic region within business segment future could also lead impairment adjustments issues identified revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including price allocated among deliverable elements multiple deliverables whether undelivered elements essential functionality delivered elements recognize revenue recognize revenue delivered elements following criteria satisfied undelivered elements essential functionality delivered elements uncertainties regarding customer acceptance resolved significant obligations remain fair value undelivered element known changes allocation sales price deliverables might impact timing revenue recognition would change total revenue recognized contract recognize revenue profit work progresses longterm fixed price consulting contracts using percentageofcompletion method applying percentageofcompletion method rely estimates total expected contract revenue costs follow method reasonably dependable estimates revenue costs applicable various stages contract made recognized revenue profit subject revisions contract progresses completion revisions revenue profit estimates charged income period facts give rise revision become known record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate number customers actually redeem incentive based historical experience allowance doubtful accounts evaluate collectibility trade financing receivables based combination factors regularly analyze significant customer accounts become aware specific customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position record specific reserve bad debt reduce related receivable amount reasonably believe collectible also record reserves bad debt customers based variety factors including length time receivables past due financial health customer macroeconomic considerations historical experience circumstances related specific customers change estimates recoverability receivables could adjusted inventory purchases commitments made order build inventory meet future shipment schedules based forecasted demand products business environment operate subject rapid changes technology customer demand perform detailed assessment inventory segment period includes review among factors demand requirements product life cycle development plans component cost trends product pricing quality issues based analysis record adjustments inventory excess obsolescence impairment appropriate reflect inventory net realizable value revisions inventory adjustments may required actual demand component costs product life cycles differ estimates warranty provision provide estimated cost product warranties time revenue recognized engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers estimated warranty obligation affected ongoing product failure rates specific product class failures outside baseline experience material usage service delivery costs incurred correcting product failure actual product failure rates material usage service delivery costs differ estimates revisions estimated warranty liability would required evaluate warranty obligations segment basis retirement benefits employee pension postretirement benefit ie health care life insurance costs obligations dependent assumptions used actuaries calculating amounts assumptions include health care cost trend rates salary growth longterm return plan assets discount rates factors health care cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical results portfolio managements expectation current economic environment base discount rate assumption current investment yields aarated corporate longterm bond yields key assumptions described detail note 15 consolidated financial statements item 8 actual results differ assumptions accumulated amortized future working life plan participants believe assumptions used appropriate significant differences actual experience significant changes assumptions would affect pension postretirement benefits costs obligations investment debt equity securities monitor investment portfolio impairment periodic basis investment portfolio includes equity debt investments publiclytraded privatelyheld emerging technology companies many emerging technology companies still startup development stage investments companies inherently risky technologies products development typically early stages may never become successful event carrying value investment exceeds fair value decline value determined otherthantemporary impairment charge recorded new cost basis investment established fair values investments public companies determined using quoted market prices fair values investments privatelyheld companies estimated based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies order determine whether decline value temporary evaluate among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry intent ability retain investment period time sufficient allow anticipated recovery fair value taxes earnings effective tax rate includes impact certain undistributed foreign earnings us taxes provided earnings planned reinvested indefinitely outside us earnings remittance amounts planned based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distributed us accordingly provide us federal taxes due amounts material changes estimates cash working capital longterm investment requirements could impact effective tax rate record valuation allowance reduce deferred tax assets amount likely realized considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future adjustment deferred tax assets would charged earnings period determination made likewise later determine likely net deferred tax assets would realized previously provided valuation allowance would reversed results operations overview acquisition compaq computer corporation may 3 2002 acquired outstanding stock compaq leading global provider information technology products services solutions enterprise customers result fluctuations operating results hp segments fiscal 2002 compared historical fiscal 2001 fiscal 2000 results due generally acquisition compaq historical results section presents discussion consolidated operating results using historical results hp prepared accordance generally accepted accounting principles gaap years ended october 31 2002 2001 2000 including compaqs results operations may 3 2002 acquisition date order provide additional information relating operating results also present discussion consolidated operating results hp compaq combined company fiscal 2002 fiscal 2001 included additional information order provide insight operating results prior period trends current position supplemental information presented manner consistent disclosure requirements statement financial accounting standards sfas 141 business combinations described detail note 3 consolidated financial statements item 8 due different fiscal periodends hp compaq compaqs results prior quarters ended december 31 march 31 june 30 september 30 combined hps results fiscal quarters ended january 31 april 30 july 31 october 31 discussion operating results consolidated level followed detailed discussion operating results segment discussion segment operating results presented historical basis years ended october 31 2002 2001 2000 including compaqs results operations may 3 2002 acquisition date order provide additional information relating segment operating results also present discussion segment operating results hp compaq combined company fiscal 2002 fiscal 2001 supplemental information presented manner consistent supplemental disclosures included consolidated operating results discussion combined company segment discussions also present certain product category fluctuations highlighted combined company consolidated level spinoff agilent technologies consolidated financial statements periods present businesses agilent technologies discontinued operation spinoff date june 2 2000 unless otherwise indicated following discussion relates hps continuing operations historical results following discussion compares historical results operations gaap basis years ended october 31 2002 2001 2000 results include compaqs results operations may 3 2002 acquisition date results operations dollars percentage net revenue follows 1gross margin defined total net revenue less cost products cost services financing interest net revenue net revenue increased 25 fiscal 2002 566 billion us revenue fiscal 2002 increased 24 233 billion international revenue fiscal 2002 grew 26 333 billion foreign currency fluctuations material impact hp consolidated revenue growth fiscal 2002 due relatively stable exchange rates significant foreign currencies generated revenue net revenue increase attributable primarily acquisition compaq beginning may 2002 net revenue growth ipg also contributed increase particularly due growth printer supplies resulted rise volume due continued expansion printer hardware installed base however effects partially offset decline sales volumes across many product categories due ongoing global economic downturn well competitive environment particularly pc server businesses addition experienced shift sales mix lowerpriced products particularly printer hardware industry standard servers workstations sales volumes also declined due consolidation product offerings result postacquisition product roadmap decisions industry standard servers commercial pcs storage personal appliances fiscal 2001 net revenue declined 7 452 billion us revenue fiscal 2001 declined 13 188 billion international revenue fiscal 2001 decreased 3 264 billion foreign currencyadjusted basis net revenue declined 3 yearoveryear foreign currency effect fiscal 2001 due primarily weakening euro global economic downturn contributed significantly decline us international revenue fiscal 2001 sales volumes declined across many product categories revenue printer hardware pcs declined primarily result decreases volume printer hardware revenue also affected shift sales mix sub150 printer market business critical industry standard servers also contributed slightly yearoveryear decline decreases partially offset growth printer supply revenue addition ongoing competitive pricing pressures affected revenue performance many product categories particularly commercial consumer pcs printer hardware gross margin gross margin percentage net revenue 265 fiscal 2002 compared 259 fiscal 2001 06 percentage point gross margin increase result primarily higher gross margin ipg fiscal 2002 gross margin also impacted positively effective overall cost management cost reductions resulting workforce reductions addition although hp recorded inventoryrelated charges fiscal 2002 related primarily product roadmap decisions associated acquisition compaq charges 180 million lower inventoryrelated charges recorded fiscal 2001 partially offsetting improvement gross margin lower gross margin esg well product mix shift including impact addition compaq products beginning third quarter fiscal 2002 moderating overall improvement gross margin declines sales volumes across many product categories due continued economic weakness competitive pricing environment gross margin percentage net revenue 259 fiscal 2001 compared 283 fiscal 2000 24 percentage point decrease gross margin ratio fiscal 2001 resulted primarily declines ipg esg psg declined 09 05 04 percentage points respectively weighted basis overall fiscal 2001 gross margins impacted negatively significant decline sales volumes across many product categories resulting global economic downturn increased inventoryrelated charges response downturn increase 336 million inventoryrelated charges mainly impacted inkjet digital imaging personal appliances businesses addition printer hardware digital imaging impacted unfavorably continuing shift lowerpriced products response customer demand server financing businesses also slightly contributed overall gross margin decrease gross margin declines partially offset improved gross margin printer supplies operating expenses research development research development expense percentage net revenue 59 fiscal 2002 compared 60 fiscal 2001 research development expense increased 22 fiscal 2002 inclusion compaq since acquisition may 2002 accounted substantially increase research development expense remainder increase resulted continuing investment printer hardware supplies digital imaging products well higher company performance bonuses compared fiscal 2001 increase expense mitigated workforce reduction efforts expense control measures research development expense percentage net revenue 60 fiscal 2001 compared 54 fiscal 2000 research development expense increased 4 fiscal 2001 continued investment server products within esg partially offset lower research development spending hps ipg result focused spending key areas expense reductions less strategic programs addition companywide actions taken management throughout year control expenses including restructuring actions undertaken fiscal 2001 moderated research development expense growth fiscal 2001 selling general administrative selling general administrative expense percentage net revenue 160 fiscal 2002 compared 153 fiscal 2001 selling general administrative expense increased 30 fiscal 2002 compared prior year inclusion compaq since acquisition may 2002 accounted majority increase selling general administrative expense mitigated part declines resulting workforce reduction efforts expense control measures addition higher company performance bonuses fiscal 2002 compared fiscal 2001 contributed approximately 2 percentage points increase expense offset 1 percentage point decrease lower bad debt expense selling general administrative expense percentage net revenue 153 fiscal 2001 compared 143 fiscal 2000 selling general administrative expense decreased less 1 fiscal 2001 companywide actions taken management throughout year control expenses including restructuring actions undertaken fiscal 2001 partially offset 172 million increase bad debt reserves writeoffs financing portfolio due weakened economic conditions restructuring charges connection acquisition compaq hps management initiated third fourth quarters approved plans restructure operations preacquisition hp eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions consequently recorded approximately 18 billion costs associated restructuring plans fiscal 2002 costs accounted emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity included charge results operations year ended october 31 2002 management also approved plans restructure operations preacquisition compaq connection plans recorded approximately 960 million restructuring costs items similar described hp costs accounted eitf issue 953 recognition liabilities connection purchase business combinations costs recognized liability assumed purchase business combination included allocation cost acquire compaq total expected 3 billion annual cost synergies associated compaq acquisition anticipated fully realized fiscal year 2004 approximately 2 billion savings result restructuring plans savings expected reduce product service cost sales resulting combined procurement activities operating expenses related leveraging labor facilities costs fiscal 2002 charge 18 billion restructure preacquisition hp organization consisted mainly severance early retirement costs employee benefits noninventory asset impairment charges related restructuring activities severance early retirement costs employee benefits related planned early retirement termination 8600 employees worldwide across many regions business functions job classes october 31 2002 approximately 6400 employees included workforce reduction program retired terminated payments approximately 255 million made benefits approximately 215 million paid postretirement pension plans retiring employees additionally approximately 104 million charge noncash relates primarily net pension postretirement settlement curtailment losses expect pay remaining balance severance accrual within fiscal 2003 noninventory asset impairment 546 million goodwill purchased intangible assets due primarily product roadmap decisions made conjunction compaq acquisition led elimination substantially middleware storage virtualization offerings acquired fiscal 2001 related restructuring charges consisted primarily cost vacating duplicate facilities cost exiting certain contractual obligations discussed note 18 consolidated financial statements item 8 restructuring charges allocated segments however restructuring plans actions undertaken streamline business operations total 27 billion restructuring costs recorded fiscal 2002 12 billion 510 million 421 million 76 million attributable actions taken esg hps psg ipg respectively remaining 497 million relates actions taken shared services infrastructure functions fiscal 2001 management approved restructuring actions respond global economic downturn improve cost structure streamlining operations prioritizing resources strategic areas business infrastructure recorded restructuring charge 384 million fiscal 2001 reflect actions fiscal 2001 charge consisted severance employee benefits related termination approximately 7500 employees worldwide across many regions business functions job classes well costs related consolidation excess facilities recorded additional restructuring charges 21 million fiscal 2002 reflect adjustments expected severance cost fiscal 2001 restructuring plans october 31 2002 substantially employees terminated paid 394 million accrued costs fiscal 2000 management approved enhanced early retirement eer program designed balance workforce based longterm business strategy offered approximately 2500 us employees opportunity retire early receive enhanced payout approximately 1300 employees accepted offer accordingly recorded restructuring charge 71 million consisting 95 million severance 5 million employee benefits offset 29 million related pension postretirement settlement curtailment gains addition eer program incurred 31 million restructuring charges fiscal 2000 related various site shutdowns resulting strategic management decisions amounts relating eer program paid october 31 2001 inprocess research development charges fiscal 2002 recorded iprd charges 735 million connection acquisition compaq 58 million connection acquisition indigo projects qualify iprd represent yet reached technological feasibility future alternative uses existed technological feasibility defined equivalent betaphase working prototype remaining risk relating development fiscal 2001 recorded iprd charges 35 million related primarily middleware storage virtualization offerings acquired year acquisitionrelated charges incurred acquisitionrelated charges 701 million fiscal 2002 25 million fiscal 2001 fiscal 2002 charge related acquisition compaq consisted primarily costs incurred employee retention bonuses advertising proxy solicitation costs consulting services professional fees fiscal 2001 charge included charges related primarily unsuccessful bid pricewaterhousecoopers consulting business amortization purchased intangible assets goodwill related acquisitions occurred prior july 1 2001 purchased intangible assets amortized estimated useful lives generally two ten years amortization expense 402 million fiscal 2002 174 million fiscal 2001 86 million fiscal 2000 increase fiscal 2002 due purchased intangible assets compaq indigo acquisitions goodwill related acquisitions occurred june 30 2001 amortized provisions sfas 142 goodwill intangible assets effective november 1 2002 hp adopted remaining portion sfas 142 accordingly goodwill reviewed impairment least annually postretirement benefit costs future effects postretirement benefit plans operating results depend number factors including assumptions health care cost trend rates salary growth longterm return plan assets discount rates changes assumptions october 31 2002 include decrease longterm rate return assets decrease discount rate decrease average rate salary increases increase health care cost trend rates expect addition preacquisition compaq employees pension postretirement benefit plans january 1 2003 difference actual portfolio performance historical assumptions changes assumptions october 31 2002 convergence compaqs existing plans hps accounting policies result overall increase net periodic pension postretirement benefit costs approximately 450 million fiscal 2003 interest net interest net decreased 119 million fiscal 2002 fiscal 2001 decreased 185 million fiscal 2001 fiscal 2000 decline fiscal 2002 attributable primarily higher costs associated foreign currency forward contracts coupled increase unhedged losses foreign currency exposure balance sheet remeasurement unhedged losses result primarily strengthening dollar latin american currencies fiscal 2002 decline also resulted lesser extent decreased interest income due lower interest rates cash investments offset part lower interest expense debt fiscal 2001 decline due primarily decrease interest income resulting lower interest rates cash investments lower average cash investment balances compared fiscal 2000 remainder fiscal 2001 decline due increase interest expense result higher average debt balances partially offset lower interest rates net loss gain divestitures fiscal 2001 incurred net loss divestures 53 million net loss consisted 131 million loss sale verifone inc subsidiary partially offset gain 78 million sale ericsson hps remaining interest ericssonhp technology joint venture fiscal 2000 recorded net gain divestitures 203 million consisting gains sale nonstrategic businesses well gain sale ericsson portion hps interest ericssonhp technology joint venture net investment losses gains due economic downturn declines value certain investments emerging technology companies determined temporary accordingly recorded net investment losses 106 million fiscal 2002 455 million fiscal 2001 investments publiclytraded well privatelyheld emerging technology companies fiscal 2001 net investment losses consisted 471 million impairment loss offset 16 million realized gains sale equity securities fiscal 2000 recorded 41 million net gains investments representing gains sales equity investments 104 million partially offset impairment losses 63 million investment portfolio includes equity debt investments publiclytraded privatelyheld emerging technology companies many emerging technology companies still startup development stage investments companies inherently risky technologies products development typically early stages may never become successful depending market conditions may incur additional charges investment portfolio future litigation settlements july 2001 signed definitive agreement comdisco inc comdisco acquire substantially comdiscos business continuity services business agreement subject bankruptcy court sales process related approvals november 2001 bankruptcy court announced selected winning bidder acquire comdiscos business continuity services business third quarter fiscal 2002 received 14 million settlement related termination definitive agreement june 2001 hp pitney bowes inc pitney bowes announced entered agreements resolved pending patent litigation parties without admission infringement connection therewith hp paid pitney bowes 400 million cash june 2001 discussion agreement see note 17 consolidated financial statements item 8 benefit provision taxes effective tax rate differs us federal statutory rate 35 generally due tax rate benefits certain earnings operations lowertax jurisdictions throughout world us taxes provided earnings planned reinvested indefinitely outside us benefits partially offset years nondeductible charges amortization goodwill iprd certain acquisitionrelated charges reconciliation effective tax rate federal statutory rate see note 11 consolidated financial statements item 8 hps effective tax benefit rate continuing operations 12 fiscal 2002 hps effective tax provision rates continuing operations 11 fiscal 2001 23 fiscal 2000 addition impact benefits lowertax jurisdictions effective tax benefit rate fiscal 2002 statutory rate impact nondeductible items primarily iprd goodwill acquisition costs effective tax rates fiscal 2001 fiscal 2000 statutory rate primarily mix earnings lowertax rate jurisdictions partially offset nondeductible goodwill fiscal 2001 nondeductible acquisitionrelated costs iprd net earnings discontinued operations net earnings discontinued operations 136 million fiscal 2000 second quarter fiscal 2000 cumulative net earnings agilent technologies since july 31 1999 measurement date began exceed total estimated net costs effect spinoff 136 million net earnings agilent technologies period july 31 1999 measurement date june 2 2000 spinoff date totaled 287 million net related tax expense 174 million net costs effect spinoff 151 million net related tax benefit 23 million extraordinary item december 2000 board directors authorized repurchase program zerocoupon subordinated convertible notes due 2017 repurchase program repurchased notes time varying prices fiscal 2002 repurchased 257 million face value notes book value 158 million aggregate purchase price 127 million resulting extraordinary gain early extinguishment debt 20 million net related taxes 11 million fiscal 2001 repurchased 12 billion face value notes book value 729 million aggregate purchase price 640 million resulting extraordinary gain early extinguishment debt 56 million net related taxes 33 million cumulative effect change accounting principle hp adopted securities exchange commission staff accounting bulletin 101 sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 2000 accordingly restated consolidated results operations first three quarters fiscal 2001 including cumulative effect change accounting principle 272 million recorded reduction net income beginning first quarter fiscal 2001 combined company results previously described following discussion includes combined results operations hp compaq acquisition occurred beginning fiscal 2001 due different historical fiscal period ends hp compaq results year ended october 31 2002 combine results hp year ended october 31 2002 historical quarterly results compaq sixmonth period ended march 31 2002 period may 3 2002 acquisition date october 31 2002 combined company results year ended october 31 2001 combine historical results hp year ended october 31 2001 historical quarterly results compaq twelvemonth period ended september 30 2001 adjustments made combined results operations primarily reflect amortization purchased intangible assets acquisition occurred beginning periods presented results operations combined company dollars percentage net revenue follows net revenue combined company basis net revenue declined 11 fiscal 2002 723 billion us revenue declined 8 fiscal 2002 291 billion international revenue decreased 13 432 billion ongoing weakness global economy competitive environment contributed significantly decline us international revenue foreign currency fluctuations material impact hps consolidated combined company revenue fiscal 2002 due relatively stable exchange rates significant foreign currencies generated revenue period fiscal 2002 combined company net revenue declined business segments except ipg compared fiscal 2001 net revenue decreased primarily psg declined 18 esg declined 20 hps declined 3 hpfs declined 2 decreases offset small part ipg increased 4 fiscal 2002 weighted basis pc business desktop notebook pcs accounted 5 percentage points servers industry standard servers business critical servers accounted 4 percentage points consulting integration storage personal appliances printer hardware accounted 1 percentage point overall 11 net revenue decrease decreases partially offset 2 percentage point increase weighted basis printer supplies overall combined company net revenue fiscal 2002 impacted negatively decline sales volumes across many product categories due ongoing global economic downturn competitive environment shift sales mix lowerpriced products particularly printer hardware pc business industry standard servers workstations also contributed decrease revenue additionally decline revenue reflected consolidation product offerings result postacquisition product roadmap decisions industry standard servers commercial pcs storage personal appliances declines mitigated part net revenue growth printer supplies resulting rise volume due continued expansion printer hardware installed base gross margin combined company gross margin percentage combined company net revenue 253 fiscal 2002 compared 243 fiscal 2001 increase gross margin fiscal 2002 result primarily improved gross margins ipg lesser extent psg improvements partially offset gross margin decrease esg 10 percentage point increase combined company gross margin fiscal 2002 weighted basis ipg products accounted 2 percentage points increase psg products accounted 05 percentage points increase weighted basis improvements partially offset 15 percentage point decrease weighted basis gross margin esg products gross margin improvement ipg products result manufacturing efficiencies favorable currency impacts primarily yenbased component procurement contracts well approximately 290 million lower inventory fixed asset charges relative fiscal 2001 overall gross margin increase also attributable mix shift toward printer supplies gross margins higher company average gross margin improvement psg products resulted strong demand highermargin retail notebook pcs gross margin deterioration esg products primarily reflected obsolescence unabsorbed fixed costs industry standard servers due product roadmap decisions additionally server categories impacted unfavorably competitive pricing mix shift lowend products operating expenses research development combined company research development expense percentage combined company net revenue 54 fiscal 2002 compared 51 fiscal 2001 research development expense decreased 5 fiscal 2002 fiscal 2002 research development expense decreased business segments except ipg increased 9 increase research development spending result continued investment printer hardware supplies digital imaging products overall decrease research development expense fiscal 2002 result primarily workforce reduction efforts expense control measures moderated higher company performance bonuses relative fiscal 2001 selling general administrative combined company selling general administrative expense percentage combined company net revenue 157 fiscal 2002 156 fiscal 2001 selling general administrative expense decreased 10 fiscal 2002 overall decrease selling general administrative expense fiscal 2002 attributable mainly workforce reduction efforts expense control measures lower bad debt expense partially offset higher company performance bonuses relative fiscal 2001 restructuring charges combined company basis recorded restructuring charges 18 billion fiscal 2002 10 billion fiscal 2001 discussion fiscal 2002 fiscal 2001 charges recorded hp included historical results presentation fiscal 2001 addition charges recorded hp compaqs management approved restructuring plans realign organization reduce operating costs compaq implemented significant changes business model supply chain operations actions designed simplify product offerings derive greater internal operating efficiencies lower order cycle time reduce channel inventory improve account order management compaq also consolidated certain functions within global business units reduced administrative functions accordingly compaq planned terminate approximately 8500 employees worldwide connection plans restructuring charges 656 million expensed fiscal 2001 december 2001 compaq reversed excess reserves 68 million employee separation costs accrued conjunction fiscal 2001 plans expensed additional charge approximately amount additional reductions 1400 employee positions approved management help better meet objectives realigning organization reducing operating costs employee separation benefits plan similar included severance medical benefits employee separations fiscal 2001 plans substantially completed march 31 2002 inprocess research development charges discussed historical results presentation fiscal 2002 hp recorded iprd charges totaling 793 million connection acquisitions compaq indigo fiscal 2001 hp recorded iprd charges 35 million related primarily middleware storage virtualization product offering acquisitions acquisitionrelated charges connection compaq acquisition combined company incurred acquisitionrelated charges 772 million fiscal 2002 consisted primarily costs incurred employee retention bonuses advertising proxy solicitation costs consulting services professional fees acquisitionrelated charges 33 million fiscal 2001 related primarily unsuccessful bid pricewaterhousecoopers consulting business compaq acquisitionrelated charges amortization purchased intangible assets goodwill related acquisitions occurred prior july 1 2001 purchased intangible assets amortized estimated useful lives generally two ten years combined company basis amortization expense 664 million fiscal 2002 698 million fiscal 2001 goodwill related acquisitions occurred june 30 2001 amortized accordance sfas 142 postretirement benefit costs future effects postretirement benefit plans operating results depend number factors including assumptions health care cost trend rates salary growth longterm return plan assets discount rates changes assumptions october 31 2002 include decrease longterm rate return assets decrease discount rate decrease average rate salary increases increase health care cost trend rates expect addition preacquisition compaq employees pension postretirement benefit plans january 1 2003 difference actual portfolio performance historical assumptions changes assumptions october 31 2002 convergence compaqs existing plans hps accounting policies result overall increase net periodic pension postretirement benefit costs approximately 400 million fiscal 2003 combined company basis interest net combined company basis interest net decreased 274 million fiscal 2002 addition items discussed historical results interest net declined additional 155 million combined company basis primarily due higher interest income earned prior year associated compaqs investment activities fiscal 2001 net loss gain divestitures fiscal 2001 combined company basis incurred net loss divestures 53 million fully discussed historical results presentation net investment losses gains combined company basis net investment losses 100 million fiscal 2002 26 billion fiscal 2001 addition items discussed historical results presentation fiscal 2001 loss included 21 billion impairment charges associated compaqs investments including 18 billion impairment cmgi inc judged experienced temporary decline value litigation settlements fiscal 2002 recorded litigation settlement gain 14 million fiscal 2001 recorded litigation settlement expense 400 million fully discussed historical results presentation benefit provision taxes combined company basis hps effective tax rate benefit 13 fiscal 2002 37 fiscal 2001 hps effective tax rate differed us federal statutory rate 35 fiscal 2002 due impact nondeductible items primarily iprd goodwill acquisitionrelated costs extraordinary item extraordinary item 20 million fiscal 2002 56 million fiscal 2001 reflects gain early extinguishment debt repurchase program zerocoupon subordinated convertible notes due 2017 program fully described historical results discussion cumulative effect changes accounting principles discussed historical results presentation fiscal 2001 includes cumulative effect change accounting principle 272 million connection hps adoption sab 101 fourth quarter fiscal 2001 retroactive november 1 2000 remaining balance cumulative effect change accounting principles fiscal 2002 result compaqs adoption january 2001 eitf issue 019 accounting consideration given vendor customer reseller vendors products issued eitf november 2001 compaqs adoption eitf issue 019 resulted change method accounting certain sales incentive offerings historically compaq recognized certain incentives time obligation incurred generally occurred upon completion qualifying sales transactions compaqs direct indirect customers eitf issue 019 requires discounts recognized later date sales incentive offered date related revenue recognized effects adopting eitf issue 019 included combined company results beginning january 1 2001 segment information segment financial data years ended october 31 2001 2000 restated reflect changes hps organizational structure allocation methodology occurred first third quarters fiscal 2002 changes included movement pc business workstations computing systems segment psg movement servers storage software computing systems esg movement personal appliances psg addition hpfs moved services segment separate reporting segment remaining businesses services became hps acquisition compaq result additional reporting segments detailed description products services well financial data segment found note 18 consolidated financial statements item 8 four principal reportable segments disclosed document based hps management organizational structure october 31 2002 separate segment reporting also included hpfs included esgs organizational structure due distinct nature business future changes organizational structure may result changes reportable segments disclosed historical results historical results discussions include historical results hps segments fiscal 2002 2001 2000 including compaqs results operations may 3 2002 acquisition date fluctuations segment operating results hp fiscal 2002 compared fiscal 2001 due generally acquisition compaq discussed detail supplementary discussion operating results segment fiscal 2002 compared fiscal 2001 provided discussion combined company operating results presented historical results discussions combined company results consistent supplemental disclosures included consolidated operating results discussion combined company segment results discussions include results hps segments fiscal 2002 fiscal 2001 acquisition compaq occurred beginning fiscal 2001 previously discussed included additional information order provide insight segment operating results prior period trends current position due different historical fiscal periodends hp compaq segment results year ended october 31 2002 combine results hp year ended october 31 2002 historical quarterly results compaq sixmonth period ended march 31 2002 period may 3 2002 acquisition date october 31 2002 segment results year ended october 31 2001 combine historical results hp year ended october 31 2001 historical quarterly results compaq twelvemonth period ended september 30 2001 imaging printing grouphistorical results acquisition compaq material impact results ipg detailed discussion ipgs fiscal 2002 results presented combined company discussion ipgs net revenue declined 5 fiscal 2001 compared fiscal 2000 overall 5 net revenue decrease fiscal 2001 business home printer hardware revenue represented 45 40 percentage points respectively decline weighted basis partially offset 35 percentage points growth weighted basis printer supplies overall slowing markets across product categories geographic regions due economic downturn negatively impacted revenue fiscal 2001 decline printer hardware net revenue fiscal 2001 attributable decrease average selling prices driven continuing demand shift lowerpriced printer products particularly sub150 printer hardware market competitive pricing environment decline printer hardware net revenue also reflected drop units due mainly softening consumer business markets partially offsetting decline printer hardware revenue growth printer supplies revenue growth printer supplies reflected rise volumes due continued expansion printer hardware installed base higher average selling prices revenue growth printer supplies fiscal 2001 dampened economic downturn earnings operations percentage net revenue 96 fiscal 2001 compared 124 fiscal 2000 decline gross margin accounted 21 percentage points 28 percentage point decrease earnings operations ratio fiscal 2001 remaining decline due increase operating expenses percentage net revenue overall segment gross margin decline due gross margin decreases printer hardware digital imaging products gross margin decreases resulted mainly continued shift sales mix lowerpriced products gross margins categories impacted unfavorably increase inventoryrelated reserves charges inkjet imaging businesses well charges related cancellation planned production line expansion inkjet business occurred response weakened economic conditions incremental reserves charges totaled 214 million fiscal 2001 gross margin declines printer hardware imaging moderated primarily lower component costs due weaker japanese yen supplies typically gross margins exceed segment average becoming larger portion segments product mix although operating expenses decreased slightly total operating expenses percentage net revenue segment increased compared prior year decrease revenue exceeded rate decrease operating expenses imaging printing groupcombined company results ipgs combined company net revenue grew 4 fiscal 2002 compared fiscal 2001 overall 4 revenue increase fiscal 2002 printer supplies represented 65 percentage points growth weighted basis partially offset business home printer hardware contributed 15 10 percentage points revenue decline respectively weighted basis despite continued market weakness segment revenue growth across regions growth printer supplies revenue fiscal 2002 reflected higher volumes result continued expansion printer hardware installed base revenue decline business printer hardware due mainly continued shift demand lowerpriced products particularly sub1000 laser market revenue decrease home printer hardware attributable mainly decline average selling prices driven continued shift demand lowerpriced products particularly sub100 home printer hardware market moderated increased sales higherpriced allinone products sales newlyintroduced products part segments big bang consumer launch combined company earnings operations percentage net revenue 160 fiscal 2002 compared 96 fiscal 2001 64 percentage point increase due almost entirely improvement gross margin increase gross margin driven gross margin improvements supplies printer hardware manufacturing efficiencies favorable currency impacts primarily yenbased component procurement contracts supplies business home printer hardware contributed majority gross margin improvement weighted basis segment gross margin also impacted favorably supplies typically gross margins exceed segment average becoming greater percentage total segment revenue mix shift toward highermargin multifunction products within home printer hardware lower inventory fixed asset writedowns compared fiscal 2001 approximately 290 million contributed overall segment gross margin improvement personal systems grouphistorical results fluctuations psgs operating results fiscal 2002 compared fiscal 2001 due substantially acquisition compaq although acquisition compaq resulted increase unit sales average selling prices fiscal 2002 impacted unfavorably continued competitive pricing environment loss operations percentage net revenue improved due increase gross margin well decrease operating expenses percentage revenue supplementary discussion psgs fiscal 2002 results compared fiscal 2001 presented combined company discussion psgs net revenue declined 16 fiscal 2001 compared fiscal 2000 overall 16 revenue decrease fiscal 2001 commercial desktop pcs consumer desktop pcs personal appliances accounted 70 60 30 percentage points respectively decline weighted basis addition decline revenue workstations offset growth retail notebook pcs overall segment net revenue fiscal 2001 impacted unfavorably economic downturn resulting slowing markets across product categories geographic regions decline fiscal 2001 net revenue within pc business resulted revenue decreases commercial consumer desktop pcs offset part growth retail notebook pcs fiscal 2001 net revenue pc business impacted negatively declining average selling prices result decreasing component costs generally passed customer competitive pricing environment revenue decline commercial desktop pcs reflected decrease volumes ongoing decrease average selling prices consumer desktop pc revenue decreased due decline volumes lesser extent decrease average selling prices decline unit sales commercial consumer desktop pcs reflected effects economic slowdown fiscal 2001 addition continued shift toward mobile computing dampened growth desktop pcs consumer pc revenue also impacted unfavorably market saturation began late fiscal 2000 retail notebook pc revenue increased mainly result higher unit sales largely result previously noted shift toward mobile computing however growth moderated ongoing decline average selling prices decline personal appliance revenue driven cdwriter business impacted negatively decline unit sales lesser extent decrease average selling prices reflecting competitive pricing pressures mix shift lowend market saturation competitive pricing pressures associated cdwriter business resulted decision exit business fourth quarter fiscal 2001 revenue workstations decreased result decline spending mix shift unix® workstations lowerpriced industry standard machines loss operations percentage net revenue 41 fiscal 2001 compared earnings operations 28 fiscal 2000 increase operating expenses percentage net revenue accounted 35 percentage points 69 percentage point decrease earnings operations ratio fiscal 2001 remaining 34 percentage point net decrease due decline gross margin increase operating expenses percentage revenue attributable mainly investment research development activities particularly personal appliances business gross margin decline segment reflected declines commercial consumer desktop pcs well personal appliances gross margin decline within pc business accounted approximately half segment gross margin decline weighted basis resulted effects overall pc market slowdown personal appliance gross margin decrease accounted remainder overall segment gross margin deterioration due mainly decline revenue discussed coupled inventory reserve charges taken result market saturation personal appliances particularly cdwriters personal systems groupcombined company results psgs combined company net revenue declined 18 fiscal 2002 compared fiscal 2001 overall 18 revenue decrease consumer desktop pcs commercial desktop pcs commercial notebook pcs accounted 70 65 30 percentage points respectively decline weighted basis personal appliances workstations accounted 20 10 percentage points respectively decrease net revenue decline offset slightly revenue growth retail notebook pcs 15 percentage points weighted basis net revenue impacted unfavorably continued softened demand reflecting ongoing economic downturn combined company net revenue decline within pc business fiscal 2002 reflected revenue decreases consumer commercial desktop pcs commercial notebook pcs net revenue decline moderated growth sales retail notebook pcs net revenue pc business impacted negatively declining average selling prices resulting continued competitive pricing environment revenue decrease consumer desktop pcs fueled decline unit sales lesser extent decrease average selling prices decline unit sales due weakened economic conditions across regions revenue decline commercial desktop pcs result decrease average selling prices lesser extent decline unit sales decrease unit sales attributable continued shift toward mobile computing well execution postacquisition product roadmap decisions including discontinuance hp vectra line hp vectra winddown also unfavorably impacted average selling prices incentives offered sell remaining inventory commercial notebook pc revenue decline attributable decreasing average selling prices retail notebook pc revenue growth reflected increase unit sales resulting previously mentioned shift toward mobile computing moderated decreasing average selling prices personal appliance revenue declined due exit cdwriter business transition dvdrw market well product roadmap decision cancel jornada handheld product line workstations revenue decline driven decrease average selling prices reflecting mix shift unix® workstations lowerpriced windows® nt workstations partially offset increase unit sales windows® nt workstations unfavorable effects transition new product line moderated volume increase windows® nt workstations combined company loss operations percentage net revenue 24 fiscal 2002 compared 36 fiscal 2001 improvement gross margin represented 06 percentage points 12 percentage point decrease loss operations ratio remaining 06 percentage point decrease result decrease operating expenses percentage revenue gross margin improvement driven consumer pcs personal appliances partially offset gross margin declines primarily commercial pcs gross margin improvement consumer pcs contributed majority overall segment gross margin increase weighted basis resulted primarily strong demand retail notebook pcs typically higher margins desktops improvement personal appliances also contributed gross margin improvement segment weighted basis attributable lower inventory reserve charges compared fiscal 2001 moderating overall segment gross margin improvement decline commercial pc gross margin gross margin decline commercial pcs reflected declining average selling prices due competitive pricing pressures particularly endoflife product transitions decrease operating expense ratio attributable cost control measures cost savings achieved workforce reductions initiated fiscal 2001 enterprise systems grouphistorical results fluctuations esgs operating results fiscal 2002 compared fiscal 2001 due substantially acquisition compaq although unit sales increased due acquisition compaq average selling prices impacted unfavorably fiscal 2002 continued competitive pricing pressures continued mix shift lowend products increase loss operations ratio partly attributable declines gross margin due pricing factors discussed earlier coupled inventory charges unabsorbed fixed costs related net server line resulting product roadmap decisions supplementary discussion esgs fiscal 2002 results compared fiscal 2001 presented combined company discussion esgs net revenue declined 13 fiscal 2001 compared fiscal 2000 overall 13 revenue decrease fiscal 2001 weighted basis business critical servers industry standard servers accounted 60 55 percentage points decline storage contributed 15 percentage points decrease overall segment net revenue fiscal 2001 impacted unfavorably economic downturn resulting slowing markets across product categories geographic regions decrease business critical server net revenue fiscal 2001 due primarily midrange unix® servers impacted negatively enterprise market slowdown competitive pricing pressures business critical server revenue decline also resulted decrease highend unix® server revenue reflected slowdown enterprise capital spending fact superdome begin shipping volume january 2001 decline highend unix® server revenue fiscal 2001 entirely offset growth lowend unix® server category revenue decline industry standard servers driven sales mix shift toward lowend products ongoing competitive pricing pressures delayed product launches fiscal 2001 storage revenue decline attributable decline spending loss operations percentage net revenue 35 fiscal 2001 compared earnings operations 69 fiscal 2000 increase operating expenses percentage net revenue accounted 86 percentage points 104 percentage point decrease earnings operations ratio fiscal 2001 remaining 18 percentage point decrease due decline gross margin increase operating expenses percentage net revenue attributable lower revenue coupled increase operating expenses increase operating expenses reflected significant hiring sales organizations fiscal 2001 anticipation growth key areas particularly unix® servers software storage materialize due weakened economic conditions addition segment invested research development activities primarily server products half segment gross margin decline attributable industry standard servers remaining half due gross margin declines storage business critical servers server storage gross margin declines driven lower volumes competitive pricing pressures enterprise systems groupcombined company results esgs combined company net revenue declined 20 fiscal 2002 compared fiscal 2001 overall 20 revenue decrease fiscal 2002 industry standard servers business critical servers storage accounted 95 65 30 percentage points respectively decline weighted basis software contributed remaining 10 percentage point decrease overall segment revenue fiscal 2002 impacted unfavorably weak demand enterprise market due continuing effects economic downturn competitive pricing pressures cautious technology spending across product categories geographical regions combined company revenue decline industry standard servers fiscal 2002 resulted decrease average selling prices lesser extent decline volumes decrease average selling prices due continued competitive pricing pressures continued mix shift lowend products well pricing incentives offered accelerate installed base conversions proliant server line due postacquisition product roadmap decisions weak economic conditions contributed decline volumes decline volumes pronounced retiring netserver line proliant volumes remaining strong revenue decrease business critical servers fiscal 2002 attributable declines server categories including alphaservers nonstop servers unix® servers revenue decline across business critical server products reflected ongoing decline enterprise capital spending competitive pricing pressures weak spending telecommunications financial services industries storage revenue declined fiscal 2002 due continued weakness spending declines unix® industry standard servers well product roadmap modifications mid highend arrays tape libraries software revenue impacted unfavorably continued decline enterprise spending weakness telecommunications markets decision exit selected middleware assets third quarter fiscal 2002 combined company loss operations percentage net revenue 55 fiscal 2002 compared earnings operations 14 fiscal 2001 increase operating expenses percentage net revenue represented 39 percentage points 69 percentage point decrease earnings operations ratio fiscal 2002 decline gross margin accounted remaining 30 percentage point decrease although operating expense dollars decreased fiscal 2002 operating expenses percentage net revenue segment increased decrease revenue exceeded rate operating expense declines increase operating expense ratio moderated cost control measures cost savings achieved workforce reduction initiated fiscal 2001 majority gross margin decline fiscal 2002 driven gross margin decreases industry standard servers storage gross margin deterioration industry standard servers storage reflected lower volumes highermargin products competitive pricing pressures gross margin decline industry standard servers also attributable obsolescence unabsorbed fixed costs associated winddown netserver line well mix shift toward lowend products partially offset relative increase direct fulfilled business lower delivery costs hp serviceshistorical results fluctuations hps operating results fiscal 2002 compared fiscal 2001 substantially due acquisition compaq despite revenue growth attributable compaq overall consulting integration customer support businesses impacted unfavorably global economic downturn competitive pricing pressures fiscal 2002 however managed services business benefited slowdown customers reduced costs outsourcing infrastructure earnings operations percentage net revenue increased due shift revenue mix away consulting integration business typically operating profit ratios lower segment average along expense control measures workforce reduction initiatives supplementary discussion hps fiscal 2002 results compared fiscal 2001 presented combined company discussion hps net revenue increased 7 fiscal 2001 compared fiscal 2000 foreign currency adjusted basis net revenue increased 13 fiscal 2001 compared period fiscal 2000 continued growth customer support accounted 30 percentage points segments 7 revenue growth weighted basis growth consulting integration business includes complementary thirdparty products delivered sales hp solutions contributed 25 percentage points weighted basis overall segment increase managed services accounted remaining 15 percentage points growth weighted basis overall customer support consulting integration businesses net revenue growth fiscal 2001 moderated global economic downturn managed services business benefited slowdown companies strived reduce costs outsourcing infrastructure customer support net revenue growth fiscal 2001 attributable primarily sales missioncritical networking services lesser extent strength various support services revenue growth consulting integration business fueled increased number well larger engagements reflecting strong demand financial services telecommunications industries growth business also resulted increase engagements manufacturing businesses well growth types consulting services net revenue growth managed services attributable larger comprehensive deals increased business companies reduced costs outsourcing functions earnings operations percentage net revenue 106 fiscal 2001 compared 101 fiscal 2000 increase fiscal 2001 operating profit ratio driven improvements managed services consulting integration business collectively accounted 10 percentage points segment operating profit ratio growth weighted basis segment operating profit improvement moderated operating profit ratio deterioration customer support contributed 06 percentage points operating profit decline weighted basis improvement managed services operating profit ratio reflected increased process standardization delivery efficiency operating profit ratio increase consulting integration business resulted improved labor utilization overall engagement cost management customer support operating profit ratio impacted negatively increased costs support parts due unfavorable currency effects mix shift toward lowermargin services hp servicescombined company results hps combined company net revenue declined 3 fiscal 2002 compared fiscal 2001 overall 3 net revenue decrease consulting integration business includes complementary thirdparty products delivered sales hp solutions accounted 50 percentage points decline weighted basis partially offset managed services customer support businesses contributed 15 05 percentage points growth respectively weighted basis overall consulting integration customer support businesses impacted unfavorably global economic downturn competitive pricing pressures fiscal 2002 however managed services business benefited slowdown customers reduced costs outsourcing infrastructure combined company revenue decline consulting integration business fiscal 2002 attributable decline core consulting integration services decrease sales complementary thirdparty products decline consulting integration revenue reflected weak demand slowdown spending particularly telecommunications industry decrease sales complementary thirdparty products resulted tightened focus business customer critical solutions growth managed services revenue fiscal 2002 driven ongoing mix shift toward larger comprehensive deals increased business customers outsourced substantial portions infrastructure hp growth customer support revenue attributable solid demand storage services missioncritical services network services windows®environment services growth customer support revenue moderated slower revenue growth unix® server support reflecting decrease unix® server revenue result weak enterprise capital spending combined company earnings operations percentage net revenue 116 fiscal 2002 compared 123 fiscal 2001 decline fiscal 2002 operating profit ratio shared primarily consulting integration managed services businesses operating profit ratio decrease consulting integration business resulted weakened demand coupled decline consultant utilization managed services operating profit decline attributable lengthened selling cycles higher presales costs due shift toward comprehensive outsourcing contracts overall segment operating profit ratio impacted negatively engagement writeoffs reflecting customer acceptance issues deteriorating economic conditions increase infrastructure shared services costs due convergence resource usage rates based number professionals segment moderating segment gross margin decline mix shift away consulting integration business typically operating profit ratios lower segment average along expense control measures workforce reduction initiatives hp financial serviceshistorical results hpfs net revenue includes interest financing receivables rental payments operating leases sales equipment expiration lease terms fluctuations hpfs operating results fiscal 2002 compared fiscal 2001 due substantially acquisition compaq despite revenue growth attributable acquisition compaq lease originations declined fiscal 2002 due mainly decline spending worldwide moderating segment revenue growth loss operations percentage revenue declined due lower bad debt charges fiscal 2002 supplementary discussion hpfs fiscal 2002 results compared fiscal 2001 presented combined company discussion hpfs net revenue increased 3 fiscal 2001 compared fiscal 2000 increase revenue driven mix shift portfolio toward operating leases revenue fiscal 2001 also impacted favorably higher earning assets along increase sales equipment expiration lease terms revenue increase moderated decrease lease originations fiscal 2001 due mainly decline spending result ongoing global economic downturn well strengthened credit controls response downturn loss operations percentage net revenue 123 fiscal 2001 compared earnings operations 60 fiscal 2000 decline operating profit ratio attributable mainly increase 172 million bad debt reserves writeoffs response weakened economic conditions mix shift toward operating leases lower margins operating profit ratio also impacted unfavorably writedowns resulting changes residual value assumptions hp financial servicescombined company results hpfs combined company net revenue includes interest financing receivables rental payments operating leases sales equipment expiration lease terms hpfs net revenue declined 2 fiscal 2002 compared fiscal 2001 decrease revenue driven decrease lease originations year due mainly decline spending result ongoing global economic downturn related decrease earning assets well strengthened credit controls response downturn revenue decrease partially offset increase revenue equipment sales expiration lease terms midterm endofterm portfolio activities combined company loss operations percentage net revenue 64 fiscal 2002 compared 77 fiscal 2001 although bad debt writeoffs additions allowance recorded response ongoing global economic downturn fiscal 2002 fiscal 2001 incremental charges lower fiscal 2002 resulting decrease loss operations ratio fiscal 2002 liquidity capital resources information discussed presented based hps historical results include results compaq period following may 3 2002 closing date acquisition october 31 2002 held cash equivalents shortterm investments 114 billion compared 43 billion october 31 2001 fiscal 2002 net cash flows operating activities borrowings used mainly fund repayments borrowings purchases property plant equipment payments dividends repurchases common stock acquisitionrelated expenditures cash flows operating activities 54 billion fiscal 2002 compared 26 billion fiscal 2001 37 billion fiscal 2000 increase cash flows operations fiscal 2002 resulted higher earnings adjusting noncash items depreciation amortization noncash portion restructuring charges iprd charges improvement cash flows operations also reflected timing payments accounts payable improved collections trade financing receivables decreases inventory improvements partially offset acquisitionrelated expenditures including cash payments restructuring charges retention bonuses decrease cash flows operating activities fiscal 2001 resulted primarily decline net earnings timing payments accounts payable partially offset decline receivables decrease inventory cash flows investing activities 31 billion fiscal 2002 compared cash flows used investing activities 561 million fiscal 2001 14 billion fiscal 2000 increase cash flows investing activities fiscal 2002 related primarily 36 billion net cash acquired compaq transaction addition recorded 879 million upon dissolution equity method investment liquidity management corporation lmc became whollyowned subsidiary november 1 2001 net capital expenditures 13 billion fiscal 2002 11 billion fiscal 2001 13 billion fiscal 2000 capital expenditures related primarily financing assets manufacturing investments across businesses october 31 2001 held 495 equity interest lmc accounted equity method accounting remaining 505 equity interest held third party investor november 1 2001 lmc redeemed outstanding equity third party investor leaving us remaining shareholder lmc accordingly effective november 1 2001 assets liabilities results operations lmc included consolidated financial statements november 1 2001 assets lmc consisted primarily 879 million cash equivalents trade accounts receivable days sales outstanding 42 october 31 2002 compared 37 october 31 2001 increase due primarily change composition receivables balance resulting compaq acquisition part change composition result fewer early payment incentives longer payment terms compaqs sales agreements annualized inventory turns 91 october 31 2002 compared 62 october 31 2001 improvement partially result acquisition compaq operated businesses require lower levels inventories well result active inventory management currently expect fund expenditures capital requirements well liquidity needs combination available cash balances internallygenerated funds financing arrangements invest excess cash short longterm investments depending projected cash needs operations capital expenditures business purposes also supplement internally generated cash flow combination short longterm borrowings shortterm borrowings include issuances 4 billion commercial paper program established december 2000 500 million euro commercial papercertificate deposit program established may 2001 january 17 2003 approximately 12 billion commercial paper outstanding short longterm net borrowings fiscal 2002 used cash 472 million payments short longterm debt repurchases zerocoupon subordinated convertible notes partially offset shortterm longterm debt issuances including issuance 15 billion global notes june 2002 issuance 10 billion global notes december 2001 longterm debt totaling 472 million matured scheduled fiscal 2002 fiscal 2001 short longterm net borrowings generated cash 277 million shortterm longterm debt issuances including issuance 636 million based foreign exchange rate date issuance euro mediumterm notes july 2001 partially offset repurchases zerocoupon subordinated convertible notes payments longterm debt longterm debt totaling 290 million matured scheduled fiscal 2001 repurchase shares common stock systematic program manage dilution created shares issued employee stock plans opportunistic share repurchases plan authorizes purchases open market private transactions fiscal 2002 39623000 shares repurchased aggregate price 671 million january 17 2003 authorization remaining future repurchases approximately 800 million fiscal 2001 45036000 shares repurchased aggregate price 12 billion fiscal 2000 96978000 shares repurchased aggregate price 56 billion result restructuring plans expect future cash expenditures approximately 14 billion primarily employee severance related benefits total cash expenditures expected funded primarily existing cash balances cash flows generated operations cash expenditures related restructuring plans expected substantially complete end fiscal 2003 global capital market developments resulted negative returns retirement benefit plan assets decline discount rates used estimate liability result required record aftertax charge equity amount 379 million october 31 2002 related minimum pension liability currently anticipate pension contribution approximately 800 million fiscal 2003 acquisition compaq may 2002 connection acquisition compaq outstanding debt compaq consolidated financial results face value compaq debt consisted 17 billion commercial paper 275 million unsecured 745 mediumterm notes matured august 1 2002 300 million unsecured 765 mediumterm notes mature august 1 2005 300 million unsecured 62 mediumterm notes mature may 15 2003 65 million debt including debt issued digital equipment corporation interest rates ranging 7125 8625 matures various dates march 15 2004 april 1 2023 outstanding compaq debt assumed hp entire balance compaq commercial paper paid third quarter fiscal 2002 debt aggregate fair value approximately 27 billion acquisition date january 17 2003 outstanding amount debt acquired connection acquisition compaq 642 million result acquisition associated credit rating changes approximately 250 million hps debt due ccf charterhouse hsbcccf became subject put option whereby debt became repayable option hsbcccf december 17 2002 put option waived hsbcccf renegotiated debt becomes repayable hsbcccfs election september 29 2003 borrowings march 2002 replaced 10 billion committed borrowing facility due expire april 2002 two senior unsecured credit facilities totaling 40 billion borrowing capacity including 27 billion 364day facility 13 billion threeyear facility credit facilities interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities generally available support issuance commercial paper corporate purposes january 17 2003 borrowings outstanding credit facilities approximately 12 billion commercial paper outstanding programs january 17 2003 february 2002 filed shelf registration statement 2002 shelf registration statement sec register 30 billion debt securities common stock preferred stock depositary shares warrants 2002 shelf registration statement declared effective march 2002 june 2002 offered 2002 shelf registration statement 10 billion unsecured 55 global notes mature july 1 2007 unless previously redeemed also june 2002 hp offered 2002 shelf registration statement 500 million unsecured 65 global notes mature july 1 2012 unless previously redeemed may redeem either series global notes time redemption prices described prospectus supplement dated june 21 2002 december 2002 filed prospectus supplement 2002 shelf registration statement allowed us offer time 15 billion mediumterm notes series b due nine months date issue addition types securities described january 17 2003 capacity remaining issue approximately 15 billion securities 2002 shelf registration statement hp ability offer time 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange notes denominated currency including euro however notes registered united states july 2001 750 million euro 636 million based exchange rate date issuance 525 mediumterm notes maturing july 5 2006 issued program january 17 2003 capacity remaining issue approximately 22 billion mediumterm notes program february 2000 filed shelf registration statement 2000 shelf registration statement sec register 30 billion debt securities common stock preferred stock depositary shares warrants 2000 shelf registration statement declared effective march 2000 june 2000 offered 2000 shelf registration statement 15 billion unsecured 715 global notes mature june 15 2005 unless previously redeemed hp may redeem 715 global notes time redemption prices described prospectus supplement dated june 6 2000 may 2001 filed prospectus supplement 2000 shelf registration statement allowed us offer time 15 billion mediumterm notes series due nine months date issue series mediumterm note program addition types securities described december 2001 offered 2000 shelf registration statement 10 billion unsecured 575 global notes mature december 15 2006 unless previously redeemed fiscal 2001 issued aggregate 210 million mediumterm notes variable rates maturing 2003 2004 2000 shelf registration statement series mediumterm note program mediumterm notes weighted average interest rate 213 fiscal 2002 december 2002 hp offered 200 million 3375 series mediumterm notes 3375 notes mature december 15 2005 50 million 425 series mediumterm notes 425 notes mature december 17 2007 hp may redeem 3375 notes 425 notes time redemption prices described prospectus supplement dated june 6 2000 intend issue additional securities 2000 shelf registration statement october 1997 issued 18 billion face value zerocoupon subordinated convertible notes proceeds 968 million november 1997 issued additional 200 million face value notes proceeds 108 million notes due 2017 notes convertible holders rate 1509 shares hps common stock 1000 face value notes payable either cash common stock hps election time may redeem notes book value payable cash notes subordinated existing future senior indebtedness hp december 2000 board directors authorized repurchase program notes repurchase program repurchased notes time varying prices fiscal 2002 repurchased 257 million face value notes book value 158 million aggregate purchase price 127 million resulting extraordinary gain early extinguishment debt 20 million net related taxes 11 million fiscal 2001 repurchased 12 billion face value notes book value 729 million aggregate purchase price 640 million resulting extraordinary gain early extinguishment debt 56 million net related taxes 33 million january 17 2003 notes remaining book value 320 million also maintain various international lines credit total capacity 27 billion various short longterm borrowings number financial institutions institutional investors approximately 375 million outstanding january 17 2003 borrowings hp occasionally repurchases debt prior maturity based upon assessment current market conditions financing alternatives rating downgrade triggers would accelerate maturity material amount debt hsbcccf debt described however downgrade credit rating would increase cost credit facilities example downgrade credit rating could limit case significant downgrade preclude ability issue commercial paper current programs occur would seek alternative sources funding including issuance notes existing shelf registration statements euro mediumterm note programme addition ability option draw upon senior unsecured credit facilities totaling 40 billion impact contractual obligations october 31 2002 expected liquidity cash flow future periods follows 1amounts represent expected cash payments commercial paper borrowings longterm debt include fair value adjustments bond premiums discounts 2operating lease obligations include 354 million related certain car leases 118 million included less 1 year balance 236 million included 13 years balance entire balance lease obligation would become due immediately upon cancellation 3includes 130 million related contract cancellation fees management believes unlikely affected contracts cancelled prior expiration date 4amounts relate primarily various sponsorship alliance agreements 5represents maximum amount payable connection acquisition indigo described note 3 consolidated financial statements item 8 6represents remaining retention bonuses paid employees conjunction acquisition compaq part ongoing business hp participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes connection compaq acquisition hp acquired compaqs interest spe established march 2001 securitize leases compaq made immaterial equity investment spe transferred 15 million leases securitized loan term arrangement 33 months 15 months remaining october 31 2002 remaining principal payments due arrangement total approximately 6 million impact contingent liabilities commitments october 31 2002 could liquidity cash flow future periods follows 1represents lines credit extended customers financing business 2relates equity investments amounts due upon capital calls completed acquisitions divestitures may 3 2002 acquired outstanding stock compaq leading global provider information technology products services solutions enterprise customers exchange 06325 shares hp common stock outstanding share compaq common stock assumption options purchase compaq common stock based ratio addition hp assumed certain compaq stock plans acquisition compaq intended enhance hps combined competitive position key industries strengthening sales force relationships strategic customer bases acquisition intended enable hp focus strategic product customer bases achieve significant cost synergies economies scale improve results combined esg psg hps businesses furthermore intended cost savings offer strategic benefits potentially reducing hps cost structure competitive businesses pcs transaction resulted issuance approximately 11 billion shares hp common stock assumption options purchase shares compaq common stock became options purchase approximately 200 million shares hp common stock total consideration approximately 242 billion included fair value hp common stock issued compaq options assumed well direct transaction costs fair value hp common stock derived using average market price per share hp common stock 2092 based average closing prices range trading days august 30 august 31 september 4 september 5 2001 around announcement date september 3 2001 acquisition recorded approximately 145 billion goodwill 14 billion purchased intangible asset indefinite life 35 billion amortizable purchased intangible assets conjunction acquisition based independent thirdparty valuation amortizable purchased intangible assets amortized estimated weighted average useful lives approximately nine years customer contracts lists distribution agreements approximately six years developed core technology patents addition recorded pretax charge approximately 735 million iprd time acquisition third quarter fiscal 2002 technological feasibility established future alternative uses existed connection acquisition management reviewed operations combined company implemented several plans restructure operations accordance generally accepted accounting principles costs totaling approximately 960 million accrued severance early retirement employee benefits related preacquisition compaq employees costs vacating facilities leased owned contracts preacquisition compaq costs associated exiting activities preacquisition compaq included purchase price costs totaling approximately 18 billion accrued severance early retirement employee benefits preacquisition hp employees costs vacating duplicative facilities leased owned contracts preacquisition hp noninventory asset impairment charges costs associated exiting activities preacquisition hp expensed third fourth quarters fiscal 2002 included restructuring charges accompanying consolidated statement earnings results operations compaq included prospectively date acquisition december 27 2002 compaq board directors approved adopted agreement plan liquidation pursuant december 31 2002 compaq assigned hp assumed substantially assets liabilities compaq transferred employees hp additionally hp compaq agreed merge compaq hp promptly reasonably practicable following liquidating distribution march 22 2002 acquired substantially outstanding stock indigo previously owned hp exchange hp common stock nontransferable contingent value rights cvrs assumption options purchase indigo common stock acquisition intended strengthen hps printer offerings adding high performance digital color printing systems total consideration indigo 719 million included fair value hp common stock issued indigo options assumed well direct transaction costs cost equity investment made hp indigo october 2000 approximately 32 million shares hp common stock approximately 53 million cvrs issued connection transaction recorded approximately 499 million goodwill 153 million amortizable purchased intangible assets conjunction acquisition previous equity investment purchased intangible assets amortized estimated useful lives range five eight years addition recorded pretax charge approximately 58 million iprd time acquisition second quarter fiscal 2002 technological feasibility established future alternative uses existed results operations indigo included prospectively date acquisition cvrs issued conjunction acquisition entitle holder onetime contingent cash payment 450 per cvr based achievement certain cumulative revenue results threeyear period liability related cvrs recorded additional goodwill payout thresholds achieved future cash payout cvrs payable threeyear period commencing april 1 2002 january 2001 hp acquired outstanding stock bluestone software inc bluestone exchange hp common stock assumption bluestone options september 2001 hp acquired outstanding stock storageapps inc storageapps exchange hp common stock assumption storageapps options total consideration bluestone 531 million total consideration storageapps 319 million included fair value hp common stock issued options assumed well direct transaction costs transactions accounted purchase method accordingly results operations acquired companies included consolidated results operations prospectively date acquisition fiscal 2002 recorded impairment charge 546 million goodwill purchased intangible assets due primarily product roadmap decisions made conjunction compaq acquisition led elimination substantially middleware storage vitualization offerings see note 3 consolidated financial statements item 8 additional information acquisitions fiscal 2001 net proceeds divestitures 117 million resulting sale verifone inc subsidiary sale ericsson hps remaining interest ericssonhp technology joint venture fiscal 2000 net proceeds divestitures 448 million resulting sale nonstrategic businesses well sale ericsson part hps interest ericssonhp technology joint venture debt ratios financing business dependent issuance debt financing operations businesses typically leasing business higher leverage industrial technology business given lower risks leasing business assets although vast majority total outstanding debt issued assumed hp finance subsidiary one working capital needs hp support intercompany loans hpfs based leverage positions companies financing businesses believe appropriate consider portion external debt support financing business accordingly october 31 2002 attribute approximately 77 total outstanding debt business analysis debt allocation certain ratios discussed financing nonfinancing basis financing business 1financing business assets include financing receivables assets operating leases 2financing business debt includes allocated debt issued assumed hp generates financing interest expense consolidated statement earnings nonfinancing business 1nonfinancing business debt total debt issued assumed hp less portion allocated financing business described financing business table nonfinancing businesses generate significant cash ongoing operations therefore generally require significant amount debt finance operations although debt may used finance working capital needs taxefficient repatriate cash jurisdictions given period cash flows operations primary source funds businesses factors could affect future results following factors well variables affecting operating results past financial performance considered reliable indicator future performance investors use historical trends anticipate results trends future periods competitive pressures face could harm revenue gross margins prospects encounter aggressive competition numerous varied competitors areas business compete primarily basis technology performance price quality reliability brand distribution customer service support products services support enable us compete successfully based criteria could harm operations results prospects may continue lower prices many products services support stay competitive time trying maintain improve revenue gross margins cannot proportionately decrease cost structure response competitive price pressures gross margins therefore profitability could adversely affected addition pricing factors sufficiently competitive adverse reaction product offering decisions including product roadmap decisions connection compaq acquisition may lose market share certain areas could adversely affect revenue prospects cannot continue develop manufacture market innovative products services meet customer requirements performance reliability may lose market share revenue may suffer process developing new high technology products services enhancing existing products services complex uncertain failure us anticipate customers changing demands emerging technological trends accurately develop obtain appropriate intellectual property could significantly harm results operations must make longterm investments commit significant resources knowing whether predictions eventually result products services market accept product developed must able manufacture sufficient volumes quickly low costs accomplish must accurately forecast volumes mix products configurations meet customer requirements may succeed delay development production marketing new product could result among first market could harm competitive position effectively manage product services transitions revenue may suffer make effective transition existing products services future offerings revenue may seriously harmed among factors make smooth transition difficult delays development manufacturing variations costs delays customer purchases anticipation new introductions customer demand new offerings revenue gross margins also may suffer due timing product service introductions suppliers competitors especially challenging product short life cycle competitor introduces new product introduction furthermore sales new products services may replace sales current offerings offsetting benefit even successful introduction may also overlaps current products services hp portfolios acquired mergers acquisitions including portfolios acquired acquisition compaq must managed given competitive nature industry incur delays new introductions accurately estimate market effects new introductions future demand products services revenue may seriously harmed failure us complete acquisitions alliances successfully enhance strategic businesses product lines divest nonstrategic businesses product lines could harm financial results business prospects part business strategy frequently engage discussions third parties regarding enter agreements relating possible acquisitions strategic alliances joint ventures divestitures order manage product technology portfolios strategic objectives order pursue strategy successfully must identify suitable acquisition alliance divestiture candidates complete transactions may large complex integrate acquired companies integration risks acquisitions strategic alliances pronounced larger complicated transactions acquisition compaq multiple acquisitions pursued simultaneously however fail identify complete transactions may required expend resources develop products technology internally may competitive disadvantage may adversely affected negative market perceptions may material effect revenue selling general administrative expenses integration issues complex timeconsuming expensive without proper planning implementation could significantly disrupt business challenges involved integration include •combining product offerings preventing customers distributors deferring purchasing decisions switching suppliers due uncertainty direction product offerings willingness support service existing products could result incurring additional obligations order address customer uncertainty •demonstrating customers distributors transaction result adverse changes client service standards business focus helping customers conduct business easily •consolidating rationalizing corporate infrastructure including implementing information management system processes enable increased customer satisfaction improved productivity lower costs direct sales improved inventory management •consolidating administrative infrastructure including systems manufacturing operations maintaining adequate controls throughout integration •coordinating sales marketing efforts communicate capabilities effectively •coordinating rationalizing research development activities enhance introduction new products technologies reduced cost •preserving distribution marketing important relationships resolving potential conflicts may arise •minimizing diversion management attention ongoing business concerns •persuading employees business cultures compatible maintaining employee morale retaining key employees implementing restructuring programs •coordinating combining operations subsidiaries affiliated entities relationships facilities may subject additional constraints imposed local laws regulations also may result contract terminations renegotiations labor tax law implications •managing integration issues shortly pending completion independent reorganizations may 2002 completed acquisition compaq leading provider information technology products services solutions operations worldwide fiscal 2001 revenue 336 billion process integrating compaq company addition compaq transaction completed exchange offer acquire outstanding shares indigo leading commercial industrial printing systems company second quarter fiscal 2002 evaluate enter acquisition alliance joint venture divestiture transactions ongoing basis number pending transactions size scope acquisition compaq increase scope consequence ongoing integration risks may successfully address integration challenges timely manner may fully realize anticipated benefits synergies compaq acquisition principally associated restructurings including workforce reductions procurement synergies operational efficiencies transaction extent timeframe anticipated moreover timeframe achieving benefits may dependent partially upon actions employees suppliers third parties even acquisition alliance successfully integrated business successfully divested may receive expected benefits transaction managing acquisitions alliances joint ventures divestitures requires varying levels management resources may divert attention business operations transactions also resulted future may result significant costs expenses charges earnings case compaq acquisition costs expenses include related severance pay early retirement costs asset impairment charges elimination duplicative facilities contracts inprocess research development charges inventory adjustments legal accounting financial advisory fees required payments executive officers key employees plans adopted connection transaction moreover incurred incur additional depreciation amortization expense useful lives certain net tangible intangible assets acquired connection transaction extent value goodwill intangible assets indefinite lives acquired connection transaction becomes impaired may required incur additional material charges relating impairment assets also prior future downgrades credit rating associated acquisition could adversely affect ability borrow result restrictive borrowing terms including increased borrowing costs restrictive covenants extension less open credit turn could affect internal cost capital estimates therefore operational decisions addition effective tax rate ongoing basis uncertain could exceed currently reported tax rate weighted average preacquisition tax rates hp compaq result foregoing completed pending future transactions may contribute financial results differ investment communitys expectations given quarter revenue selling general administrative expenses may suffer cannot continue license enforce intellectual property rights business depends third parties assert violate intellectual property rights generally rely upon patent copyright trademark trade secret laws united states similar laws countries agreements employees customers partners parties establish maintain intellectual property rights technology products used operations however intellectual property rights could challenged invalidated circumvented intellectual property rights may provide competitive advantages could significantly harm business also rapid pace technological change information technology industry much business many products rely key technologies developed third parties may able obtain continue obtain licenses technologies third parties reasonable terms third parties may demand crosslicenses third parties also may claim infringing upon intellectual property rights even believe products business activities infringing upon third parties intellectual property rights claims timeconsuming costly defend divert managements attention resources away business claims intellectual property infringement also might require us enter costly settlement license agreements pay significant damage awards cannot license infringed technology reasonable terms substitute similar technology another source operations could suffer addition possible consequence merger acquisition transaction intellectual property rights may licensed third party licensed prior transaction certain restrictions could imposed business imposed prior transaction consequently may lose competitive advantage respect intellectual property rights may required enter costly arrangements order terminate limit agreements economic downturn could adversely affect revenue gross margins expenses revenue gross margins depend significantly overall demand computing imaging products services particularly product service segments compete softening demand products services caused ongoing economic downturn resulted may result decreased revenue earnings growth rates problems ability manage inventory levels realize customer receivables global economy weakened market conditions continue challenging result individuals companies delaying reducing expenditures including information technology addition customers experience financial difficulties could suffer losses associated outstanding portion accounts receivable exposed risks lessees unable make required lease payments leased equipment worth less upon return us estimated lease inception observed effects global economic downturn many areas business downturn contributed reported net revenue declines fiscal 2001 combined company basis fiscal 2002 current downturn also experienced gross margin declines certain businesses reflecting effect competitive pressures well inventory writedowns charges associated cancellation planned production line expansion selling general administrative expenses impacted due part increase bad debt writeoffs additions reserves receivables portfolio economic downturn also led restructuring actions associated expenses delays reductions information technology spending could material adverse effect demand products services consequently results operations prospects stock price terrorist acts war may seriously harm business revenue costs expenses financial condition terrorist acts war wherever located around world may cause damage disruption hp employees facilities partners suppliers distributors resellers customers could significantly impact revenue costs expenses financial condition terrorist attacks took place united states september 11 2001 unprecedented events created many economic political uncertainties may materially harm business results operations longterm effects business september 11 2001 attacks unknown potential future terrorist attacks national international responses terrorist attacks perceived threats national security acts war hostility created many economic political uncertainties could adversely affect business results operations ways cannot presently predicted addition major multinational company headquarters significant operations located united states may impacted actions united states predominantly uninsured losses interruptions caused terrorist acts war fail manage distribution products services properly distributors financial condition operations weaken revenue gross margins profitability could adversely affected use variety different distribution methods sell products services including thirdparty resellers distributors retail direct sales enterprise accounts consumers since distribution method distinct risks gross margins failure implement advantageous balance delivery model products services could adversely affect revenue gross margins therefore profitability example •as continue increase commitment direct sales could risk alienating channel partners adversely affecting distribution model since direct sales may compete sales made thirdparty resellers distributors thirdparty resellers distributors may elect use suppliers directly sell products customers prefer seek purchase directly increase commitment direct sales could alienate channel partners result may lose customers purchase thirdparty resellers distributors •some wholesale retail distributors may unable withstand changes business conditions wholesale retail distributors may insufficient financial resources may able withstand changes business conditions including ongoing economic downturn industry consolidation revenue indirect sales could suffer could experience disruptions distribution distributors financial condition operations weaken •our inventory management complex continue sell significant mix products distributors must manage inventory effectively particularly respect sales distributors may increase orders periods product shortages cancel orders inventory high delay orders anticipation new products distributors also may adjust orders response supply products competitors available distributor seasonal fluctuations enduser demand excess inventory may reduce prices write inventory turn could result lower gross margins depend third party suppliers revenue gross margins could adversely affected fail receive timely delivery quality components fail manage inventory levels properly manufacturing operations depend ability anticipate needs components products suppliers ability deliver quality components products time meet critical manufacturing distribution schedules given wide variety systems products services offer large number suppliers contract manufacturers dispersed across globe problems could arise planning production managing inventory levels could seriously harm us among problems could arise component shortages excess supply risks related fixedprice contracts would require us pay open market price •supply shortages occasionally may experience short supply certain component parts result strong demand industry parts problems experienced suppliers shortages delays persist price components may increase may exposed product quality issues components may available may able secure enough components reasonable prices acceptable quality build new products timely manner quantities configurations needed accordingly revenue gross margins market share could suffer sources developed •oversupply order secure components production new products times may make advance payments suppliers may enter noncancelable purchase commitments vendors fail anticipate customer demand properly temporary oversupply parts could result excess obsolete components could adversely affect gross margins •longterm pricing commitments result binding price purchase commitments vendors may obligated purchase components prices higher available current market event become committed purchase components prices excess current market price may disadvantage competitors access components lower prices gross margins could suffer effects may exacerbated result use single source suppliers certain components obtain significant number components single sources due technology availability price quality considerations addition new products introduce may initially utilize custom components obtained one source evaluated whether need additional suppliers performance single source suppliers may affect quality quantity supplies hp due international nature business political economic changes constraints could harm future revenue costs expenses financial condition sales outside united states make half revenue future revenue costs expenses financial condition could adversely affected variety international factors including •changes countrys regions political economical conditions including inflation recession currency interest rate fluctuations •longer accounts receivable cycles financial instability among customers •trade protection measures local labor conditions •overlap different corporate structures •unexpected changes regulatory environment requirements •differing technology standards customer requirements •import export business licensing requirements relating making foreign direct investments could affect ability obtain favorable terms components lead penalties restrictions •difficulties associated repatriating cash generated held abroad taxefficient manner •problems caused conversion various european currencies euro macroeconomic dislocations may result •natural disasters portion product component manufacturing along key suppliers also located outside united states also could disrupted international factors described particular along pc vendors engaged manufacturers taiwan production notebook computers past taiwan suffered earthquakes typhoons resulting temporary communications supply disruptions addition procure components japan also suffers earthquakes periodically moreover indigo subsidiary research development manufacturing operations located israel may subject disruptions light ongoing regional instability impairment investment financing portfolios could harm net earnings investment portfolio includes minority equity debt investments financing purchase products services cases attempt reduce eliminate market exposure investments may incur losses related impairment investments therefore charges net earnings investments public privatelyheld companies still startup development stage inherent risks technologies products development typically early stages may never become successful furthermore values investments publiclytraded companies subject significant market price volatility investments technology companies often coupled strategic commercial relationship commercial agreements companies may sufficient allow us obtain integrate products services offerings otherwise benefit relationship companies may subsequently acquired third parties including competitors moreover due economic downturn difficulties may faced companies supplied financing investment portfolio could impaired success solutions model could impacted cost constraints organizational transition could adversely affect revenue offer total information technology solutions customers requires us maintain vertical industry presence enhance programs enable customers purchase information technology utility develop new solutions offerings develop new employee skills failure could result offerings competitive lead reduction consumer demand products services could adversely affect revenue business disruptions could seriously harm future revenue financial condition increase costs expenses worldwide operations could subject natural disasters business disruptions could seriously harm revenue financial condition increase costs expenses corporate headquarters portion research development activities critical business operations suppliers located california near major earthquake faults ultimate impact us significant suppliers general infrastructure located near major earthquake faults unknown revenue financial condition costs expenses could significantly impacted event major earthquake addition areas including california experienced may continue experience ongoing power shortages resulted rolling blackouts could cause disruptions operations suppliers distributors resellers customers predominantly selfinsured losses interruptions caused earthquakes power outages water shortages floods natural disasters revenue profitability operations historically varied revenue profit margins vary among products customer groups geographic markets revenue mix future periods different current revenue mix overall profitability given period dependent partially product customer geographic mix reflected periods net revenue particular ipg certain product categories supplies contribute significantly profitability actual trends competitive pressures regulatory considerations factors may result fluctuation revenue cause us adjust operations could cause periodtoperiod fluctuations results operations sales cycle makes planning inventory management difficult future financial results less predictable like technology companies generally sell hardware products third month quarter first second months uneven sales pattern makes difficult predict nearterm demand quarterly results places pressure inventory management logistics systems predicted demand substantially greater orders excess inventory alternatively orders substantially exceed predicted demand ability fulfill orders received last weeks quarter may limited could adversely affect quarterly revenue earnings increase risk unanticipated variations quarterly results financial condition developments late quarter systems failure component pricing movements global logistics disruptions could adversely impact inventory levels results operations manner disproportionate number days quarter affected addition experience seasonal trends sale products example sales governments particularly sales us government often stronger third calendar quarter european sales often weaker third calendar quarter consumer sales often stronger third fourth calendar quarters customers may spend remaining capital budget authorizations fourth calendar quarter prior new budget constraints first calendar quarter following year many factors create affect seasonal trends beyond control order successful must retain motivate key employees failure could seriously harm us order successful must retain motivate executives key employees including managerial technical marketing information technology support positions particular product generation efforts depend hiring retaining qualified engineers attracting retaining skilled solutions providers support business qualified sales representatives also critical future experienced management technical marketing support personnel information technology industry high demand competition talents intense particularly case silicon valley hps headquarters certain key research development facilities located also implemented retention programs connection compaq acquisition cannot predict effect employee retention programs expire generally may 2003 loss key employees could significant impact operations stock price also must continue motivate employees keep focused hps strategies goals may particularly difficult due morale challenges posed workforce reductions acquisition compaq related proxy fight general uncertainty failure us execute planned cost reductions successfully could result total costs expenses greater expected historically undertaken restructuring plans bring operational expenses appropriate levels businesses simultaneously implementing extensive new companywide expensecontrol programs connection compaq acquisition announced workforce reductions including restructurings well reductions early retirement programs expected involve aggregate 17900 employees worldwide addition previously announced workforce reductions may additional workforce reductions future significant risks associated actions may impair ability achieve anticipated cost reductions may otherwise harm business include delays implementation anticipated reductions force highly regulated locations outside united states particularly europe asia redundancies among restructuring programs failure meet operational targets due loss employees decreases employee morale hps stock price historically fluctuated may continue fluctuate hps stock price like technology companies volatile factors affect stock price •the announcement new products services technological innovations us competitors •quarterly increases decreases revenue gross margin earnings changes business operations prospects segments •changes quarterly revenue earnings estimates investment community •speculation press investment community strategic position financial condition results operations business significant transactions including market assessments acquisition compaq integration progress general market conditions domestic international macroeconomic geopolitical factors unrelated performance also may affect price hp common stock reasons investors rely recent trends predict future stock prices financial condition results operations cash flows addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources system security risks systems integration issues could disrupt internal operations services provided customers could harm revenue increase expenses experienced computer programmers hackers may able penetrate network security misappropriate confidential information third parties create system disruptions result could incur significant expenses addressing problems created security breaches network moreover could lose existing potential customers outsourcing services solutions incur significant expenses connection customers system failures costs eliminate computer viruses alleviate security problems could significant efforts address problems could result interruptions delays cessation service addition portions infrastructure may experience interruptions delays cessations service produce errors connection ongoing systems integration work unforeseen environmental costs could impact future net earnings operations use substances regulated various federal state international laws governing environment could subject liability remediation handle substances compliance applicable laws could face significant liabilities required implement financial guarantees connection product takeback legislation policy apply strict standards environmental protection sites inside outside united states even subject local government regulations record liability environmental remediation environmental costs consider costs probable amount costs reasonably estimated incurred environmental costs presently material antitakeover provisions contained certificate incorporation bylaws shareowner rights plan well provisions delaware law could impair takeover attempt provisions certificate incorporation bylaws could effect rendering difficult discouraging acquisition deemed undesirable board directors include provisions •authorizing blank check preferred stock could issued voting liquidation dividend rights superior common stock •limiting liability providing indemnification directors officers •limiting ability shareowners call special meetings •requiring advance notice shareowner proposals business conducted meetings hp shareowners nominations candidates election board directors •controlling procedures conduct board shareowner meetings election removal directors •specifying shareowners may take action duly called annual special meeting shareowners provisions alone together could deter delay hostile takeovers proxy contests changes control management hp delaware corporation hp also subject provisions delaware law including section 203 delaware general corporation law prevents shareowners engaging certain business combinations without approval holders substantially hps outstanding common stock 2001 hp issued preferred share purchase rights pursuant preferred stock rights agreement dated august 31 2001 rights agreement hp computershare investor services llc rights intended prevent takeover hp however rights may effect rendering difficult discouraging acquisition hp deemed undesirable hp board directors rights would caused substantial dilution person group attempted acquire hp terms manner approved board directors except pursuant offer conditioned upon redemption rights board directors approved termination rights agreement effective close business january 21 2003 provision certificate incorporation bylaws delaware law effect delaying deterring change control could limit opportunity shareowners receive premium shares hp common stock also could affect price investors willing pay hp common stock recent accounting pronouncements july 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires business combinations accounted purchase method accounting changes criteria recognition intangible assets acquired business combination provisions sfas 141 apply business combinations initiated june 30 2001 sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized however assets must reviewed least annually impairment intangible assets finite useful lives continue amortized respective useful lives standard also establishes specific guidance testing impairment goodwill intangible assets indefinite useful lives nonamortization provisions sfas 142 effective immediately goodwill intangible assets acquired june 30 2001 hp adopted remaining provisions sfas 142 effective november 1 2002 adoption sfas 142 material impact hps amortization goodwill intangible assets majority goodwill intangible assets affected adoption sfas 142 written restructuring charge recorded third quarter fiscal 2002 upon adoption sfas 142 hp required perform transitional impairment test recorded goodwill within six months necessary determine amount impairment loss october 31 2003 management currently process evaluating effect required impairment testing hps recorded goodwill addition hp required perform transitional impairment test intangible assets indefinite lives within three months adoption hp process completing impairment test intangible asset indefinite useful life compaq trade name expect record impairment charge first quarter fiscal 2003 october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 amends existing accounting guidance asset impairment provides single accounting model longlived assets disposed among provisions new rules change criteria classifying asset heldforsale standard also broadens scope businesses disposed qualify reporting discontinued operations changes timing recognizing losses operations hp adopted sfas 144 effective november 1 2002 expect adoption material effect results operations financial condition april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections among provisions sfas 145 rescinds sfas 4 reporting gains losses extinguishment debt accordingly gains losses extinguishment debt shall reported extraordinary items unless extinguishment qualifies extraordinary item criteria accounting principles board apb opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions gains losses extinguishment debt meet criteria apb 30 reclassified income continuing operations prior periods presented hp adopted sfas 145 effective november 1 2002 reclassify gains early extinguishment debt related taxes previously recorded extraordinary item interest net provision taxes respectively june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 provides guidance related accounting costs associated disposal activities covered sfas 144 exit restructuring activities previously covered eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 supercedes eitf issue 943 entirety sfas 146 requires costs related exiting activity restructuring recognized liability incurred sfas 146 applied prospectively exit disposal activities initiated december 31 2002 november 2002 fasb issued fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities hp apply recognition provisions fin 45 prospectively guarantees issued december 31 2002 disclosure provisions fin 45 effective financial statements first quarter hps fiscal year 2003 hp currently process evaluating potential impact adoption fin 45 consolidated financial position results operations november 2002 eitf reached consensus issue 0021 revenue arrangements multiple deliverables eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 hp currently evaluating effect adoption eitf issue 0021 results operations financial condition december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally sfas 148 requires disclosure pro forma effect interim financial statements transition annual disclosure requirements sfas 148 effective hps fiscal year 2003 interim disclosure requirements effective second quarter hps fiscal year 2003 hp expect sfas 148 material effect results operations financial condition january 2003 fasb issued fasb interpretation 46 fin 46 consolidation variable interest entities interpretation arb 51 fin 46 requires certain variable interest entities consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 hp currently evaluating effect adoption fin 46 results operations financial condition item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global technology company earn revenues profits sale products technologies solutions services consumers businesses portfolio broad includes home business imaging printing devices publishing systems personal computers handheld computing devices servers storage software solutions wide array services face variety challenges opportunities responding dynamics technology industry characterized rapid change evolving customer demands intense competition six business segments imaging printing group ipg personal systems group psg enterprise systems group esg hp services hps hp financial services hpfs corporate investments provide robust platform innovation strive deliver best possible experience customers strategy revolves around continued investment technology research development innovation expanding strengthening product portfolio partnering global industry leaders delivering value proposition customers working improve profitability market share financial strength financial strength ability adapt current market economic conditions dependent part generation cash flow effective management working capital funding commitments obligations well growth business fiscal 2002 lesser extent first half fiscal 2003 performance industry whole impacted negatively global economic downturn cautious spending economic environment remains challenging spending showed signs improvement indications improving economic outlook exited fiscal 2003 acquisition compaq may 2002 combined effective integration operations hp also significant impact business financial condition market share last 18 months fiscal 2003 made substantial progress toward completing integration including execution product transition plans alignment cost structure leverage synergies expected result combining businesses net revenue 731 billion fiscal 2003 compared 566 billion fiscal 2002 increase net revenue reflects market share gains across majority segments due primarily acquisition compaq well net revenue increase 11 ipg business fiscal 2003 2002 recorded significant charges relating restructuring actions well acquisitionrelated costs including inprocess research development iprd consulting integration expenses actions related charges fiscal 2002 resulted net loss 903 million returned profitability net earnings 25 billion fiscal 2003 addition fiscal 2003 generated approximately 61 billion cash flow operating activities increased cash equivalents approximately 30 billion paid dividends 977 million repurchased 751 million common stock investing 16 billion net capital expenditures repaying certain borrowings intend discussion financial condition results operations follows provide information assist understanding financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect financial statements historical results sections results operations present discussion consolidated operating results using historical results hp prepared accordance accounting principles generally accepted united states gaap fiscal years ended october 31 2003 2002 2001 including compaqs results operations may 3 2002 acquisition date order provide additional information relating operating results also present combined company sections discuss consolidated operating results hp compaq combined company fiscal 2002 fiscal 2001 included additional information order provide insight operating results prior period trends current position supplemental information presented manner consistent disclosure requirements sfas 141 business combinations described detail note 3 consolidated financial statements item 8 combined company results fiscal 2003 historical results compaq included entire period due different historical fiscal period ends hp compaq combined company results year ended october 31 2002 combine results hp year ended october 31 2002 historical quarterly results compaq sixmonth period ended march 31 2002 period may 3 2002 acquisition date october 31 2002 combined company results year ended october 31 2001 combine historical results hp year ended october 31 2001 historical quarterly results compaq twelvemonth period ended september 30 2001 discussion results operations consolidated level followed detailed discussion results operations segment discussion segment operating results presented historical basis fiscal years ended october 31 2003 2002 2001 including compaqs results operations may 3 2002 order provide additional information relating segment operating results also present combined company sections discuss segment operating results hp compaq combined company fiscal 2002 fiscal 2001 supplemental information presented manner consistent supplemental disclosures included consolidated operating results discussion combined company segment discussions also present certain product category fluctuations highlighted combined company consolidated level critical accounting policies estimates general managements discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance gaap preparation financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenue expenses related disclosure contingent assets liabilities management bases estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee board directors actual results may differ estimates different assumptions conditions accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes accounting estimates reasonably likely occur periodically could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements valuation goodwill indefinitelived purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable accordance statement financial accounting standards sfas 142 goodwill intangible assets provisions sfas 142 require twostep impairment test performed goodwill first step compare fair value reporting unit carrying value reporting units consistent reportable segments identified note 18 consolidated financial statements item 8 determine fair value reporting units using combination income approach market approach income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenues earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step order determine implied fair value reporting units goodwill compare carrying value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value must record impairment loss equal difference sfas 142 also requires fair value purchased intangible assets indefinite lives estimated compared carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value income approach use estimate fair value reporting units purchased intangible assets dependent number factors including estimates future market growth trends forecasted revenue costs expected periods assets utilized appropriate discount rates variables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments selection comparable companies used market approach valuing reporting units well certain assumptions allocate shared assets liabilities calculate carrying values reporting units revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among deliverable elements recognize revenue element recognize revenue delivered elements fair values undelivered elements known uncertainties regarding customer acceptance resolved customernegotiated refund return rights affecting revenue recognized delivered elements changes allocation sales price deliverable elements might impact timing revenue recognition would change total revenue recognized contract recognize revenue work progresses fixed price contracts consulting arrangements using proportional performance method applying proportional performance method rely estimates total expected contract costs order determine amount revenue earned date follow method reasonably dependable estimates revenue applicable various stages contract made total contract profit subject revisions throughout life contract revisions cost estimates recorded income period facts give rise revision become known record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience number customers actually redeem incentive allowance doubtful accounts allowance doubtful accounts determined using combination factors ensure trade financing receivables balances overstated due uncollectibility maintain bad debt reserve customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience also record additional reserves individual accounts become aware customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position circumstances related customers change estimates recoverability receivables would adjusted inventory stated lower cost market adjustments inventory made product group level estimated excess obsolescence impaired balances reflect inventory lower cost market factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates restructuring engaged may continue engage restructuring actions require management utilize significant estimates related realizable values assets made redundant obsolete expenses severance employee separation costs lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussion restructuring charges results operations section warranty provision provide estimated cost product warranties time revenue recognized evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers estimated warranty obligation based upon ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates service delivery costs postsales support costs differ estimates revisions estimated warranty liability would required retirement benefits pension postretirement benefit ie health care life insurance costs obligations dependent various actuarial assumptions used calculating amounts assumptions relate discount rates salary growth longterm return plan assets health care cost trend rates factors base discount rate assumption current investment yields aarated corporate longterm bond yields salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment health care cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends key assumptions described detail note 15 consolidated financial statements item 8 actual results differ assumptions accumulated amortized estimated future working life plan participants taxes earnings effective tax rate includes impact certain undistributed foreign earnings us taxes provided earnings planned reinvested indefinitely outside united states earnings remittance amounts planned based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distributed united states provide us federal taxes due amounts result certain employment actions capital investments undertaken hp income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes years 2013 material changes estimates cash working capital longterm investment requirements could impact effective tax rate record valuation allowance reduce deferred tax assets amount likely realized considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future adjustment deferred tax assets would charged earnings period determination made likewise later determine likely net deferred tax assets would realized previously provided valuation allowance would reversed order realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located recent accounting pronouncements see note 1 consolidated financial statements full description recent accounting pronouncements including respective expected dates adoption effects results operations financial condition results operations historical results following discussion compares historical results operations gaap basis years ended october 31 2003 2002 2001 results include compaqs results operations may 3 2002 date acquired outstanding stock compaq leading global provider information technology products services solutions result fluctuations historical operating results hp segments fiscal 2003 compared fiscal 2002 fiscal 2001 due generally acquisition compaq results operations dollars percentage net revenue follows 1cost products cost services financing interest 2certain reclassifications made prior fiscal year balances order conform current fiscal year presentation net revenue net revenue increased 29 23 constant currency basis fiscal 2003 25 fiscal 2002 respectively foreign currency fluctuations material impact hp consolidated fiscal 2002 net revenue growth due relatively stable exchange rates foreign currencies generated revenue us revenue increased 25 292 billion fiscal 2003 24 233 billion fiscal 2002 international revenue grew 32 438 billion fiscal 2003 26 333 billion fiscal 2002 net revenue increase fiscal 2003 compared fiscal 2002 fiscal 2002 compared fiscal 2001 attributable primarily acquisition compaq beginning may 2002 resulting market share increases psg esg hps lesser extent hpfs ipg also contributed overall revenue increase fiscal 2003 fiscal 2002 due primarily strong growth printer supplies reflecting higher volumes result continued expansion printer hardware installed base lesser extent growth printer hardware digital imaging products well synergies resulting compaq acquisition addition fiscal 2003 overall net revenue favorably impacted currency effects weakening dollar euro declining average selling prices due competitive pricing pressures shift sales mix lowerpriced products service offerings moderated overall revenue increases fiscal 2003 fiscal 2002 gross margin gross margin percentage net revenue improved 02 percentage points fiscal 2003 compared fiscal 2002 07 percentage points fiscal 2002 compared fiscal 2001 improvement periods due effective overall cost management cost reductions resulting workforce reductions declining average selling prices due competitive pricing pressures mix shift toward lowermargin products across segments moderated overall increase addition fiscal 2003 gross margin favorably impacted currency effects revenue resulting primarily weakening dollar euro well higher cost sales fiscal 2002 due 147 million inventory adjustments resulting product roadmap decisions addition fiscal 2002 gross margin compared fiscal 2001 favorably impacted 180 million lower inventoryrelated charges fiscal 2002 recorded fiscal 2001 expect gross margin remain pressure due primarily continued price competition mix shifts toward lowermargin products services however expect effects moderated continued operational efficiencies across segments resulting better management cost structures improving economic outlook operating expenses research development research development expense percentage net revenue decreased 10 percentage point fiscal 2003 compared fiscal 2002 due primarily synergies realized workforce reduction efforts expense control measures particularly esg psg research development expense increased 8 fiscal 2003 22 fiscal 2002 due primarily acquisition compaq well continuing investment inkjet technology addition fiscal 2003 expense partially impacted unfavorable currency effects primarily weakening dollar euro fiscal 2002 expense impacted higher company performance bonuses compared fiscal 2001 selling general administrative selling general administrative expense increased 26 fiscal 2003 31 fiscal 2002 majority growth fiscal 2003 fiscal 2002 selling general administrative expense attributable acquisition compaq may 2002 mitigated part declines resulting workforce reduction efforts expense control measures lower bad debt expense addition fiscal 2003 expense partially impacted unfavorable currency effects primarily weakening dollar euro fiscal 2002 expense impacted higher company performance bonuses compared fiscal 2001 amortization purchased intangible assets goodwill effective november 1 2002 date adoption sfas 142 goodwill intangible assets longer amortize goodwill instead test goodwill least annually impairment amortize purchased intangible assets finite useful lives estimated useful lives generally two ten years amortization expense 563 million fiscal 2003 402 million fiscal 2002 174 million fiscal 2001 increase amortization expense fiscal 2003 compared fiscal 2002 due primarily amortization purchased intangible assets related acquisition compaq may 2002 lesser extent acquisition indigo nv indigo march 2002 elimination goodwill amortization lesser extent writeoff purchased intangible assets related middleware storage virtualization offerings fiscal 2002 result product roadmap decisions made connection compaq acquisition offset part increase fiscal 2002 compared fiscal 2001 also due primarily amortization purchased intangible assets compaq acquisition restructuring charges second third fourth quarters fiscal 2003 management approved implemented plans restructure certain operations actions included workforce reductions associated managing cost structure better align current business conditions second quarter action also included asset impairments associated identification duplicative assets facilities leased owned relating acquisition compaq 800 million charge recorded fiscal 2003 composed following 175 million charge fourth quarter action 342 million charge third quarter action 235 million charge second quarter action 48 million adjustment fiscal year 2002 actions discussed detail total cost expect incur fourth quarter action approximately 188 million recorded approximately 175 million amount recorded fourth quarter action 162 million charge associated severance early retirement employee benefits related termination early retirement approximately 2000 employees worldwide across many regions job classes including 10 million noncash charges october 31 2003 approximately 600 employees terminated placed workforce reduction program retired made payments relating terminations totaling approximately 20 million expect pay majority remaining 132 million relating severance employee benefits end fiscal 2004 fourth quarter action also included restructuring charges 13 million remaining costs approximately 13 million associated primarily cost vacating duplicative facilities leased owned contract termination costs anticipate substantially settled end fiscal 2004 record liability october 31 2003 associated remaining costs components meet recognition criteria sfas 146 recorded restructuring charge approximately 342 million connection third quarter restructuring plan charge third quarter action associated severance early retirement employee benefits related termination early retirement approximately 4700 employees worldwide across many regions job classes including 11 million noncash charges october 31 2003 approximately 4100 employees terminated placed workforce reduction program retired made payments relating terminations totaling approximately 232 million expect pay majority remaining 99 million relating severance employee benefits end fiscal 2004 total cost expect incur second quarter action approximately 268 million recorded approximately 235 million amount 135 million associated severance employee benefits related termination approximately 2300 employees worldwide across many regions job classes hp services terminated placed workforce reduction program period plan approved payments severance employee benefits approximately 127 million made october 31 2003 also recorded approximately 100 million charges associated asset impairments costs vacating duplicative facilities leased owned contract termination costs primarily within psg esg remaining costs approximately 33 million associated primarily cost vacating duplicative facilities leased owned contract termination costs anticipate substantially settled end fiscal 2004 record liability october 31 2003 associated remaining costs components meet recognition criteria sfas 146 fiscal 2003 recorded 48 million additional costs net reductions estimated severance costs employee benefits asset impairments restructuring costs related preacquisition hp plan initially recorded fiscal 2002 charge results operations charges consisted 65 million additional asset impairments related mainly buildings vacated result acquisition net addition 32 million employee severance employee benefits reflecting voluntary severance actions met criteria accrual third quarter fiscal 2003 adjustments original estimates actual costs incurred various locations throughout world net reduction 49 million restructuring activities adjusted original estimates lease contract termination costs actual costs incurred connection acquisition compaq management approved initiated plans restructure operations preacquisition hp eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions consequently fiscal 2002 recorded approximately 18 billion costs associated restructuring plans 18 billion charge consisted mainly severance early retirement employee benefits costs vacating duplicative facilities leased owned contract termination costs noninventory asset impairment charges costs associated exiting activities hp asset impairment charges 544 million result primarily writeoff goodwill purchased intangible assets associated product roadmap decisions made connection compaq acquisition led elimination substantially middleware storage virtualization offerings acquired fiscal 2001 accounted costs restructure preacquisition hp organization eitf issue 943 liability recognition certain employee termination benefits costs exit activity included costs charge results operations fiscal 2002 also recorded approximately 960 million similar restructuring costs connection restructuring preacquisition compaq organization accounted costs restructure preacquisition compaq eitf issue 953 recognition liabilities connection purchase business combinations recognized costs liability assumed purchase business combination included allocation cost acquire compaq severance early retirement costs employee benefits related termination planned early retirement 17600 employees worldwide across many regions business functions job classes october 31 2003 approximately 17500 employees included workforce reduction program terminated retired made payments related workforce reduction program approximately 12 billion paid pay benefits approximately 215 million postretirement pension plans retiring employees expect pay majority remaining balance severance accrual end fiscal 2004 related restructuring charges consist primarily contractual obligations facility leases anticipated paid life related obligation expect obligations substantially settled end fiscal 2005 fiscal 2001 management approved restructuring actions respond global economic downturn improve cost structure streamlining operations prioritizing resources strategic areas business infrastructure recorded restructuring charge 384 million fiscal 2001 reflect actions fiscal 2001 charge consisted severance employee benefits related termination approximately 7500 employees worldwide across many regions business functions job classes well costs related consolidation excess facilities recorded additional restructuring charges 18 million fiscal 2002 reflect adjustments expected severance cost fiscal 2001 restructuring plans substantially employees terminated substantially accrued costs related severance related benefits paid acquisitionrelated charges connection compaq acquisition incurred acquisitionrelated charges 280 million fiscal 2003 701 million fiscal 2002 consisted primarily costs incurred employee retention bonuses consulting services professional fees addition acquisitionrelated charges fiscal 2002 included costs incurred proxy solicitation advertising acquisitionrelated charges 25 million fiscal 2001 related primarily unsuccessful bid pricewaterhousecoopers consulting business inprocess research development charges projects qualify iprd represent yet reached technological feasibility future alternative uses exist technological feasibility defined equivalent betaphase working prototype remaining risk relating development fiscal 2003 2002 2001 recorded iprd charges 1 million 793 million 35 million respectively charge fiscal 2002 included 735 million connection acquisition compaq 58 million connection acquisition indigo interest net interest net decreased 31 million fiscal 2003 fiscal 2002 119 million fiscal 2002 fiscal 2001 decline fiscal 2003 attributable primarily increased interest expense associated higher average borrowings lower dividend income associated investment activities compared fiscal 2002 lower net currency losses balance sheet remeasurement moderated decline fiscal 2002 attributable primarily higher net currency losses balance sheet remeasurement fiscal 2002 decline also resulted lesser extent lower dividend income associated investment activities compared 2001 net loss divestitures fiscal 2001 incurred net loss divestures 53 million net loss consisted 131 million loss sale verifone inc subsidiary partially offset gain 78 million sale ericsson interest ericssonhp technology joint venture losses investments net losses investment net fiscal 2003 2002 2001 resulted mainly impairment charges excess gains realized investment portfolio gains early extinguishment debt repurchase program zero coupon subordinated convertible notes due 2017 31 million fiscal 2002 89 million fiscal 2001 offset part investment losses gains reported previously extraordinary item prior november 2002 adoption sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections investment portfolio includes equity investments publiclytraded privatelyheld emerging technology companies many emerging technology companies still startup development stage investments companies inherently risky technologies products development typically early stages may never become successful depending market conditions may incur additional charges investment portfolio future litigation settlements july 2001 signed definitive agreement comdisco inc comdisco acquire substantially comdiscos business continuity services business agreement subject bankruptcy court sales process related approvals november 2001 bankruptcy court announced selected winning bidder acquire comdiscos business continuity services business third quarter fiscal 2002 received 14 million settlement related termination definitive agreement june 2001 hp pitney bowes inc pitney bowes announced entered agreements resolved pending patent litigation parties without admission infringement connection therewith paid pitney bowes 400 million june 2001 discussion agreement see note 17 consolidated financial statements item 8 provision benefit taxes effective tax rate earnings operations fiscal 2003 2002 2001 differs united states federal statutory rate 35 due generally tax rate benefits certain earnings operations lowertax jurisdictions throughout world united states taxes provided earnings planned reinvested indefinitely outside united states full reconciliation effective tax rate federal statutory rate see note 11 consolidated financial statements item 8 effective tax rate resulted 12 provision fiscal 2003 12 benefit fiscal 2002 14 provision fiscal 2001 pretax earnings loss lower tax rates nonus jurisdictions provided benefit 239 360 381 fiscal 2003 2002 2001 respectively year benefit effective tax rate derived nonus jurisdictions increased result benefits restructuring charges incurred part highertax jurisdictions fiscal 2002 operating losses also significant contributor tax benefit offset part impact nondeductible items primarily acquisitionrelated charges goodwill amortization iprd charges fiscal 2001 impact nondeductible items primarily acquisitionrelated charges goodwill amortization iprd charges effective tax rate moderated effect lower tax rates nonus jurisdictions discussed cumulative effect change accounting principle adopted securities exchange commission staff accounting bulletin 101 sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 2000 accordingly restated consolidated results operations first three quarters fiscal 2001 including cumulative effect change accounting principle 272 million recorded reduction net income beginning first quarter fiscal 2001 combined company results previously described following discussion includes combined results operations hp compaq acquisition occurred beginning fiscal 2001 combined company results fiscal 2003 historical results compaq included entire period due different historical fiscal period ends hp compaq results year ended october 31 2002 combine results hp year ended october 31 2002 historical quarterly results compaq sixmonth period ended march 31 2002 period may 3 2002 acquisition date october 31 2002 combined company results year ended october 31 2001 combine historical results hp year ended october 31 2001 historical quarterly results compaq twelvemonth period ended september 30 2001 adjustments made combined results operations primarily reflect amortization purchased intangible assets acquisition occurred beginning periods presented results operations combined company dollars percentage net revenue follows 1cost products cost services financing interest 2certain reclassifications made prior fiscal year balances order conform current fiscal year presentation net revenue combined company basis net revenue increased 1 declined 4 constant currency basis fiscal 2003 us revenue remained essentially flat 292 billion international revenue increased 1 438 billion overall combined company net revenue increase fiscal 2003 favorably impacted currency effects particularly weakening dollar euro lower average selling prices due competitive pricing pressures shift sales mix lowerpriced products service offerings consolidation product offerings result postacquisition product roadmap decisions moderated overall increase weighted percentage point basis ipg accounted 30 percentage points overall combined company net revenue increase offset net revenue declines esg psg hpfs 11 09 02 percentage points respectively weighted basis decline hps revenue significant impact weighted basis net revenue increase ipg driven strong growth printer supplies resulting rise volumes reflecting continued expansion printer hardware installed base lesser extent growth business printer hardware digital imaging products esg revenue decline attributable primarily revenue decrease business critical servers due competitive pricing well cautious enterprise capital spending net revenue decline psg resulted primarily lower average selling prices due competitive pricing pressure lesser extent decline volumes commercial consumer desktop pcs hpfs net revenue decline due primarily decrease revenuegenerating assets hps net revenue decreased due primarily declines consulting integration business moderated increases managed services customer support revenue combined company basis net revenue declined 11 fiscal 2002 723 billion us revenue declined 8 fiscal 2002 291 billion international revenue decreased 13 432 billion ongoing weakness global economy competitive environment contributed significantly decline us international revenue foreign currency fluctuations material impact consolidated combined company revenue fiscal 2002 due relatively stable exchange rates significant foreign currencies generated revenue period weighted basis pc business desktop notebook pcs accounted 5 percentage points servers industry standard servers business critical servers accounted 4 percentage points consulting integration storage personal appliances printer hardware accounted 1 percentage point overall net revenue decrease 2 percentage point increase weighted basis printer supplies partially offset decreases overall decline sales volumes across many product categories due ongoing global economic downturn competitive environment negatively impacted combined company net revenue fiscal 2002 shift sales mix lowerpriced products particularly printer hardware pcs industry standard servers workstations also contributed decrease revenue additionally decline revenue reflected consolidation product offerings result postacquisition product roadmap decisions industry standard servers commercial pcs storage personal appliances net revenue growth printer supplies resulting rise volume due continued expansion printer hardware installed base partially mitigated declines gross margin gross margin percentage combined company net revenue improved 14 percentage points fiscal 2003 compared fiscal 2002 overall gross margin improvement fiscal 2003 attributable primarily cost savings resulting improved cost structures continued expense control measures lesser extent decreased component prices moderated declining average selling prices due competitive pricing pressures 14 percentage point increase combined company gross margin fiscal 2003 psg hpfs accounted 05 03 percentage points increase weighted basis respectively esg ipg accounted 02 percentage points increase weighted basis 01 percentage point decrease hps partially offset overall increase gross margin improvement psg due primarily reduced direct indirect procurement costs reflecting synergies associated acquisition compaq improvement hpfs gross margin due primarily reduced bad debt expense resulting stronger portfolio ipg gross margin improvement due primarily highermargin supplies business becoming greater percentage ipg revenue combined favorable currency impact revenue resulting primarily weakening dollar euro esgs gross margin improvement primarily reflected cost reductions storage industry standard server businesses result compaq acquisition offset part product mix shift away highermargin business critical servers toward lower margin industry standard servers hps gross margin decline attributable primarily competitive pricing pressures reduced service levels customer support business addition overall gross margin favorably impacted 02 percentage point improvement attributable primarily inventory adjustments 147 million fiscal 2002 resulting product roadmap decisions gross margin percentage net revenue improved 11 percentage points fiscal 2002 compared fiscal 2001 11 percentage point increase combined company gross margin fiscal 2002 weighted basis ipg products accounted 2 percentage points increase psg products accounted 06 percentage points increase weighted basis decreases 11 percentage points esg 02 percentage points hps weighted basis moderated overall improvement gross margin improvement ipg products result manufacturing efficiencies favorable currency impacts primarily yenbased component procurement contracts well approximately 290 million lower inventory fixed asset charges relative fiscal 2001 ipg gross margin increase also attributable mix shift toward printer supplies gross margins higher company average gross margin improvement psg resulted strong demand highermargin consumer notebook pcs gross margin deterioration esg products primarily reflected obsolescence unabsorbed fixed costs industry standard servers due product roadmap decisions additionally competitive pricing mix shift lowend products unfavorably impacted server gross margins hps gross margin decline due primarily consulting integration managed services businesses operating expenses research development research development expense decreased 8 fiscal 2003 compared fiscal 2002 5 fiscal 2002 compared fiscal 2001 decrease years attributable primarily workforce reduction efforts expense control measures fiscal 2003 fiscal 2002 research development expense decreased business segments except ipg research development expense increased 8 fiscal 2003 15 fiscal 2002 ipgs increase research development spending resulted primarily continued investment emerging inkjet technology addition overall decrease fiscal 2003 expense moderated higher pension postretirement costs unfavorable currency effects weakening dollar euro overall decrease fiscal 2002 expense moderated higher company performance bonuses compared fiscal 2001 selling general administrative selling general administrative expense remained flat fiscal 2003 compared fiscal 2002 decreased 9 fiscal 2002 compared fiscal 2001 fiscal 2003 unfavorable currency effects driven mainly weakening dollar euro higher sales marketing costs associated companywide product branding campaign higher pension postretirement costs offset almost entirely overall decreases attributable workforce reduction efforts expense control measures lower bad debt expense overall decrease selling general administrative expense fiscal 2002 attributable mainly workforce reduction efforts expense control measures lower bad debt expense moderated higher company performance bonuses relative fiscal 2001 amortization purchased intangible assets goodwill effective november 1 2002 date adoption sfas 142 goodwill intangible assets longer amortize goodwill instead test goodwill least annually impairment amortize purchased intangible assets finite useful lives estimated useful lives generally two ten years combined company basis amortization expense decreased 101 million fiscal 2003 compared fiscal 2002 34 million fiscal 2002 compared fiscal 2001 decrease fiscal 2003 expense due primarily elimination goodwill amortization writeoff purchased intangible assets related middleware storage virtualization offerings fiscal 2002 result product roadmap decisions connection compaq acquisition restructuring charges combined company basis recorded restructuring charges 800 million fiscal 2003 18 billion fiscal 2002 10 billion fiscal 2001 detailed discussion fiscal 2003 2002 2001 charges recorded hp included historical results presentation fiscal 2001 addition charges recorded hp compaqs management approved restructuring plans realign organization reduce operating costs compaq implemented significant changes business model supply chain operations actions designed simplify product offerings derive greater internal operating efficiencies lower order cycle time reduce channel inventory improve account order management compaq also consolidated certain functions within global business units reduced administrative functions accordingly compaq planned terminate approximately 8500 employees worldwide connection actions restructuring charges 656 million expensed fiscal 2001 december 2001 compaq reversed excess reserves 68 million employee separation costs accrued connection fiscal 2001 plans expensed additional charge approximately amount additional reductions 1400 employee positions approved management help better meet objectives realigning organization reducing operating costs employee separation benefits plan similar included severance medical benefits employee terminations fiscal 2001 plans substantially completed march 31 2002 acquisitionrelated charges connection compaq acquisition combined company incurred acquisitionrelated charges 280 million fiscal 2003 772 million fiscal 2002 consisted primarily costs incurred employee retention bonuses consulting services professional fees addition acquisitionrelated charges fiscal 2002 included costs incurred proxy solicitation advertising acquisitionrelated charges 33 million fiscal 2001 related primarily unsuccessful bid pricewaterhousecoopers consulting business well compaq acquisition inprocess research development charges iprd charges combined company historical basis discussed historical results presentation interest net combined company basis interest net remained essentially flat fiscal 2003 decreased 274 million fiscal 2002 fiscal 2001 fiscal 2003 lower net losses foreign currency transactions resulting balance sheet remeasurement related hedging strategies compared fiscal 2002 offset almost entirely lower interest income higher interest expense debt addition items discussed historical results interest net declined additional 155 million fiscal 2002 combined company basis due primarily higher interest income earned 2001 associated compaqs cash investment balances net loss divestitures fiscal 2001 combined company basis incurred net loss divestures 53 million fully discussed historical results presentation losses investments net combined company basis net investment losses net 29 million fiscal 2003 70 million fiscal 2002 25 billion fiscal 2001 addition items discussed historical results presentation fiscal 2001 loss included 21 billion impairment charges associated compaqs investments including 18 billion impairment cmgi inc determined experienced otherthantemporary decline value litigation settlements fiscal 2002 recorded litigation settlement gain 14 million fiscal 2001 recorded litigation settlement expense 400 million fully discussed historical results presentation provision benefit taxes combined company basis effective tax rate resulted 12 provision fiscal 2003 12 37 benefit fiscal 2002 2001 respectively pretax earnings loss effective tax rate differed united states federal statutory rate 35 fiscal 2003 2002 2001 due generally reasons discussed historical results section addition fiscal 2002 2001 tax benefit combined company basis due operating loss period cumulative effect change accounting principle discussed historical results presentation fiscal 2001 includes cumulative effect change accounting principle 272 million connection adoption sab 101 fourth quarter fiscal 2001 retroactive november 1 2000 remaining balance cumulative effect change accounting principles fiscal 2001 combined company basis resulted compaqs adoption january 2001 eitf issue 019 accounting consideration given vendor customer reseller vendors products issued eitf november 2000 compaqs adoption eitf issue 019 resulted change method accounting certain sales incentive offerings historically compaq recognized certain incentives time incurred obligation generally occurred upon completion qualifying sales transactions compaqs direct indirect customers eitf issue 019 requires discounts recognized later date sales incentive offered date related revenue recognized effects adopting eitf issue 019 included combined company results beginning january 1 2001 segment information segment financial data years ended october 31 2002 2001 restated reflect changes organizational structure allocation methodology occurred first quarter fiscal 2003 changes included reorganization minor product crossfunctional organizations aggregated corporate investments also revised allocation methodology shared services infrastructure began allocating segments company performance bonus expense including previously unallocated amount actual bonus expense differs targeted amount addition longer distribute segments certain corporate governancerelated items including internal audit government affairs executive office function costs believe changes expense distribution methodology result better reflection use services provided benefits received segments four principal reportable segments disclosed document based management organizational structure october 31 2003 separate segment reporting also included hpfs included esgs organizational structure due distinct nature business detailed description products services well financial data segment found note 18 consolidated financial statements item 8 future changes organizational structure may result changes reportable segments disclosed historical results historical results discussions include historical results hps segments fiscal 2003 2002 2001 including compaqs results operations may 3 2002 acquisition date fluctuations segment operating results except ipg fiscal 2003 compared fiscal 2002 fiscal 2002 compared fiscal 2001 due generally acquisition compaq discussed detail acquisition compaq material impact results ipg combined company results consistent supplemental disclosures included consolidated operating results discussion combined company segment results discussions include results hps segments fiscal 2002 fiscal 2001 acquisition compaq occurred beginning fiscal 2001 previously discussed included additional information order provide insight segment operating results prior period trends current position due different historical fiscal period ends hp compaq segment results year ended october 31 2002 combine results hp year ended october 31 2002 historical quarterly results compaq sixmonth period ended march 31 2002 period may 3 2002 october 31 2002 segment results year ended october 31 2001 combine historical results hp year ended october 31 2001 historical quarterly results compaq twelvemonth period ended september 30 2001 combined company results fiscal 2003 historical results compaq included entire period imaging printing grouphistorical results compaq comparable imaging printing business ipgs historical results materially different combined company results period detailed discussion ipgs results fiscal 2003 compared fiscal 2002 fiscal 2002 compared fiscal 2001 presented combined company discussion imaging printing groupcombined company results ipgs combined company net revenue grew 11 fiscal 2003 4 fiscal 2002 revenue increase fiscal 2003 5 constant currency basis favorable currency impact due primarily weakening dollar euro foreign currency material impact revenue increase fiscal 2002 overall 11 revenue increase fiscal 2003 printer supplies represented 75 percentage points increase weighted basis business printer hardware accounted 15 percentage points increase weighted basis digital imaging products home printer hardware accounted 10 05 percentage points respectively increase overall 4 revenue increase fiscal 2002 printer supplies represented 65 percentage points growth weighted basis offset part declines business home printer hardware 15 10 percentage points respectively weighted basis segment solid revenue growth across regions fiscal 2003 fiscal 2002 growth printer supplies revenue fiscal 2003 reflected higher volumes result continued expansion printer hardware installed base sales color lowend monochrome printers well multifunction printers digital press products drove revenue increase business printer hardware period continued shift demand lowerpriced products competitive pricing environment moderated net revenue increase business printer hardware revenue growth digital imaging products fiscal 2003 attributable sales newly introduced cameras photosmart printers part segments big bang consumer launch last half fiscal 2002 new models cameras photosmart printers introduced big bang 2 consumer launch fiscal 2003 offset part decrease sales scanners due declining scanner market net revenue increase home printer hardware fiscal 2003 attributable significant volume increase allinone devices well shift singlefunction printers multifunction devices decreases average selling prices due continued shift demand lowerpriced products particularly sub200 allinone market well decreases sales singlefunction devices moderated home printer hardware revenue growth period growth printer supplies revenue fiscal 2002 reflected higher volumes result continued expansion printer hardware installed base revenue decline business printer hardware due mainly continued shift demand lowerpriced products particularly sub1000 laser market revenue decrease home printer hardware attributable mainly decline average selling prices driven continued shift demand lowerpriced products particularly sub100 home printer hardware market moderated increased sales higherpriced allinone products sales newlyintroduced products part segments big bang consumer launch combined company earnings operations percentage net revenue 158 fiscal 2003 compared 164 fiscal 2002 107 fiscal 2001 fiscal 2003 06 net percentage point decrease earnings operations ratio consisted 08 percentage point increase operating expenses percentage revenue offset part improvement gross margin 02 percentage points increase operating expenses percentage revenue driven mainly increased marketing costs associated companywide product branding campaign higher selling costs associated increased focus commercial sales segment unfavorable currency impacts offsetting part operating expense ratio increase gross margin improvement due primarily mix shift away lower margin hardware increase supplies business typically gross margins exceed segment average well favorable currency impact revenue resulting strengthening euro noted partially offsetting gross margin improvement gross margin decline printer hardware digital imaging products reflecting shift lowerpriced printing imaging products continued competitive pricing fiscal 2002 57 percentage point increase earnings operations ratio due almost entirely improvement gross margin increase gross margin driven gross margin improvements supplies printer hardware manufacturing efficiencies favorable currency impacts primarily yenbased component procurement contracts supplies business home printer hardware contributed majority gross margin improvement segment gross margin also impacted favorably supplies typically gross margins exceed segment average becoming greater percentage total segment revenue mix shift toward highermargin multifunction products within home printer hardware lower inventory fixed asset writedowns compared fiscal 2001 approximately 290 million contributed overall segment gross margin improvement personal systems grouphistorical results fluctuations psgs yearoveryear operating results fiscal 2003 fiscal 2002 due substantially acquisition compaq although acquisition compaq resulted increase unit sales continued competitive pricing environment impacted unfavorably average selling prices fiscal 2003 fiscal 2002 execution postacquisition product roadmap decisions included discontinuance hp vectra jornada product lines impacted unfavorably commercial desktop pc handheld volumes fiscal 2003 earnings operations percentage net revenue increased fiscal 2003 due decrease operating expenses primarily headcount reductions tightening administrative costs lower research development expense earnings operations also increased due improvement gross margin primarily result reduced direct indirect procurement costs reflecting synergies associated acquisition compaq well shift toward lowercost direct business fiscal 2002 loss operations percentage net revenue remained flat due increase gross margin offset increase operating expenses percentage revenue present supplementary discussion psgs results fiscal 2003 compared fiscal 2002 fiscal 2002 compared fiscal 2001 including trends impacted historical well combined company results combined company discussion personal systems groupcombined company results psgs combined company net revenue declined 3 fiscal 2003 18 fiscal 2002 revenue decrease fiscal 2003 8 constant currency basis favorable currency impact due primarily weakening dollar euro foreign currency material impact revenue decrease fiscal 2002 overall 3 revenue decrease fiscal 2003 commercial consumer desktop pcs accounted 60 percentage points decline weighted basis workstations also contributed slightly decline increase notebook pcs revenue 30 percentage points weighted basis offset part declines overall 18 revenue decrease fiscal 2002 consumer commercial desktop pcs accounted 135 percentage points decline weighted basis handhelds notebook pcs workstations accounted 20 15 10 percentage points respectively decrease continued soft demand unfavorably impacted net revenue fiscal 2003 fiscal 2002 combined company revenue decline fiscal 2003 resulted decline average selling prices across businesses within psg lesser extent decline volumes commercial consumer desktop pcs decline average selling prices period attributable realignment product prices continued mix shift desktop pcs notebook pcs impacted unfavorably commercial consumer desktop pc volumes additionally commercial desktop pc volume decline period due execution postacquisition product roadmap decisions included discontinuance hp vectra product line increase notebook pc volumes fiscal 2003 compared prior year due increased product competitiveness broader product portfolio previously mentioned mix shift desktop pcs notebook pcs offset part desktop pc decreases addition increase notebook pc volumes handheld volumes increased due new product introductions fiscal 2002 net revenue pc business impacted negatively declining average selling prices resulting continued competitive pricing environment revenue decrease consumer desktop pcs fueled decline unit sales lesser extent decrease average selling prices decline unit sales due weakened economic conditions across regions revenue decline commercial desktop pcs result decrease average selling prices lesser extent decline unit sales decrease unit sales attributable continued shift toward mobile computing well execution postacquisition product roadmap decisions including discontinuance hp vectra line hp vectra winddown also unfavorably impacted average selling prices incentives offered sell remaining inventory commercial notebook pc revenue declined due decreasing average selling prices decline offset part consumer notebook pc revenue growth reflecting increase unit sales result previously mentioned shift toward mobile computing moderated decreasing average selling prices handheld revenue included certain personal appliances declined due exit cdwriter business transition dvdrw market well product roadmap decision cancel jornada handheld product line workstations revenue decline driven decrease average selling prices reflecting mix shift unix® workstations lowerpriced windows® nt workstations offset part increase unit sales windows® nt workstations unfavorable effects transition new product line moderated volume increase windows® nt workstations combined company earnings operations percentage net revenue 01 fiscal 2003 compared losses 17 fiscal 2002 27 fiscal 2001 fiscal 2003 improvement gross margin percentage net revenue represented 11 percentage points 18 percentage point increase remaining 07 percentage points due decrease operating expenses percentage revenue gross margin improvement resulted reduced direct indirect procurement costs reflecting synergies associated acquisition compaq moderated declining average selling prices described operating expense improvement resulted headcount reductions tightening administrative costs lower research development expense fiscal 2002 improvement gross margin represented 06 percentage points 10 percentage point decrease loss operations ratio remaining 04 percentage point decrease result decrease operating expenses percentage revenue gross margin improvement driven consumer pcs handhelds offset part gross margin declines commercial pcs gross margin improvement consumer pcs contributed majority overall segment gross margin increase resulted primarily strong demand consumer notebook pcs typically higher margins desktops improvement handhelds also contributed gross margin improvement segment attributable lower inventory reserve charges compared fiscal 2001 moderating overall segment gross margin improvement decline commercial pc gross margin gross margin decline commercial pcs reflected declining average selling prices due competitive pricing pressures particularly endoflife product transitions decrease operating expense ratio attributable cost control measures cost savings achieved workforce reductions initiated fiscal 2001 enterprise systems grouphistorical results fluctuations esgs yearoveryear operating results fiscal 2003 fiscal 2002 due substantially acquisition compaq significant increase compaqs industry standard server business compaqs storage business critical server businesses main contributors overall revenue growth fiscal 2003 although overall unit sales increased due acquisition compaq continued competitive pricing pressures impacted unfavorably average selling prices fiscal 2003 discontinuance hps netserver products well certain storage products part postacquisition product roadmap decisions moderated volumes although unit sales increased due acquisition compaq fiscal 2002 average selling prices impacted unfavorably fiscal 2002 continued competitive pricing pressures continued mix shift lowend products fiscal 2003 improvement loss operations ratio attributable primarily workforce reduction activities effective cost management offset part decline gross margin gross margin deterioration reflected competitive pricing pressures mix shift toward industry standard servers significantly lower gross margins products segment fiscal 2002 increase loss operations ratio attributable part declines gross margin due pricing pressures coupled inventory charges unabsorbed fixed costs related net server line resulting product roadmap decisions present supplementary discussion esgs results fiscal 2003 compared fiscal 2002 fiscal 2002 compared fiscal 2001 including trends impacted historical well combined company results combined company discussion enterprise systems groupcombined company results esgs combined company net revenue declined 5 fiscal 2003 20 fiscal 2002 revenue decrease fiscal 2003 10 constant currency basis favorable currency impact due primarily weakening dollar euro foreign currency material impact revenue decrease fiscal 2002 overall revenue decrease fiscal 2003 business critical servers accounted 50 percentage points decline weighted basis storage software contributed 05 percentage points decline offset part increase industry standard servers revenue 05 percentage points weighted basis overall segment revenue fiscal 2003 continued impacted unfavorably competitive pricing pressures product roadmap transitions cautious enterprise spending across business units geographic regions overall 20 revenue decrease fiscal 2002 industry standard servers business critical servers storage accounted 95 70 30 percentage points respectively decline weighted basis software contributed remaining 05 percentage point decrease overall segment revenue fiscal 2002 impacted unfavorably weak demand enterprise market due continuing effects economic downturn competitive pricing pressures cautious technology spending across product categories geographical regions combined company revenue decline many business critical server products fiscal 2003 reflected competitive pricing well constraints enterprise capital spending large purchases lowend midrange unix® revenue declined period offset part strong growth highend unix® server revenue due continued strength superdome products nonstop server revenue declined fiscal 2003 reflecting weak spending telecommunications financial services industries product roadmap transitions tape libraries due exiting oem business decreased sales legacy arrays offset part mix shift toward eva products drove storage revenue decline fiscal 2003 decline software revenue fiscal 2003 attributable mainly softness opencall telecommunications software product line due continued weakness telecommunications industry strength openview management software business moderated decline unit sales industry standard servers increased fiscal 2003 offset revenue decline attributable declining average selling prices mix shift toward lowend servers despite unit declines netserver products due postacquisition roadmap decision discontinue line servers total industry standard server units grew approximately 9 period due strong worldwide shipments proliant servers combined company revenue decline industry standard servers fiscal 2002 resulted decrease average selling prices lesser extent decline volumes decrease average selling prices due continued competitive pricing pressures continued mix shift lowend products well pricing incentives offered accelerate installed base conversions proliant server line due postacquisition product roadmap decisions weak economic conditions contributed decline volumes decline volumes pronounced retiring netserver line proliant volumes remaining strong revenue decrease business critical servers fiscal 2002 attributable declines server categories including alphaservers nonstop servers unix® servers revenue decline across business critical server products reflected ongoing decline enterprise capital spending competitive pricing pressures weak spending telecommunications financial services industries storage revenue declined fiscal 2002 due continued weakness spending declines unix® industry standard servers well product roadmap modifications mid highend arrays tape libraries software revenue impacted unfavorably continued decline enterprise spending weakness telecommunications markets decision exit selected middleware products third quarter fiscal 2002 combined company loss operations percentage net revenue 04 fiscal 2003 41 fiscal 2002 compared earnings operations 29 fiscal 2001 fiscal 2003 operating loss improvement 37 percentage points due 20 percentage point decrease operating expenses percentage revenue 17 percentage point increase gross margin cost savings achieved workforce reductions continued cost control measures offset part unfavorable currency impact drove decline operating expenses percentage revenue fiscal 2003 gross margin improvement period reflected cost reductions resulting compaq acquisition storage industry standard server businesses coupled product mix shift within business critical servers storage software toward highermargin products unfavorable mix shift low midrange business critical servers toward lowermargin industry standard servers moderated gross margin improvements period increase operating expenses percentage net revenue represented 40 percentage points 70 percentage point decrease earnings operations ratio fiscal 2002 decline gross margin accounted remaining 30 percentage point decrease although operating expense dollars decreased fiscal 2002 operating expenses percentage net revenue segment increased decrease revenue exceeded rate operating expense declines increase operating expense ratio moderated cost control measures cost savings achieved workforce reductions initiated fiscal 2001 majority gross margin decline fiscal 2002 driven gross margin decreases industry standard servers storage gross margin deterioration industry standard servers storage reflected lower volumes highermargin products competitive pricing pressures gross margin decline industry standard servers also attributable obsolescence unabsorbed fixed costs associated winddown netserver line well mix shift toward lowend products offset part relative increase direct fulfilled business lower delivery costs hp serviceshistorical results fluctuations hps yearoveryear operating results fiscal 2003 fiscal 2002 due substantially acquisition compaq although acquisition compaq resulted increase services across business units fiscal 2003 fiscal 2002 consulting integration customer support businesses impacted unfavorably weak demand infrastructure products slowdown enterprise spending competitive pricing pressures managed services business benefited economic pressures faced customers fiscal years customers reduced costs outsourcing infrastructure earnings operations percentage net revenue increased fiscal 2003 compared prioryear period due expense control measures workforce reduction initiatives shift revenue mix away consulting integration business typically operating profit ratios lower segment average also contributed increase earnings operations ratio fiscal 2002 earnings operations percentage net revenue declined due primarily weakened demand consulting integration business lengthened selling cycles higher presales costs managed services business due shift toward comprehensive outsourcing contracts present supplementary discussion hps results fiscal 2003 compared fiscal 2002 fiscal 2002 compared fiscal 2001 including trends impacted historical well combined company results combined company discussion hp servicescombined company results hps combined company net revenue essentially flat fiscal 2003 declined 4 fiscal 2002 constant currency basis revenue decreased 6 fiscal 2003 favorable currency impact fiscal 2003 due primarily weakening dollar euro foreign currency material impact revenue decline fiscal 2002 although overall revenue essentially flat fiscal 2003 revenue declined consulting integration business offset part revenue growth managed services customer support businesses fiscal 2002 overall 4 net revenue decrease consulting integration business accounted 55 percentage points decline weighted basis offset part managed services customer support businesses contributed 10 05 percentage points growth respectively weighted basis decline core consulting integration services decrease sales complementary thirdparty products drove combined company net revenue decrease consulting integration business fiscal 2003 decline core consulting integration revenue reflected competitive pricing pressures weak demand decrease sales complementary thirdparty products resulted hps 2002 strategic decision actively decrease sales efforts area increase new existing large outsourcing deals reflecting ongoing mix shift toward larger comprehensive deals customers outsourced substantial portions infrastructure hp well favorable currency impacts mentioned drove growth managed services revenue fiscal 2003 growth customer support revenue fiscal 2003 due primarily favorable currency impacts combined company revenue decline consulting integration business fiscal 2002 attributable decline core consulting integration services decrease sales complementary thirdparty products decline consulting integration revenue reflected weak demand slowdown spending particularly telecommunications industry decrease sales complementary thirdparty products resulted strategic decision actively decrease sales efforts area growth managed services revenue fiscal 2002 driven ongoing mix shift toward larger comprehensive deals increased business customers outsourced substantial portions infrastructure hp growth customer support revenue attributable solid demand storage services missioncritical services network services windows®environment services growth customer support revenue moderated slower revenue growth unix® server support reflecting decrease unix® server revenue result weak enterprise capital spending combined company earnings operations percentage net revenue 111 fiscal 2003 fiscal 2002 126 fiscal 2001 although operating profit ratio remained flat fiscal 2003 operating expenses percentage revenue favorably impacted expense control measures workforce reductions initiated fiscal 2002 well reduced costs reflecting synergies associated acquisition compaq favorable business mix shift away consulting integration business typically operating profit ratio lower segment average also positively impacted overall segment operating profit ratio period however operating profit ratio decline customer support business due competitive pricing pressures reduced service levels negatively impacted fiscal 2003 operating margin higher pension postretirement costs unfavorably impacted overall segment operating profit ratio fiscal 2003 decline fiscal 2002 operating profit ratio shared primarily consulting integration managed services businesses operating profit ratio decrease consulting integration business resulted weakened demand coupled decline consultant utilization managed services operating profit decline attributable lengthened selling cycles higher presales costs due shift toward comprehensive outsourcing contracts overall segment operating profit ratio impacted negatively engagement writeoffs reflecting customer acceptance issues deteriorating economic conditions increase infrastructure shared services costs due convergence resource usage rates based number professionals segment moderating segment gross margin decline mix shift away consulting integration business typically operating profit ratios lower segment average along expense control measures workforce reduction initiatives hp financial serviceshistorical results hpfs net revenue includes interest financing receivables rental payments operating leases sales equipment expiration associated lease terms acquisition compaq caused substantial portion yearoveryear fluctuations hpfs operating results fiscal 2003 fiscal 2002 acquisition resulted higher revenuegenerating assets however slowdown lease originations fiscal 2003 fiscal 2002 moderated revenue increases fiscal 2003 earnings operations percentage net revenue improved prior year due significant reduction bad debt expense coupled decline interest costs percentage revenue fiscal 2002 loss operations percentage revenue declined prior year due lower bad debt charges present supplementary discussion hpfss results fiscal 2003 compared fiscal 2002 fiscal 2002 compared fiscal 2001 including trends impacted historical well combined company results combined company discussion hp financial servicescombined company results hpfs combined company net revenue declined 8 fiscal 2003 2 fiscal 2002 lower lease originations fiscal 2003 fiscal 2002 drove decreases revenue years strengthened credit controls ongoing weakness global economy resulted decreases lease originations related decreases revenuegenerating assets decreases average selling prices hp products also factor decrease lease originations fiscal 2003 increased revenue equipment sales expiration associated lease terms midterm endofterm portfolio activities moderated revenue decreases fiscal years combined company earnings operations percentage net revenue 41 fiscal 2003 compared losses 61 fiscal 2002 72 fiscal 2001 fiscal 2003 reduction bad debt expense customer writeoffs resulting strengthened global credit standards stronger portfolio resulted majority operating profit ratio improvement lower interest costs percentage revenue also positive impact ratio bad debt writeoffs additions allowance recorded response ongoing economic downturn fiscal 2002 fiscal 2001 however incremental charges lower fiscal 2002 resulting decrease loss operations ratio liquidity capital resources cash flow information discussed presented based hps historical results includes results compaq period beginning may 3 2002 closing date acquisition cash balances held numerous locations throughout world including substantial amounts held outside united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws hp provided united states federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states repatriation could result additional united states federal income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain foreign country would meet united states liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed hp generated annual cash provided operating activities amounts greater net income loss fiscal 2003 2002 2001 driven mainly continually improving management working capital management currently expects fiscal 2004 cash flows operations continue exceed net income addition management believes cash flows operations available cash balances shortterm borrowings sufficient fund operating liquidity needs fiscal 2003 used net cash provided operating activities short longterm borrowings funds stock exercises employee stock plans mainly fund purchases property plant equipment payments dividends repayments borrowings repurchases common stock net cash provided operating activities also contributed increase cash equivalents balance approximately 30 billion increase net cash provided operations fiscal 2003 compared fiscal 2002 resulted primarily higher earnings compared loss fiscal 2002 well increase accounts payable improved management payables function contract manufacturing transition laptop products china contributed increase accounts payable period increases inventory continued severance payments restructuring programs pension contributions increases receivables contract manufacturers partially offset increases cash flow provided operations increase net cash provided operating activities fiscal 2002 compared fiscal 2001 resulted higher earnings adjusting noncash items depreciation amortization noncash portion restructuring charges iprd charges improvement cash provided operating activities also reflected timing payments accounts payable improved collections trade financing receivables decreases inventory acquisitionrelated expenditures including cash payments restructuring charges retention bonuses partially offset improvements change net cash flows investing activities fiscal 2002 fiscal 2003 fiscal 2001 fiscal 2002 due primarily 36 billion cash acquired compaq acquisition fiscal 2002 well 879 million recorded upon dissolution equity method investment liquidity management corporation lmc became whollyowned subsidiary november 1 2001 addition net capital expenditures 16 billion fiscal 2003 13 billion fiscal 2002 11 billion fiscal 2001 capital expenditure increases fiscal 2003 related mainly assets lease hpfs third parties continued investment ipg manufacturing equipment fiscal 2002 capital expenditures related primarily financing assets manufacturing investments across businesses hpfs capital expenditures fiscal 2003 fiscal 2002 increased primarily result acquisition compaq third quarter fiscal 2002 october 31 2001 held 495 equity interest lmc accounted equity method accounting thirdparty investor held remaining 505 equity interest november 1 2001 lmc redeemed outstanding equity third party investor leaving us remaining shareholder lmc accordingly effective november 1 2001 assets liabilities results operations lmc included consolidated financial statements november 1 2001 assets lmc consisted primarily 879 million cash equivalents change net cash flows used financing activities fiscal 2003 compared fiscal 2002 due primarily decrease approximately 22 billion net repayments notes payable shortterm borrowings offset part decrease issuances longterm debt 18 billion increase repayments longterm debt approximately 360 million change net cash flows used financing activities fiscal 2002 compared fiscal 2001 resulted increase net repayments approximately 27 billion notes payable shortterm borrowings well increases payments longterm debt dividends approximately 360 million offset part decreases amount stock convertible notes repurchased approximately 11 billion detail changes financing activities including stock repurchases borrowing activity provided performance metrics trade accounts receivable days sales outstanding 40 october 31 2003 compared 42 october 31 2002 decrease resulted increased effectiveness collection efforts retail business customers annualized inventory turns 98 october 31 2003 compared 92 october 31 2002 improvement resulted active inventory management stock repurchases repurchase shares common stock systematic program manage dilution created shares issued employee stock plans purposes program authorizes repurchases open market private transactions fiscal 2003 repurchased 39780000 shares aggregate price 751 million general programs fiscal 2002 repurchased 39623000 shares aggregate price 671 million fiscal 2001 repurchased 45036000 shares aggregate price 12 billion september 2003 board directors hp authorized additional 10 billion future repurchases outstanding shares common stock addition december 2003 hp conducted program repurchase shares held stockholders fewer 100 shares oddlot program oddlot program repurchased 174000 shares aggregate price 4 million january 8 2004 authorization remaining future repurchases approximately 953 million funding commitments result approved restructuring plans expect future cash expenditures approximately 850 million primarily employee severance employee benefits facilities costs amount 807 million recorded part shortterm liability part longterm liability consolidated balance sheet october 31 2003 46 million expensed future periods costs incurred requirements record costs liability met cash expenditures related employee severance restructuring plans expected substantially complete end fiscal 2004 made pension postretirement contributions approximately 12 billion fiscal 2003 estimate contribute approximately 10 billion pension postretirement plans fiscal 2004 hps funding policy contribute cash pension plans minimum contribution requirements established local government funding taxing authorities met 2003 cash contributions approximately 390 million 720 million made hps us nonus pension plans respectively outside us hp made contributions increased fair market value respective plan assets levels additional minimum liability eliminated nonus entities 2004 hp continue contribute cash global pension plans amounts consistent local funding requirements tax considerations issued approximately 53 million nontransferable contingent value rights cvrs connection acquisition indigo entitle holder onetime contingent cash payment 450 per cvr based achievement certain cumulative revenue results threeyear period future cash payout cvrs payable threeyear period began april 1 2002 could result maximum obligation 237 million hp incurred liability associated cvrs october 31 2003 currently expect fund expenditures capital requirements well liquidity needs combination available cash balances cash flows operations short longterm borrowings invest excess cash primarily shortterm investments meet hps credit rating standards borrowings 1amount available includes amounts remaining available future borrowings lines credit commercial paper program well amounts registered unissued 2002 shelf registration statement amounts available future borrowings euro mediumterm note programme short longterm debt decreased 254 million fiscal 2003 including 46 million effect noncash items related foreign currency remeasurement marktomarket adjustments premium discount amortization decrease notes payable shortterm borrowings due mainly repayment 51 billion commercial paper programs repayment shortterm portion longterm debt approximately 750 million net repayment 123 million additional shortterm borrowings offset part 50 billion issued commercial paper programs increase longterm debt due mainly issuance longterm debt approximately 750 million moderated part reclassification shortterm borrowings 274 million repayments longterm debt approximately 80 million notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt related average interest rates amounts remaining available future borrowings follows january 8 2004 fiscal 2003 issued total 23 billion commercial paper interest rates ranging 109 159 40 billion us commercial paper program established december 2000 hewlettpackard international bank plc whollyowned subsidiary hp issued 27 billion certificates deposit fiscal 2003 local currency interest rates ranging 008 422 euro commercial papercertificate deposit programme established may 2001 result compaq acquisition associated credit rating changes satisfaction specified conditions hps debt 250 million due ccf charterhouse hsbcccf became repayable repaid debt september 29 2003 also maintain various foreign subsidiaries lines credit number financial institutions march 2003 27 billion 364day senior unsecured committed borrowing facility expired simultaneously replaced 17 billion 364day senior unsecured committed borrowing facility also 13 billion threeyear credit facility established march 2002 together credit facilities interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities generally available support issuance commercial paper corporate purposes longterm debt book value longterm debt amounts registered unissued applicable registration statement available future borrowings euro mediumterm note programme case shown amount available column follows january 8 2004 january 8 2004 outstanding longterm debt totaling 67 billion excludes fair value adjustment related sfas 133 149 million discounts debt issuances totaling 175 million includes 117 million due within one year total longterm debt outstanding approximately 31 billion due 2004 2006 approximately 26 billion due 2007 2009 remainder due various dates 2023 description outstanding debt see note 10 consolidated condensed financial statements incorporated herein reference may issue future longterm borrowings shelf registration statement declared effective march 2002 shelf registration statement also may issue future longterm borrowings euro mediumterm note programme filed luxembourg stock exchange originally allowed us offer 30 billion mediumterm notes denominated currency including euro however notes registered united states rating downgrade triggers would accelerate maturity material amount debt however downgrade credit rating would increase cost borrowings credit facilities also downgrade credit rating could limit case significant downgrade preclude ability issue commercial paper current programs occur would seek alternative sources funding including issuance notes existing shelf registration statements euro mediumterm note programme addition ability option draw upon senior unsecured credit facilities totaling 30 billion vast majority total outstanding debt issued assumed hp financing business hpfs however hpfs financial services organization like financial services companies business model assetintensive nature therefore debtdependent business segments october 31 2003 hpfs approximately 66 billion net financing assets include short longterm financing receivables operating lease assets contractual obligations impact contractual obligations october 31 2003 expected liquidity cash flow future periods follows 1amounts represent expected cash payments longterm debt include fair value adjustments bond premiums discounts 2purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty 3minimum pension funding requirements included amounts determined estimate contribute approximately 10 billion pension postretirement plans fiscal 2004 including minimum pension funding requirements fiscal 2003 made pension postretirement contributions approximately 12 billion 330 million represented minimum funding requirements addition contractual obligations noted table hp also commitments fund various activities see page 51 detail funding commitments completed acquisitions divestitures see note 3 notes consolidated financial statements item 8 detailed discussion completed acquisitions divestitures affected liquidity offbalance sheet arrangements part ongoing business participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes october 31 2003 involved material unconsolidated spe transactions indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial factors could affect future results following factors well variables affecting operating results past financial performance may reliable indicator future performance historical trends used anticipate results trends future periods competitive pressures face could harm revenue gross margin prospects encounter aggressive competition numerous varied competitors areas business compete primarily basis technology performance price quality reliability brand distribution range products services account relationships customer service support security availability application software products services support cost structure enable us compete successfully based criteria could harm operations results prospects may continue lower prices many products services stay competitive time trying maintain improve revenue gross margin business model based providing innovative high quality products may spend proportionately greater amount research development competitors cannot proportionately decrease cost structure timely basis response competitive price pressures gross margin therefore profitability could adversely affected addition pricing factors sufficiently competitive adverse reaction product decisions may lose market share certain areas could adversely affect revenue prospects even able maintain increase market share particular product revenue could decline due increased competition types products product maturing industry example desktop computer industry continues mature customers may purchase new desktop computers frequently past industry consolidation may affect competition creating larger homogeneous potentially stronger competitors markets compete competitors also may affect business entering exclusive arrangements existing potential customers suppliers cannot continue develop manufacture market products services meet customer requirements innovation quality revenue gross margin may suffer process developing new high technology products services enhancing existing products services complex costly uncertain failure us anticipate customers changing needs emerging technological trends accurately could significantly harm market share results operations must make longterm investments develop obtain appropriate intellectual property commit significant resources knowing whether predictions accurately reflect customer demand products services develop product must able manufacture appropriate volumes quickly low costs accomplish must accurately forecast volumes mix products configurations meet customer requirements may succeed within given products life cycle delay development production marketing new product could result among first market could harm competitive position addition course conducting business must adequately address quality issues associated products services including defects engineering design manufacturing processes well defects third party components included products order address quality issues work extensively customers suppliers engage product testing determine root cause problem determine appropriate solutions however may limited ability control quality issues particularly respect faulty components manufactured third parties unable determine cause find appropriate solution offer temporary fix patch may delay shipment customers would delay revenue recognition could adversely affect revenues reported results finding solutions quality issues expensive may result additional warranty replacement costs adversely affecting profits addition quality issues impair relationships new existing customers adversely affect reputation could material adverse effect revenue operating results effectively manage product services transitions revenue may suffer many industries compete characterized rapid technological advances hardware performance software functionality features frequent introduction new products short product life cycles continual improvement product price characteristics relative product performance make effective transition existing products services future offerings revenue may decline among risks associated introduction new products services delays development manufacturing variations costs delays customer purchases anticipation new introductions difficulty predicting customer demand new offerings effectively managing inventory levels line anticipated demand risks associated customer qualification evaluation new products risk new products may quality defects may adequately supported application software revenue gross margin also may suffer due timing product service introductions suppliers competitors especially challenging product short life cycle competitor introduces new product introduction furthermore sales new products services may replace sales result discounting current offerings offsetting benefit even successful introduction may also overlaps current products services hp portfolios acquired mergers acquisitions must managed addition may difficult ensure performance new customer contracts accordance revenue margin cost estimates achieve operational efficiencies embedded estimates given competitive nature industry risks materialize future demand products services results operations may suffer failure us manage acquisitions divestitures significant transactions successfully could harm financial results business prospects part business strategy frequently engage discussions third parties regarding enter agreements relating possible acquisitions strategic alliances joint ventures divestitures outsourcing transactions order business objectives many cases manage product technology portfolios order pursue strategy successfully must identify suitable candidates transactions complete transactions may large complex manage postclosing issues integration acquired companies employees integration risks acquisitions strategic alliances joint ventures outsourcing deals pronounced larger complicated transactions multiple transactions pursued simultaneously however fail identify successfully complete transactions strategic objectives may required expend resources develop products technology internally may competitive disadvantage may adversely affected negative market perceptions may material effect revenue selling general administrative expenses integration issues complex timeconsuming expensive without proper planning implementation could significantly disrupt business challenges involved integration include •combining product offerings entering new markets experienced preventing customers distributors deferring purchasing decisions switching suppliers could result incurring additional obligations order address customer uncertainty •demonstrating customers distributors transaction result adverse changes client service standards business focus coordinating sales marketing distribution efforts •consolidating rationalizing corporate infrastructure may include multiple legacy systems various acquisitions including implementing information management system processes enable increased customer satisfaction improved productivity lower costs accurate financial reporting direct sales improved inventory management •minimizing diversion management attention ongoing business concerns •persuading employees business cultures compatible maintaining employee morale retaining key employees integrating employees hp correctly estimating employee benefit costs implementing restructuring programs •coordinating combining administrative manufacturing research development operations subsidiaries facilities relationships third parties accordance local laws obligations maintaining adequate standards controls procedures •achieving savings supply chain integration •managing integration issues shortly pending completion independent transactions fiscal 2003 acquired intria select access identity management assets baltimore technologies plc talking blocks inc pipe beach ag also entered several large outsourcing transactions manage infrastructure provide related products services ericsson procter gamble company telecom italia group time continued integration efforts relating fiscal 2002 acquisition compaq evaluate enter acquisition alliance joint venture outsourcing divestiture transactions ongoing basis may successfully address challenges associated transactions timely manner may fully realize anticipated benefits synergies transaction extent timeframe anticipated moreover timeframe achieving benefits may depend partially upon actions employees suppliers third parties managing acquisitions alliances joint ventures divestitures outsourcing transactions requires varying levels management resources may divert attention business operations transactions also resulted future may result significant costs expenses charges earnings including related severance pay early retirement costs employee benefit costs asset impairment charges elimination duplicative facilities contracts inprocess research development charges inventory adjustments legal accounting financial advisory fees required payments executive officers key employees retention plans moreover hp incurred incur additional depreciation amortization expense useful lives certain assets acquired connection transactions extent value goodwill intangible assets indefinite lives acquired connection transaction becomes impaired may required incur additional material charges relating impairment assets order complete acquisition may issue common stock potentially creating dilution existing stockholders borrow affecting financial condition potentially credit ratings prior future downgrades credit rating associated acquisition could adversely affect ability borrow result restrictive borrowing terms addition hps effective tax rate ongoing basis uncertain extraordinary transactions could impact effective tax rate result completed pending future transactions may contribute financial results differ investment communitys expectations given quarter revenue cost sales expenses may suffer cannot continue license enforce intellectual property rights business depends third parties assert violate intellectual property rights rely upon patent copyright trademark trade secret laws united states similar laws countries agreements employees customers partners parties establish maintain intellectual property rights technology products used operations however direct indirect intellectual property rights could challenged invalidated circumvented intellectual property rights may sufficient permit us take advantage current market trends otherwise provide competitive advantages could result costly product redesign efforts discontinuance certain product offerings competitive harm laws certain countries protect proprietary rights extent laws united states therefore certain jurisdictions may unable protect proprietary technology adequately unauthorized thirdparty copying use could adversely affect competitive position also rapid pace technological change information technology industry much business many products rely key technologies developed licensed third parties may able obtain continue obtain licenses technologies third parties reasonable terms third parties may demand crosslicenses third parties also may claim customers indemnified us infringing upon intellectual property rights even believe customers indemnified us infringing upon third parties intellectual property rights claims timeconsuming costly defend divert managements attention resources away business claims intellectual property infringement also might require us enter costly settlement license agreements pay costly damage awards redesign affected products cannot license infringed technology reasonable terms substitute similar technology another source operations could suffer costs operations could affected ongoing basis imposition copyright levies similar fees rights holders collection agencies certain jurisdictions primarily europe addition possible consequence merger acquisition transaction third parties may obtain licenses intellectual property rights business may subject certain restrictions place prior transaction consequently may lose competitive advantage respect intellectual property rights may required enter costly arrangements order terminate limit agreements economic weakness affected adversely could continue affect adversely revenue gross margin expenses revenue gross margin depend significantly general economic conditions demand computing imaging products services markets compete softened demand products services caused economic weakness constrained information technology spending past several years resulted may result future decreased revenue gross margin earnings growth rates problems ability manage inventory levels realize customer receivables addition customer financial difficulties resulted could future result increases bad debt writeoffs additions reserves receivables portfolio inability lessees make required lease payments reduction value leased equipment upon return us compared value estimated lease inception also experienced may future experience gross margin declines certain businesses reflecting effect items competitive pricing pressures inventory writedowns charges associated cancellation planned production line expansion increases pension postretirement benefit expenses economic difficulties also led restructuring actions associated expenses impairment investment portfolio uncertainty future economic conditions makes difficult forecast operating results make decisions future investments delays reductions information technology spending could material adverse effect demand products services consequently results operations prospects stock price terrorist acts international conflicts acts war may seriously harm business revenue costs expenses financial condition stock price terrorist acts war wherever located around world may cause damage disruption hp employees facilities partners suppliers distributors resellers customers could significantly impact revenue costs expenses financial condition terrorist attacks took place united states september 11 2001 subsequent terrorist attacks iraq countries created many economic political uncertainties may materially harm business results operations potential future terrorist attacks national international responses terrorist attacks perceived threats national security actual potential conflicts acts war including ongoing military operations iraq created many economic political uncertainties could adversely affect business results operations stock price ways cannot presently predict addition major multinational company headquarters significant operations located united states actions united states may impact business predominantly uninsured losses interruptions caused terrorist acts war fail manage distribution products services properly distributors financial condition operations weaken revenue gross margin profitability could suffer use variety different distribution methods sell products services including thirdparty resellers distributors retail direct sales enterprise accounts consumers since distribution method distinct risks gross margins failure implement advantageous balance delivery model products services could adversely affect revenue gross margins therefore profitability moreover distribution channel mix may limit willingness ability quickly adjust prices otherwise respond pricing changes competitors distribution risks include alientating channel partners financial weakness competitors inventory management problems described •as continue increase commitment direct sales could risk alienating channel partners adversely affecting distribution model since direct sales may compete sales made thirdparty resellers distributors thirdparty resellers distributors may elect use suppliers directly sell products reduce retail shelf space available products customers prefer purchase directly increase commitment direct sales could alienate channel partners result may lose customers purchase thirdparty resellers distributors •some wholesale retail distributors may unable withstand changes business conditions wholesale retail distributors may insufficient financial resources may able withstand changes business conditions including economic weakness industry consolidation revenue indirect sales could suffer could experience disruptions distribution distributors financial condition operations weaken •our inventory management complex continue sell significant mix products distributors must manage inventory effectively particularly respect sales distributors may increase orders periods product shortages cancel orders inventory high delay orders anticipation new products distributors also may adjust orders response supply products competitors seasonal fluctuations enduser demand excess inventory may reduce prices write inventory turn could result lower gross margin depend third party suppliers revenue gross margin could suffer fail manage supplier issues properly manufacturing operations depend ability anticipate needs components products suppliers ability deliver sufficient quantities quality components products reasonable prices time meet critical manufacturing distribution schedules given wide variety systems products services offer large number suppliers contract manufacturers dispersed across globe long lead times required manufacture assemble deliver certain components products problems could arise planning production managing inventory levels could seriously harm us also rely third party suppliers provision contingent workers failure effectively manage use workers could adversely affect results operations could also exposed various legal claims relating status supplier problems could face include component shortages excess supply risks related fixedprice contracts would require us pay open market price described •supply shortages occasionally may experience short supply delay receiving certain component parts result strong demand capacity constraints problems experienced suppliers shortages delays persist price components may increase may exposed quality issues components may available may able secure enough components reasonable prices acceptable quality build new products timely manner quantities configurations needed accordingly revenue gross margin could suffer could lose timesensitive sales incur additional freight costs unable pass price increases customers cannot adequately address supply issues might reengineer products resulting costs delays •oversupply order secure components production new products secure workers critical areas times may make advance payments suppliers may enter noncancelable commitments vendors fail anticipate customer demand properly temporary oversupply parts could result excess obsolete components could oversupply workers certain areas either could adversely affect gross margin ability manage size costs associated contingent workforce may subject additional constraints imposed local laws •longterm pricing commitments result binding price purchase commitments vendors may obligated purchase components retain workers prices higher available current market limited ability respond changing market conditions event become committed purchase components retain workers prices excess current market price may disadvantage competitors access components workers lower prices gross margin could suffer addition many instances rely offshore suppliers including manufacturers taiwan production notebook computers suppliers asia product assembly manufacture regional economic business environmental political medical military conditions events discussed following risk factor could disrupt supplies foreign locations use single source suppliers certain components could exacerbate supplier issues obtain significant number components single sources due technology availability price quality considerations addition new products introduce may initially utilize custom components obtained one source evaluated whether need additional suppliers performance single source suppliers may affect quality quantity price supplies hp due international nature business political economic changes factors could harm future revenue costs expenses financial condition sales outside united states make half revenue future revenue gross margin expenses financial condition could also suffer due variety international factors including •changes countrys regions economic political conditions including inflation recession interest rate fluctuations actual anticipated military conflicts •currency fluctuations particularly japanese yen euro contribute variations sales products services impacted jurisdictions also affect reported results expressed us dollars •longer accounts receivable cycles financial instability among customers •trade regulations procedures actions affecting production pricing marketing products •local labor conditions regulations •changes regulatory legal environment •differing technology standards customer requirements •import export business licensing requirements relating making foreign direct investments could affect ability obtain favorable terms components lead penalties restrictions •difficulties associated repatriating cash generated held abroad taxefficient manner changes tax laws •fluctuations freight costs disruptions important geographic points exit entry •natural medical disasters factors described could also disrupt product component manufacturing key suppliers located outside united states hp previously imposed travel restrictions quarantines certain countries affected severe acute respiratory syndrome sars similar medical crises may disrupt manufacturing processes economies affected countries result quarantines imposed future taiwan also suffered earthquakes typhoons resulting temporary communications supply disruptions addition procure components japan suffers earthquakes periodically moreover indigo subsidiary research development manufacturing operations located israel may subject disruptions problems light ongoing regional instability business disruptions could seriously harm future revenue financial condition increase costs expenses worldwide operations could subject natural disasters business disruptions could seriously harm revenue financial condition increase costs expenses corporate headquarters portion research development activities critical business operations suppliers located california near major earthquake faults ultimate impact us significant suppliers general infrastructure located near major earthquake faults unknown revenue profitability financial condition could suffer event major earthquake addition areas including california parts east coast midwest united states experienced may continue experience major power shortages blackouts could cause disruptions operations suppliers distributors resellers customers predominantly selfinsured losses interruptions caused earthquakes power shortages telecommunications failures water shortages floods fires extreme weather conditions natural manmade disasters impairment investment portfolio could harm net earnings investment portfolio includes minority equity debt investments cases attempt reduce eliminate market exposure investments may incur losses related impairment investments therefore charges net earnings investments public privatelyheld companies still startup development stage inherent risks technologies products development typically early stages may never become successful furthermore values investments publiclytraded companies subject significant market price volatility often couple investments technology companies strategic commercial relationship commercial agreements companies may sufficient allow us obtain integrate products services offerings otherwise benefit relationship third parties including competitors may subsequently acquire companies economic weakness could impact investment portfolio revenue profitability operations historically varied revenue profit margins vary among products services customer groups geographic markets therefore different future periods current revenue profit margins overall gross margins profitability given period dependent partially product customer geographic mix reflected periods net revenue particular imaging printing group certain business units printer supplies contribute significantly profitability addition newer geographic markets may relatively less profitable due investments associated entering markets local pricing pressures market trends competitive pressures seasonal rebates increased component shipping costs regulatory impacts factors may result reductions revenue pressure gross margins given period may necessitate adjustments operations sales cycle makes planning inventory management difficult future financial results less predictable quarterly sales reflected pattern disproportionate percentage quarters total sales occur toward end quarter trend become pronounced recent periods uneven sales pattern makes prediction revenue earnings working capital financial period difficult increases risk unanticipated variations quarterly results financial condition places pressure inventory management logistics systems predicted demand substantially greater orders excess inventory alternatively orders substantially exceed predicted demand may able fulfill orders received last weeks quarter developments late quarter systems failure component pricing movements global logistics disruptions could adversely impact inventory levels results operations manner disproportionate number days quarter affected addition experience seasonal trends sale products example sales governments particularly sales us government often stronger third calendar quarter consumer sales often stronger fourth calendar quarter customers may spend remaining capital budget authorizations fourth calendar quarter prior new budget constraints first calendar quarter following year european sales often weaker summer months demand spring early summer may also adversely impacted market anticipation seasonal trends moreover extent introduce new products anticipation seasonal demand trends discounting existing products may adversely affect gross margin prior shortly product launches many factors create affect seasonal trends beyond control order successful must retain motivate key employees failure could seriously harm us order successful must retain motivate executives key employees including managerial technical marketing information technology support positions particular hiring retaining qualified engineers skilled solutions providers support business qualified sales representatives critical future competition experienced management technical marketing support personnel industry intense moreover implemented retention programs executives key employees connection compaq acquisition although participants retention programs received payouts ultimate effect employee retention following expirations programs uncertain loss key employees could significant impact operations stock price also must continue motivate employees keep focused hps strategies goals may particularly difficult due morale challenges including posed workforce reductions acquisition integration compaq decreased effectiveness equity compensation could adversely affect ability attract retain employees proposed changes accounting equity compensation could adversely affect earnings historically used stock options forms equityrelated compensation key components total rewards employee compensation program order align employees interests stockholders encourage employee retention provide competitive compensation packages recent periods substantial majority hps employee stock options exercise prices excess hps stock price could affect ability retain attract present prospective employees addition financial accounting standards board agencies proposed currently considering changes united states generally accepted accounting principles would require hp companies record charge earnings employee stock option grants equity incentives moreover applicable stock exchange listing standards relating obtaining stockholder approval equity compensation plans could make difficult expensive us grant options employees future may result changes equity compensation strategy developments provision equity compensation employees could make difficult attract retain motivate employees result additional expense hp failure us execute planned cost reductions successfully could result total costs expenses greater expected historically undertaken restructuring plans bring operational expenses appropriate levels businesses simultaneously implementing extensive new companywide expensecontrol programs connection compaq acquisition announced workforce restructurings well reductions early retirement programs involving approximately 17600 employees worldwide addition workforce reductions fiscal 2003 took restructuring charge incremental workforce reductions 2300 employees second quarter 4700 employees third quarter 2000 employees fourth quarter hiring key areas offset workforce reductions may additional workforce reductions future significant risks associated actions workforce management issues may impair ability achieve anticipated cost reductions may otherwise harm business include delays implementation anticipated workforce reductions highly regulated locations outside united states particularly europe asia redundancies among restructuring programs decreases employee morale failure meet operational targets due loss employees particularly sales employees hps stock price historically fluctuated may continue fluctuate hps stock price like technology companies volatile factors affect stock price •the announcement new products services technological innovations us competitors •quarterly increases decreases revenue gross margin earnings changes business organizational structure operations prospects hp business units •changes quarterly revenue earnings estimates investment community variations actual anticipated financial results •speculation press investment community strategic position financial condition financial reporting results operations business significant transactions general industryspecific market conditions stock market performance domestic international macroeconomic geopolitical factors unrelated hps performance also may affect price hp common stock reasons investors rely recent trends predict future stock prices financial condition results operations cash flows addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources system security risks systems integration issues could disrupt internal operations information technology services provided customers could harm revenue increase expenses harm reputation stock price experienced computer programmers hackers may able penetrate network security misappropriate confidential information third parties create system disruptions cause shutdowns result could incur significant expenses addressing problems created security breaches network moreover could lose existing potential customers information technology outsourcing services information technology solutions incur significant expenses connection customers system failures addition sophisticated hardware operating system software applications produce procure third parties may contain defects design manufacture including bugs problems unexpectedly interfere operation system costs eliminate alleviate security problems viruses bugs could significant efforts address problems could result interruptions delays cessation service may impede sales manufacturing distribution critical functions portions information technology infrastructure also may experience interruptions delays cessations service produce errors connection ongoing systems integration work particular connection compaq integration plan implement new general ledger information system data warehouse replace current systems 2004 part effort rationalizing various legacy systems upgrading existing software applications implementing new data management applications administer business information may successful implementing new system transitioning data aspects process could expensive time consuming disruptive resource intensive disruptions may occur implementation new system future systems could adversely affect ability report accurate timely manner results consolidated operations business segment results financial position cash flows otherwise operate business could adversely affect financial results stock price reputation unforeseen environmental costs could impact future net earnings operations use substances regulated various federal state international laws governing environment including governing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites certain products subject various federal state international laws governing chemical substances products including regulating manufacture distribution chemical substances restricting presence certain substances electronics products could incur substantial costs including cleanup costs fines civil criminal sanctions thirdparty property damage personal injury claims violate become liable environmental laws become noncompliant environmental permits required present former facilities ultimate costs environmental laws timing costs difficult predict liability environmental laws relating contaminated sites imposed retroactively joint several basis also could face significant costs liabilities connection product takeback legislation european union finalized waste electrical electronic equipment directive makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products directive must enacted implemented individual european union governments august 13 2004 legislation together directive weee legislation producers financially responsible weee legislation beginning august 2005 hps potential liability resulting weee legislation may substantial specific laws regulations enforcement policies vary significantly among individual european member states hp cannot currently estimate extent hps existing liability future expenses resulting weee legislation similar legislation may enacted geographies including federal state legislation united states cumulative impact could significant policy apply strict standards environmental protection sites inside outside united states even subject local government regulations record liability environmental remediation environmental costs consider costs probable amount costs reasonably estimated antitakeover provisions contained certificate incorporation bylaws well provisions delaware law could impair takeover attempt provisions certificate incorporation bylaws could effect rendering difficult discouraging acquisition deemed undesirable board directors include provisions •authorizing blank check preferred stock could issued voting liquidation dividend rights superior common stock •limiting liability providing indemnification directors officers •specifying stockholders may take action duly called annual special meeting stockholders otherwise accordance bylaws limiting ability stockholders call special meetings •requiring advance notice stockholder proposals business conducted meetings hp stockholders nominations candidates election board directors •requiring twothirds stockholder vote amend certain bylaws relating stockholder meetings board directors indemnification •controlling procedures conduct board stockholder meetings election appointment removal directors provisions alone together could deter delay hostile takeovers proxy contests changes control management hp delaware corporation hp also subject provisions delaware law including section 203 delaware general corporation law prevents stockholders engaging certain business combinations without approval holders substantially hps outstanding common stock provision certificate incorporation bylaws delaware law effect delaying deterring change control could limit opportunity stockholders receive premium shares hp common stock also could affect price investors willing pay hp common stock unanticipated changes hps tax rates exposure additional income tax liabilities could affect profitability subject income taxes united states various foreign jurisdictions domestic international tax liabilities subject allocation expenses different jurisdictions effective tax rates could adversely affected changes mix earnings countries differing statutory tax rates changes valuation deferred tax assets liabilities changes tax laws material audit assessments particular carrying value deferred tax assets predominantly united states dependent ability generate future taxable income united states addition amount income taxes pay subject ongoing audits various jurisdictions material assessment governing tax authority could affect profitability item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global technology company generate net revenue earn profits sale products technologies solutions services consumers businesses governments portfolio broad includes personal computers handheld computing devices home business imaging printing devices publishing systems storage servers wide array information technology services software solutions seven business segments personal systems group psg imaging printing group ipg enterprise storage servers ess hp services hps hp financial services hpfs software corporate investments given crosssegment linkages adaptive enterprise strategy order capitalize upselling crossselling opportunities ess hps software structured beneath broader technology solutions group tsg operating segment sometimes provide financial data aggregating segments within tsg order provide supplementary view business strategy revolves around following strategic imperatives •to provide consumer customers superior products services overall experiences providing leadingedge technologies work seamlessly together •to deliver business customers best return investments industry •to build world class cost structures processes across entire portfolio businesses •to focus innovation research development areas make unique contributions partnering top providers areas enable us provide customers complete solutions approach requires us excel individual product categories managing across broad portfolio order drive growth optimizing cost structure time product geographic breadth help reduce volatility balancing financial results across related diversified set businesses financial results also impacted ability predict respond industrywide trends instance underlying strategy belief physical static processes continue shift processes digital mobile virtual personal anticipating shifts preparing solutions make changes simple customers opportunity accelerate shifts capture revenue market share approach preparing solutions seen programs digital photography initiative offer compatible solutions spanning cameras printers paper well focus flexibility modularity integration adaptive enterprise solutions another trend significant business financial results shift toward standardized products presents revenue opportunities certain businesses presents ongoing challenge margins help address potential margin impact standardization take ongoing actions related revenue generation cost structure management sales marketing area instituting programs designed improve rates sell highermargin configurations options also continue focus managing procurement labor expenses key overall efforts delivering superior products maintaining worldclass cost structure increasingly global nature technology expertise trend allowing us develop global delivery structure take advantage regions advanced technical expertise available lower costs part effort continually evaluate workforce make adjustments deem appropriate make adjustments workforce may incur expenses associated workforce reductions delay benefit efficient workforce structure believe fundamental shift global delivery crucial maintaining longterm competitive cost structure terms execution translated financial performance following provides overview key fiscal 2004 financial metrics cash equivalents fiscal year ended october 31 2004 totaled 127 billion decline 15 billion october 31 2003 balance 142 billion decline related primarily increased cash returned stockholders share repurchases increased cash utilized acquisitions fiscal 2004 offset part increased earnings intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements order provide additional information relating operating results also present supplemental section combined company information discusses operating results fiscal year ended october 31 2002 hp compaq combined company fiscal 2002 discussion results operations consolidated level followed detailed discussion results operations segment supplemental sections combined company information discuss segment operating results hp compaq combined company fiscal 2002 discussion factors could impact operating results see section entitled factors could affect future results critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur periodically could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements valuation goodwill indefinitelived purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill intangible assets provisions sfas 142 require twostep impairment test performed goodwill first step compare fair value reporting unit carrying value reporting units consistent reportable segments identified note 18 consolidated financial statements item 8 determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference sfas 142 also requires fair value purchased intangible assets indefinite lives estimated compared carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2004 result impairment charge excess fair value carrying value hps reporting units august 1 2004 annual testing date ranged approximately 700 million approximately 34 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 200 million approximately 30 billion hps reporting units revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements fair values undelivered elements known uncertainties regarding customer acceptance resolved customernegotiated refund return rights affecting revenue recognized delivered elements changes allocation sales price elements might impact timing revenue recognition would change total revenue recognized contract recognize revenue work progresses certain fixed price contracts consulting arrangements using proportional performance method applying proportional performance method rely estimates total expected contract costs order determine amount revenue earned date follow method reasonably dependable estimates revenue applicable various stages contract made total contract profit subject revisions throughout life contract changes revenue result revisions cost estimates recorded income period facts give rise revision become known record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience number customers actually redeem incentive allowance doubtful accounts allowance doubtful accounts determined using combination factors ensure trade financing receivables balances overstated due uncollectibility maintain allowance doubtful accounts customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers also record specific provisions individual accounts become aware customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position circumstances related customers change estimates recoverability receivables would adjusted either upward downward annual provision doubtful accounts ranged 01 05 net revenue last three fiscal years using thirdparty credit risk model october 31 2004 50 basis point deterioration either weighted average default probabilities significant customers overall mix portfolio would resulted approximately 20 million increase trade allowance end fiscal year 2004 inventory stated lower cost market adjustments reduce cost inventory net realizable value required made product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates restructuring engaged may continue engage restructuring actions require management utilize significant estimates related realizable values assets made redundant obsolete expenses severance employee separation costs lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted warranty provision provide estimated cost product warranties time revenue recognized evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers estimated warranty obligation based upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates service delivery costs postsales support costs differ estimates revisions estimated warranty liability would required warranty terms generally range one three years depending upon product last three fiscal years annual warranty provision averaged approximately 4 net product revenues actual annual warranty costs also averaged approximately 4 net product revenues retirement benefits pension postretirement benefit costs obligations dependent various actuarial assumptions used calculating amounts assumptions relate discount rates salary growth longterm return plan assets medical cost trend rates factors base discount rate assumption current investment yields high quality fixed income investments salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment well target asset allocations medical cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends actual results differ assumptions accumulated amortized estimated future working life plan participants major assumptions determining net benefit cost pension postretirement plans include longterm return plan assets discount rate determining plan obligations future expected average increase compensation levels rates vary plan weighted average rates used set forth note 15 consolidated financial statements assumption different sensitivity characteristics general changes moved direction last several years fiscal 2004 change weighted average rates would following impact net benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 20 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 50 million •a decrease 25 basis points future compensation rate would decreased net benefit cost approximately 40 million taxes earnings effective tax rate includes impact certain undistributed foreign earnings us taxes provided earnings planned reinvested indefinitely outside united states described note 12 consolidated financial statements fiscal year 2004 results reflect impact american jobs creation act 2004 jobs act completed process reevaluating position respect indefinite reinvestment foreign earnings take account possible election repatriation provisions contained jobs act foreign earnings remittance amounts planned based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distributed united states provide us federal taxes due amounts result certain employment actions capital investments undertaken hp income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes years 2018 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate record valuation allowance reduce deferred tax assets amount likely realized considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future adjustment deferred tax assets would charged earnings period make determination likewise later determine likely net deferred tax assets would realized would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located calculate current deferred tax provision based estimates assumptions could differ actual results reflected income tax returns filed subsequent year adjustments based filed returns recorded identified generally third quarter subsequent year us federal state provisions amount income taxes pay subject ongoing audits federal state foreign tax authorities often result proposed assessments estimate potential outcome uncertain tax issue highly judgmental believe adequately provided reasonably foreseeable outcome related matters however future results may include favorable unfavorable adjustments estimated tax liabilities period assessments made resolved statutes limitation potential assessments expire additionally jurisdictions earnings deductions realized may differ current estimates result effective tax rate may fluctuate significantly quarterly basis recent accounting pronouncements december 2004 fasb issued sfas 123 revised 2004 sharebased payment sfas 123r replaces sfas 123 accounting stockbased compensation sfas 123 supercedes apb opinion 25 accounting stock issued employees sfas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first interim annual period june 15 2005 early adoption encouraged pro forma disclosures previously permitted sfas 123 longer alternative financial statement recognition required adopt sfas 123r fourth quarter fiscal 2005 beginning august 1 2005 sfas 123r must determine appropriate fair value model used valuing sharebased payments amortization method compensation cost transition method used date adoption transition methods include prospective retroactive adoption options retroactive options prior periods may restated either beginning year adoption periods presented prospective method requires compensation expense recorded unvested stock options restricted stock beginning first quarter adoption sfas 123r retroactive methods would record compensation expense unvested stock options restricted stock beginning first period restated evaluating requirements sfas 123r expect adoption sfas 123r material impact consolidated results operations earnings per share yet determined method adoption effect adopting sfas 123r determined whether adoption result amounts similar current pro forma disclosures sfas 123 see note 1 consolidated financial statements item 8 description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition results operations results operations dollars percentage net revenue follows 1cost products cost services financing interest 2certain reclassifications made prior year amounts order conform current year presentation net revenue components weighted average net revenue growth fiscal years ended october 31 follows fiscal 2004 net revenue increased 9 prior year period 3 constant currency basis favorable currency impact due primarily weakening dollar euro us net revenue remained flat 294 billion international net revenue increased 15 505 billion psg experienced net revenue growth across businesses customer demand resulting significant volume increases desktop notebook pcs overall volume increase offset slight decline overall average selling prices asps due mix shift lowerend products well component cost declines ipg net revenue growth fiscal year 2004 driven continued volume growth printer supplies laserjet supplies color laser printers experienced strong volume growth due growing demand colorrelated products digital photography hps achieved net revenue growth across businesses fiscal 2004 impact major outsourcing deals lesser extent triaton acquisition second half year contributed growth managed services technology services formerly called customer support fiscal 2004 ess net revenue growth generated sales industry standard servers primarily proliant server line revenue declines competitive pressures storage business critical servers moderated overall segment net revenue growth slight decrease hpfs net revenue fiscal 2004 due primarily lower levels revenuegenerating assets fiscal 2003 net revenue increased 29 prior year period 23 constant currency basis result primarily acquisition compaq beginning may 2002 favorable currency impact due primarily weakening dollar euro us net revenue increased 25 292 billion international net revenue grew 32 438 billion net revenue increase fiscal 2003 compared fiscal 2002 attributable acquisition compaq resulted market share increases psg ess hps lesser extent hpfs ipg also contributed overall net revenue increase fiscal 2003 due primarily strong growth printer supplies reflecting higher volumes result continued expansion printer hardware installed base lesser extent growth printer hardware digital imaging products well synergies resulting compaq acquisition declining asps due competitive pricing pressures shift sales mix lowerpriced products service offerings moderated overall net revenue increases fiscal 2003 gross margin weighted average components change gross margin percentage net revenue fiscal years ended october 31 follows competitive pricing pressures contributed significantly gross margin decline ess hps psg fiscal 2004 compared fiscal 2003 ess competitive environment contributed gross margin decline standards based server group along storage group addition competitive pricing pressures gross margin decline hps reflected mix shifts lower margin contracts technology services large outsourcing contracts managed services typically lower margins early stages life cycles competitive pricing pressures particularly europe contributed gross margin decline psg ipg gross margin remained flat fiscal 2004 favorable impact cost reductions increased shipments supplies offset mix shift lower margin products hpfs gross margin increased fiscal 2004 due higher portfolio profitability primarily endoflease transactions fiscal 2004 gross margin also favorably impacted currency effects net revenue resulting primarily weakening dollar euro gross margin improvement fiscal 2003 compared fiscal 2002 due cost reductions resulting workforce reductions initial economies scale procurement leverage resulting compaq acquisition declining asps due competitive pricing pressures mix shift toward lowermargin products across segments moderated overall increase addition fiscal 2003 gross margin impacted favorably currency effects net revenue resulting primarily weakening dollar euro well higher cost sales fiscal 2002 due 147 million inventory adjustments resulting product roadmap decisions ess showed slight improvement compared prior year period result growth storage offset unfavorable impact mix shift toward industry standard servers hps significant impact change gross margin psg negative impact gross margin due unfavorable mix shift increased sales lowermargin products percentage overall business operating expenses research development comparison prior years research development expense percentage net revenue decreased fiscal 2004 2003 fiscal 2004 total research development spending decreased percentage net revenue major segments decrease result focus investing categories business yield stronger longterm returns marketplace curtailing spending mature categories business particularly within ess addition continued realize synergies compaq acquisition fiscal 2004 shifted business towards standardsbased products leveraging research development technology partners decreases percentage net revenue moderated increased research development spending ipg related strategic initiatives unfavorable currency impacts resulting primarily weakening dollar euro ipgs increase research development spending due primarily investment inkjet technology fiscal 2003 decrease due primarily full year increased net revenue acquisition compaq combined favorable impact prior year restructuring actions well expense control measures addition overall decrease fiscal 2003 expense moderated higher pension postretirement costs unfavorable currency effects weakening dollar euro selling general administrative decline selling general administrative expense percentage net revenue fiscal 2004 compared fiscal 2003 due primarily increase net revenue outpacing expense growth part result effective expense controls workforce reduction measures unfavorable currency impacts moderated decline due weakening dollar euro fiscal 2003 compared fiscal 2002 selling general administrative expense percentage net revenue declined slightly majority change attributable acquisition compaq may 2002 including workforce reduction efforts expense control measures well lower bad debt expense addition fiscal 2003 expense impacted partially unfavorable currency effects primarily weakening dollar euro amortization purchased intangible assets increase amortization expense fiscal 2004 compared fiscal 2003 due primarily amortization intangible assets related acquisition triaton gmbh triaton france sas triaton na inc usa collectively triaton april 2004 increase amortization expense fiscal 2003 compared fiscal 2002 due primarily amortization purchased intangible assets related acquisition compaq may 2002 lesser extent acquisition indigo nv indigo march 2002 increase offset part elimination goodwill amortization well writeoff purchased intangible assets related middleware storage virtualization offerings fiscal 2002 related compaq acquisition product road map restructuring charges hp implemented certain strategic restructuring programs fiscal years 2003 2002 net restructuring charges 3year period ended october 31 2004 aggregated approximately 27 billion majority related restructuring premerger hp connection 2002 acquisition compaq fiscal 2003 hp implemented restructuring programs order manage cost structure better align business conditions majority restructuring charges incurred fiscal 2004 represent fiscal 2003 restructuring plan activities meet recognition criteria accrual 2003 accordingly charged expense incurred fiscal 2004 well changes original estimates fiscal 2002 2003 plans changes estimates related primarily asset impairments buildings vacated result compaq acquisition adjustments estimates severance employee benefits costs well revisions contract termination costs addition hp recorded approximately 12 billion restructuring liability part acquisition compaq allocated liability element original purchase price allocation fiscal 2002 approximately 960 million amount related restructuring premerger compaq business time acquisition approximately 259 million related preexisting compaq restructuring liabilities downward revisions original estimates premerger compaqrelated restructuring plans recorded decreases compaqrelated goodwill increases recorded restructuring expense period occur effect restructuring programs put place result acquisition compaq reduce costs removing duplication leverage benefits larger organization well streamline focus operations hp cost benefits earned strategic product roadmap decisions headcount facilities reductions realignment focused efficient research development sales marketing programs substantial seen progressive lowering operating expenses percentage net revenue total 35 billion cost synergies associated compaq integration completed end fiscal 2003 approximately 2 billion result acquisitionrelated restructuring plans efforts improved profitability also allowed hp target serve customers better restructuring liabilities 288 million october 31 2004 composed primarily remaining cash payments certain severance benefits nonus operations contract termination costs including canceled facility leases obligations largely settled end fiscal 2010 addition approximately 6 million costs related 2003 plans yet accrued requirements recognition yet met charged operations restructuring activities occur fiscal 2005 following table summarizes major activities aggregate fiscal 2004 2003 2002 related restructuring programs workforce rebalancing continue focus managing procurement expenses developing global delivery structure take advantage regions advanced technical expertise available lower costs part effort continually evaluate workforce make adjustments deem appropriate make adjustments workforce may incur expenses associated workforce reductions delay financial benefit efficient workforce structure believe fundamental shift global delivery crucial maintaining longterm competitive cost structure context expect incur expenses approximately 200 million first half fiscal 2005 connection workforce reductions full financial benefits workforce reductions begin aggregate cost savings exceed separation expenses typically quarterly period following quarter expenses incurred acquisitionrelated charges acquisitionrelated charges fiscal 2004 2003 2002 consist substantially costs related compaq acquisition acquisitionrelated charges fiscal 2004 consisted primarily amortization deferred compensation mergerrelated inventory adjustments professional fees costs fiscal 2003 fiscal 2002 attributable primarily costs incurred employee retention bonuses professional fees consulting services acquisitionrelated charges fiscal year 2002 also included costs incurred proxy solicitation advertising compaq acquisition inprocess research development charges inprocess research development iprd charges recorded connection acquisitions accounted business combinations fully described note 5 consolidated financial statements research development projects engaged acquired company analyzed acquisition date determine current technological feasibility possible future alternative uses based analysis estimated costs develop discounted cash flows projects revenue estimates related market size growth factors technology trends absence alternative future use hp determines purchase price amount allocated iprd records amount expense time fiscal 2004 2003 2002 recorded iprd charges 37 million 1 million 793 million respectively related acquisitions years interest net interest net increased 14 million fiscal 2004 fiscal 2003 increase fiscal 2004 result lower interest expense offset partially higher currency losses balance sheet remeasurement related hedging strategies interest net decreased 31 million fiscal 2003 fiscal 2002 decline fiscal 2003 attributable primarily increased interest expense associated higher average borrowings lower dividend income associated investment activities compared fiscal 2002 lower net currency losses balance sheet remeasurement moderated decline gains losses investments early extinguishment debt net gain fiscal 2004 attributable mainly realization contingent gain associated prior period divestiture realized gains sale investments excess impairment charges net losses fiscal 2003 2002 resulted mainly impairment charges excess gains realized investment portfolio losses decreased fiscal 2003 2002 gains early extinguishment debt repurchase program zero coupon subordinated convertible notes offset slightly fiscal 2002 impairment losses investment portfolio includes equity investments publiclytraded privatelyheld emerging technology companies many emerging technology companies still startup development stage investments companies inherently risky technologies products development typically early stages may never become successful depending market conditions may incur additional charges investment portfolio future dispute settlement may 14 2004 hp announced resolved dispute regarding certain contracts government canada hp canada agreed reimburse government canada sum cdn146 million approximately us105 million date settlement resulted additional charge 70 million second quarter fiscal 2004 fully described note 17 consolidated financial statements item 8 july 2001 signed definitive agreement comdisco inc comdisco acquire substantially comdiscos business continuity services business agreement subject bankruptcy court sales process related approvals november 2001 bankruptcy court announced selected winning bid acquire comdiscos business continuity services business third quarter fiscal 2002 received 14 million settlement related termination definitive agreement provision benefit taxes effective tax rate earnings operations fiscal 2004 2003 2002 differs us federal statutory rate 35 due generally tax rate benefits certain earnings operations lowertax jurisdictions throughout world us taxes provided earnings planned reinvested indefinitely outside united states full reconciliation effective tax rate us federal statutory rate see note 12 consolidated financial statements item 8 effective tax rate resulted 167 provision fiscal 2004 pretax earnings 121 provision fiscal 2003 pretax earnings 116 benefit fiscal 2002 pretax loss fiscal 2004 tax rate benefited net favorable adjustments previously estimated tax liabilities 207 million decreased provision taxes approximately 007 per share excluding adjustments tax rate fiscal 2004 would 216 significant favorable adjustments related resolution california state income tax audit net favorable revision estimated tax accruals upon filing 2003 us income tax return reduction taxes foreign earnings due change regulatory policy favorable adjustments offset part net effect smaller adjustments income tax liabilities various jurisdictions increase overall tax rate fiscal 2004 fiscal 2003 fiscal 2003 fiscal 2002 driven primarily decline benefit percentage lower rates jurisdictions periods lower tax rates nonus jurisdictions provided benefit 153 fiscal 2004 decline benefit 239 360 fiscal 2003 fiscal 2002 respectively major factor causing reduction rate benefit percentage fiscal 2004 fiscal 2003 respective preceding years decline restructuring deductible acquisitionrelated charges incurred part highertax jurisdictions years fiscal 2002 operating losses also significant contributor tax benefit offset part impact nondeductible items primarily acquisitionrelated charges goodwill amortization iprd charges combined company results following discussion includes combined results operations hp compaq acquisition occurred beginning fiscal 2002 included additional information order provide insight prior period operating results trends supplemental information presented manner consistent disclosure requirements statement financial accounting standards sfas 141 business combinations combined company results fiscal 2003 historical results compaq included entire period due different historical fiscal period ends hp compaq results fiscal year ended october 31 2002 combine results hp fiscal year ended october 31 2002 historical quarterly results compaq sixmonth period ended march 31 2002 period may 3 2002 acquisition date october 31 2002 results operations combined company dollars percentage net revenue follows 1cost products cost services financing interest 2certain reclassifications made prior fiscal year balances order conform current fiscal year presentation net revenue weighted average components increase net revenue fiscal year ended october 31 follows combined company basis net revenue increased 1 declined 4 constant currency basis fiscal 2003 us net revenue remained essentially flat 292 billion international net revenue increased 1 438 billion overall combined company net revenue fiscal 2003 impacted favorably currency effects particularly weakening dollar euro lower average selling prices due competitive pricing pressures shift sales mix lowerpriced products service offerings consolidation product offerings result postacquisition product roadmap decisions moderated overall increase net revenue increase ipg driven strong growth printer supplies resulting rise volumes reflecting continued expansion printer hardware installed base lesser extent growth business printer hardware digital imaging products ess net revenue decline attributable primarily net revenue decrease business critical servers due competitive pricing well cautious enterprise capital spending net revenue decline psg resulted primarily lower average selling prices due competitive pricing pressure lesser extent decline volumes commercial consumer desktop pcs hpfs net revenue decline due primarily decrease revenuegenerating assets hps net revenue decreased slightly due primarily declines consulting integration business moderated increases managed services technology services net revenue gross margin weighted average components increase gross margin percentage revenue fiscal year ended october 31 2003 follows gross margin percentage combined company net revenue improved 14 percentage points fiscal 2003 compared fiscal 2002 overall gross margin improvement fiscal 2003 attributable primarily cost savings resulting improved cost structures continued expense control measures lesser extent decreased component prices moderated declining average selling prices due competitive pricing pressures gross margin improvement psg due primarily reduced direct indirect procurement costs reflecting synergies associated acquisition compaq improvement hpfs gross margin due primarily reduced bad debt expense resulting stronger portfolio ipg gross margin improvement due primarily highermargin supplies business becoming greater percentage ipg net revenue combined favorable currency impact net revenue resulting primarily weakening dollar euro esss gross margin improvement primarily reflected cost reductions storage industry standard server businesses result compaq acquisition offset part product mix shift away highermargin business critical servers toward lowermargin industry standard servers hps gross margin decline attributable primarily competitive pricing pressures reduced service levels technology services business addition overall gross margin impacted favorably 02 percentage point improvement attributable primarily inventory adjustments 147 million fiscal 2002 resulting product roadmap decisions operating expenses research development research development expense decreased 8 fiscal 2003 compared fiscal 2002 decrease attributable primarily workforce reduction efforts expense control measures fiscal 2003 research development expense decreased business segments except ipg research development expense increased 8 ipgs increase research development spending resulted primarily continued investment emerging inkjet technology addition overall decrease fiscal 2003 expense moderated higher pension postretirement costs unfavorable currency effects weakening dollar euro selling general administrative selling general administrative expense remained flat fiscal 2003 compared fiscal 2002 fiscal 2003 unfavorable currency effects driven mainly weakening dollar euro higher sales marketing costs associated companywide product branding campaign higher pension postretirement costs offset almost entirely overall decreases attributable workforce reduction efforts expense control measures lower bad debt expense amortization purchased intangible assets effective fiscal 2003 date adoption sfas 142 goodwill intangible assets longer amortize goodwill instead test goodwill least annually impairment combined company basis amortization expense decreased 101 million fiscal 2003 compared fiscal 2002 decrease fiscal 2003 expense due primarily elimination goodwill amortization writeoff purchased intangible assets related middleware storage virtualization offerings fiscal 2002 result product roadmap decisions connection compaq acquisition restructuring charges combined company basis recorded restructuring charges 800 million fiscal 2003 18 billion fiscal 2002 discussion fiscal 2003 2002 charges recorded hp included previous presentation acquisitionrelated charges connection compaq acquisition combined company incurred acquisitionrelated charges 280 million fiscal 2003 772 million fiscal 2002 charges consisted primarily costs incurred employee retention bonuses consulting services professional fees addition acquisitionrelated charges fiscal 2002 included costs incurred proxy solicitation advertising inprocess research development charges iprd charges combined company basis previously discussed interest net combined company basis interest net remained essentially flat fiscal 2003 fiscal 2003 lower net losses foreign currency transactions resulting balance sheet remeasurement related hedging strategies compared fiscal 2002 offset almost entirely lower interest income higher interest expense debt losses investments early extinguishment debt combined company basis net losses 29 million fiscal 2003 70 million fiscal 2002 due generally reasons discussed previously dispute settlement fiscal 2002 recorded settlement income 14 million fully discussed previously provision benefit taxes combined company basis effective tax rate resulted 121 provision fiscal 2003 pretax earnings 120 benefit fiscal 2002 pretax loss effective tax rate differed us federal statutory rate 35 fiscal 2003 2002 due generally reasons discussed previously segment information description products services well yeartodate financial data segment found note 18 consolidated financial statements item 8 restated segment financial data fiscal years ended october 31 2003 2002 reflect changes hps organizational structure occurred beginning first quarter fiscal 2004 describe changes fully note 18 consolidated financial statements item 8 presented business segments form 10k based management organizational structure october 31 2004 distinct nature various businesses future changes organizational structure may result changes reportable segments disclosed discussions include results segments supplemental sections combined company information discuss segment operating results hp compaq combined fiscal 2002 presented manner consistent supplemental combinedcompany disclosures included consolidated operating results discussion technology solutions group given crosssegment linkages adaptive enterprise offering order capitalize upselling crossselling opportunities ess hps software structured beneath broader technology solutions group tsg operating segment sometimes provide financial data aggregating segments within tsg order provide supplementary view business reportable segments tsg described detail enterprise storage servers components weighted average net revenue growth business unit fiscal years ended october 31 follows ess net revenue increased 4 fiscal year 2004 fiscal 2003 revenue constant currency basis decreased 2 favorable currency impact due primarily weakening dollar euro fiscal 2004 ess performance hurt third fiscal quarter execution issues namely systems migration us channel management issues emea weakness storage ess net revenue growth however helped industry standard servers unit growth 22 translated 12 net revenue increase fiscal 2003 category net revenue business critical servers declined 2 fiscal 2004 compared fiscal 2003 reflecting ongoing decline alphaserver product line risc itaniumbased servers experienced revenue growth introduced midrange highend itanium products widely fiscal year 2004 sales continued increase year itanium servers representing 16 business critical servers fourth fiscal quarter hpux server revenue increased 2 fiscal 2003 offset declines alpha transition customers nonalpha products nonstop server net revenue declined 1 prior year reflecting maturing installed base storage net revenue declined 7 declines overall array tape businesses net revenue declines fiscal 2003 due primarily exposure declining tape market aggressive pricing inadequate storage sales specialists coverage product updates occurred late fiscal 2004 growth storage software network attached storage offset partially revenue decline primary product groups ess earnings operations fiscal 2004 improved 01 percentage points reflecting 39 percentage point decrease operating expenses relation revenue resulting effective cost management increased volume industry standard server business decline gross margin 38 percentage points offset decline operating expenses volume growth gross margin decline result competitive pressures impacting industry standard servers group storage business along mix shift lower margin products within business critical servers group generally continued mix shift towards industry standard servers within segment business continues focus increasing direct sales improving option attach rates reducing warranty costs order optimize future gross margins additionally execution issues third quarter led operating loss quarter hampered full year performance increase ess yearoveryear operating results fiscal 2003 due substantially acquisition compaq significant increases compaqs industry standard server business compaqs storage business critical server businesses main contributors overall net revenue growth fiscal 2003 although overall unit sales increased due acquisition compaq continued competitive pricing pressures impacted asps unfavorably fiscal 2003 discontinuance hps netserver certain storage products part postacquisition product roadmap decisions moderated volume growth improvement operating margin ratio attributable primarily workforce reduction activities effective cost management offset part decline gross margin gross margin deterioration reflected competitive pricing pressures mix shift toward industry standard servers significantly lower margins products segment enterprise storage serverssupplemental combined company information present supplementary discussion ess combined company results esss combined company net revenue declined 5 fiscal 2003 net revenue decrease fiscal 2003 10 constant currency basis favorable currency impact due primarily weakening dollar euro overall segment net revenue fiscal 2003 continued impacted unfavorably competitive pricing pressures product roadmap transitions cautious enterprise spending across business units geographic regions components weighted average net revenue growth business unit follows fiscal year ended october 31 combined company net revenue decline many business critical server products fiscal 2003 reflected competitive pricing well constraints enterprise capital spending large purchases lowend midrange unix net revenue declined period offset part strong growth highend unix servers due continued strength superdome products nonstop server net revenue declined fiscal 2003 reflecting weak spending telecommunications financial services industries product roadmap transitions tape libraries due exiting oem business decreased sales legacy arrays offset part mix shift toward eva products drove storage net revenue decline fiscal 2003 unit sales industry standard servers increased fiscal 2003 offset net revenue decline attributable lower asps mix shift toward lowend servers despite unit declines netserver products due postacquisition roadmap decision discontinue line servers total industry standard server units grew approximately 9 period due strong worldwide shipments proliant servers combined company earnings operations percentage net revenue 10 fiscal 2003 fiscal 2003 operating loss improvement 30 percentage points due 17 percentage point decrease operating expenses percentage net revenue 13 percentage point increase gross margin cost savings achieved workforce reductions continued cost control measures offset part unfavorable currency impact drove decline operating expense percentage net revenue fiscal 2003 gross margin improvement period reflected primarily cost reductions resulting compaq acquisition storage industry standard server businesses coupled product mix shift within business critical servers storage unfavorable mix shift low midrange business critical servers toward lowermargin industry standard servers moderated gross margin improvements period hp services components weighted average net revenue growth business unit follows fiscal years ended october 31 hps net revenue increased 12 fiscal 2004 compared fiscal 2003 constant currency basis net revenue increased 5 fiscal 2004 favorable currency impact due primarily weakening dollar euro yen fiscal 2004 growth managed services due increased net revenue new large outsourcing deals expansion services existing customers well triaton acquisition growth technology services net revenue driven primarily favorable currency impacts triaton acquisition along strength integrated support desktop lifecycle mission critical support solutions increase core consulting integration services contributed slight growth consulting integration business fiscal 2004 decrease sales complimentary thirdparty products impacted net revenue business negatively hps earnings operations percentage net revenue declined 18 percentage points fiscal 2004 part due continued growth managed services lowermargin business becoming increasingly larger part hps operating profit ratio declines managed services technology services business contributed overall segment operating profit ratio decline fiscal 2004 large outsourcing contracts early stages life cycle lower margins fiscal 2004 drove decline managed services operating profit ratio technology services business competitive pricing pressures renewals new contracts mix shift higher margin support agreements eg unix lower margin contracts eg networking installations integrated multivendor support offerings affected technology services operating profit ratio lesser degree costs related integration recent acquisitions overall operating profit ratio decline moderated somewhat operating profit ratio improvement consulting integration business result sales force focus hps adaptive enterprise offerings customer relationship management continued process improvements increase hps yearoveryear operating results fiscal 2003 due substantially acquisition compaq although acquisition compaq resulted increase services across business units fiscal 2003 consulting integration technology services businesses impacted unfavorably weak demand infrastructure products slowdown enterprise spending competitive pricing pressures managed services business benefited slowdown fiscal 2003 customers reduced costs outsourcing infrastructure earnings operations percentage net revenue increased fiscal 2003 compared fiscal 2002 due expense control measures workforce reduction initiatives shift net revenue mix away consulting integration business typically operating profit ratios lower segment average also increased earnings operations ratio hp servicessupplemental combined company information present supplementary discussion hps combined company results hps combined company net revenue essentially flat fiscal 2003 compared fiscal 2002 constant currency basis net revenue decreased approximately 6 fiscal 2003 favorable currency impact fiscal 2003 due primarily weakening dollar euro components weighted average net revenue growth business unit follows fiscal year ended october 31 decline core consulting integration services drove combined company net revenue decrease consulting integration business fiscal 2003 decline core consulting integration net revenue reflected competitive pricing pressures weak demand increase new existing large outsourcing deals reflecting ongoing mix shift toward larger comprehensive deals customers outsourced substantial portions infrastructure hp well favorable currency impacts mentioned contributed growth managed services net revenue fiscal 2003 growth technology services net revenue fiscal 2003 due primarily favorable currency impacts combined company earnings operations percentage net revenue 110 fiscal 2003 compared 111 fiscal 2002 although operating profit ratio remained flat fiscal 2003 operating expenses decreased percentage net revenue expense control measures workforce reductions initiated fiscal 2002 well reduced costs reflecting synergies associated acquisition compaq favorable business mix shift away consulting integration business typically operating profit ratio lower segment average helped overall segment operating profit ratio period operating profit ratio decline technology services business reduced fiscal 2003 operating margin competitive pricing pressures reduced service levels negative impact technology services operating margins higher pension postretirement costs resulting fiscal 2003 changes underlying assumptions including decrease expected portfolio performance decrease discount rates increase medical cost trend rates well extension participation pension postretirement benefit plans eligible preacquisition compaq employees united states covered plans prior january 1 2003 also contributed overall segment operating profit ratio decline fiscal 2003 software fiscal 2004 software net revenue increased 19 16 without acquisitions fiscal 2003 13 constant currency basis majority currency impact resulted weakening dollar euro overall 19 net revenue increase openview management solutions software product line represented 13 10 without acquisitions percentage points growth weighted average net revenue basis opencall telecommunications solutions product line contributed remaining 6 percentage points net revenue increase openview net revenue growth result market share gains growing market along impact recent acquisitions add breadth adaptive enterprise portfolio growth opencall due increased spending telecommunications industry associated adoption next generation network infrastructure operating margin improvement 88 percentage points fiscal 2004 fiscal 2003 driven primarily decrease operating expense percentage net revenue decrease operating expense attributable effective cost management operating expenses particularly marketing research development costs grew slower net revenue despite unfavorable impact currency increased acquisitionrelated costs gross margin decline resulting increasingly competitive pricing environment fiscal year 2003 software net revenue increased 10 compared fiscal 2002 due primarily acquisition compaq overall 10 revenue increase weighted average basis openview represented 6 percentage points increase opencall contributed remaining 4 percentage points revenue increase addition compaq products primarily opencall offset decline sales similar hp products resulted continued weakness telecommunications industry across geographical regions openview net revenue growth result market share gains growing market fiscal 2003 improvement operating margin ratio 250 percentage points fiscal 2002 attributable primarily workforce reductions effective cost management offset part unfavorable impact currency gross margin improvement reflected product mix shift towards higher margin openview products softwaresupplemental combined company information present supplementary discussion software combined company results fiscal 2003 software combined company net revenue declined 5 compared fiscal 2002 overall net revenue decrease opencall accounted 10 percentage points decline weighted average net revenue basis partially offset increase openview net revenue 5 percentage points decline opencall resulted continued weakness telecommunications industry across geographical regions openview net revenue growth result market share gains growing market fiscal 2003 software operating margin improvement 182 percentage points compared fiscal 2002 due 95 percentage point decrease operating expense percentage net revenue along 87 percentage points increase gross margin cost savings achieved workforce reductions continued cost control measures offset part unfavorable impact currency drove decline operating expense percentage net revenue fiscal 2003 gross margin improvement reflected product mix shift towards highermargin openview products personal systems group components weighted average net revenue growth business unit follows fiscal years ended october 31 psgs net revenue increased 16 fiscal 2004 fiscal 2003 constant currency basis increase 10 favorable currency impact due primarily weakening dollar euro fiscal 2004 net revenue increase across businesses result primarily overall 17 volume increase volume increases result strong market growth consumer commercial segments reentry china market introduction new products media center pcs widescreen notebook pcs converged devices broader product line offering penbased ipaqs fiscal 2004 consumer commercial desktop pc volumes increased 15 11 respectively notebook pc volume increased 21 volume increase moderated slight decline asps asp decline due mix shift toward lowerend personal workstations ipaq handhelds well component cost declines offset partially strong monitor attach rate business pcs yearoveryear net revenue increases consumer commercial desktop pcs 15 12 respectively notebook pc net revenue increased 22 psgs earnings operations percent net revenue 09 fiscal 2004 compared 01 fiscal 2003 increase result volume increases decline operating expenses 13 percentage points offset decline gross margin 04 percentage points operating expense decline due headcount reductions tightening administrative costs lower research development spending scale efficiencies selling marketing costs gross margin decline due primarily continued competitive pressures europe expansion developing markets shift towards lowerend products increase psgs yearoveryear operating results fiscal 2003 due substantially acquisition compaq fiscal 2002 although acquisition compaq resulted increase unit sales continued competitive pricing environment impacted asps unfavorably fiscal 2003 execution postacquisition product roadmap decisions included discontinuance hp vectra jornada product lines impacted commercial desktop pc handheld volumes unfavorably fiscal 2003 earnings operations percentage net revenue increased fiscal 2003 due decrease operating expenses primarily headcount reductions tightening administrative costs well lower research development spending improvement gross margin gross margin improvement result primarily reduced direct indirect procurement costs reflecting synergies associated acquisition compaq well shift toward lowercost direct business personal systems groupsupplemental combined company information present supplementary discussion psgs combined company results psgs combined company net revenue declined 3 fiscal 2003 net revenue decrease fiscal 2003 8 constant currency basis favorable currency impact due primarily weakening dollar euro components weighted average net revenue growth business unit follows fiscal year ended october 31 combined company net revenue decline fiscal 2003 resulted decline average selling prices across businesses within psg lesser extent decline volumes commercial consumer desktop pcs decline average selling prices period attributable realignment product prices continued mix shift desktops notebooks impacted unfavorably consumer commercial desktop pc volumes additionally commercial desktop pc volume decline period due execution postacquisition product roadmap decisions included discontinuance hp vectra product line notebook pc volumes increased fiscal 2003 compared prior year due increased product competitiveness broader product portfolio previously mentioned mix shift desktops notebooks offset part desktop pc decreases addition increase notebook pc volumes handheld volumes increased due new product introductions combined company earnings operations percentage net revenue 01 fiscal 2003 compared loss 17 fiscal 2002 fiscal 2003 improvement gross margin percentage net revenue represented 11 percentage points 18 percentage point increase remaining 07 percentage point increase due decrease operating expenses percentage revenue gross margin improvement resulted reduced direct indirect procurement costs reflecting synergies associated acquisition compaq moderated declining asps described operating expense improvement resulted headcount reductions tightening administrative costs lower research development expense imaging printing group ipgs net revenue grew 7 fiscal 2004 11 fiscal 2003 constant currency basis net revenue increase 2 fiscal 2004 5 fiscal 2003 favorable currency impact due primarily weakening dollar euro components weighted average net revenue growth business unit follows fiscal years ended october 31 growth printer supplies net revenue fiscal 2004 reflected higher volumes result continued expansion printer hardware installed base due primarily strong performance colorrelated products digital photography initiatives fiscal 2004 growth business printer hardware net revenue attributable unit volume growth color laser printers business inkjet printers monochrome laser printers increasing demand multifunction printers continued shift demand lowerpriced products competitive pricing environment moderated net revenue increase business printer hardware period net revenue remained unchanged digital imaging products result growth camera unit shipments offset decrease sales scanners due declining market decline home printer hardware driven decreases asps due continued shift demand lowerpriced products particularly sub200 allinone market well decline sales singlefunction devices fiscal 2004 earnings operations percentage net revenue 159 consistent fiscal 2003 percentage net revenue operating expense gross margin remained flat fiscal 2004 compared fiscal 2003 gross margin improvement supplies due part cost reductions volume increases moderated mix shift lower margin products gross margin improvement also result favorable mix shifts home printer hardware gross margin declines digital imaging business printer hardware due part shift lower margin products increasingly competitive pricing environment moderated improvement within total operating expense slight increase administrative expense offset slight decline selling costs research development costs marketing costs percentage net revenue remained flat fiscal 2004 fiscal 2003 growth printer supplies net revenue reflected higher volumes result continued expansion printer hardware installed base sales color lowend monochrome printers well multifunction printers digital press products drove net revenue increase business printer hardware period continued shift demand lowerpriced products competitive pricing environment moderated net revenue increase business printer hardware period net revenue growth digital imaging products fiscal 2003 attributable sales newly introduced cameras photosmart printers part segments consumer launch last half fiscal 2002 new models cameras photosmart printers introduced consumer launch fiscal 2003 offset part decrease sales scanners due declining scanner market net revenue increase home printer hardware fiscal 2003 attributable significant volume increase allinone devices well shift singlefunction printers multifunction devices decreases asps due continued shift demand lowerpriced products particularly sub200 allinone market well decreases sales singlefunction devices moderated home printer net hardware revenue growth period fiscal 2003 ipgs earnings operations percentage net revenue 159 compared 165 fiscal 2002 fiscal 2003 06 net percentage point decrease earnings operations ratio consisted 08 percentage point increase operating expense percentage revenue offset improvement gross margin 02 percentage points increase operating expense percentage net revenue driven mainly increased marketing costs associated companywide product branding campaign selling costs associated increased focus commercial sales segment well unfavorable currency impacts gross margin improved due primarily mix less low margin hardware increase supplies business typically gross margins exceed segment average becoming greater percentage total segment net revenue well favorable currency impact net revenue resulting strengthening euro noted offset partially operating expense ratio increase gross margin decline business printer hardware digital imaging products reflecting shift lower priced printing imaging products continued competitive pricing offset partially gross margin improvement imaging printing groupsupplemental combined company information compaq comparable imaging printing business ipgs historical results materially different combined company results hp financial services hpfs net revenue decreased 1 fiscal 2004 compared fiscal 2003 decrease resulted primarily lower average levels revenuegenerating assets lower used equipment sales decrease average assets due portfolio amortization asset sales exceeding new lease originations throughout year lower interest rates also contributed net revenue decrease fiscal 2004 25 net percentage point increase earnings operations ratio consisted 13 percentage point increase gross margin 12 percentage point decrease operating expense percentage net revenue gross margin improvement driven higher portfolio profitability resulting primarily end lease transactions lesser extent lower interest costs percentage net revenue gross margin increase offset part higher reserves related certain aged receivables particularly europe middle east africa emea fourth quarter fiscal 2004 cost savings achieved continued cost controls offset part unfavorable currency impact caused decline operating expenses percentage net revenue acquisition compaq caused substantial portion fluctuation hpfs operating results fiscal 2003 compared fiscal 2002 acquisition resulted higher revenuegenerating assets however slowdown lease originations moderated net revenue increase fiscal 2003 earnings operations percentage net revenue improved fiscal 2002 due significant reduction bad debt expense coupled decline interest costs percentage net revenue financing originations new financing originations increased 2 fiscal 2004 compared fiscal 2003 increase resulted higher levels financing asia pacific favorable currency impact offset part lower penetration rate hp sales originations increased 8 fiscal 2003 fiscal 2002 due acquisition compaq impacts strengthened credit controls weakness global economy lower average selling prices hp products offset part increase originations portfolio assets ratios hpfs financial services organization maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived hps internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated hps consolidated financial statements reconciliation segment assets consolidated total assets included note 18 consolidated financial statements item 8 portfolio assets ratios derived segment balance sheet hpfs follows october 31 1portfolio assets include financing receivables 53 billion net equipment operating leases 14 billion disclosed note 9 consolidated financial statements item 8 well approximately 400 million capitalized profit intercompany equipment transactions approximately 300 million intercompany leases eliminated consolidation portfolio assets october 31 2004 increased 3 end fiscal 2003 increase resulted higher financing originations favorable currency impact percentage portfolio assets reserved increased fiscal 2004 primarily due higher reserves related certain aged receivables emea offset part writeoff assets covered specific reserves hpfs funds operations mainly combination intercompany debt working capital portfolio assets ratios derived segment balance sheet increase debt equity ratio reflects planned increase portfolio leverage hp financial servicessupplemental combined company information present supplementary discussion hpfs combined company results hpfs combined company net revenue declined 8 fiscal 2003 lower lease originations fiscal 2003 contributed decrease net revenue strengthened credit controls ongoing weakness global economy resulted decrease lease originations related decrease revenuegenerating assets decreases asps hp products also factor decrease lease originations fiscal 2003 increased revenue used equipment sales midterm endofterm portfolio activities moderated net revenue decrease combined company earnings operations percentage net revenue 41 fiscal 2003 compared loss 61 fiscal 2002 fiscal 2003 reduction bad debt expense customer writeoffs resulting strengthened global credit standards stronger portfolio resulted majority operating profit ratio improvement lower interest costs percentage net revenue also positive impact ratio corporate investments fiscal 2004 majority net revenue segment related network infrastructure products grew 27 fiscal 2003 result continued enhancements overall product portfolio particularly gigabit ethernet switch products fiscal year 2003 yearoveryear net revenue growth network infrastructure products 18 due increased volumes new product platform fiscal 2004 expenses related corporate development global alliances hp labs increased 10 prior fiscal year increase result part increased investment strategic initiatives fiscal 2003 expenses related corporate development global alliances hp labs decreased 13 fiscal 2002 due winding several incubation programs expenses contributed majority loss segments results expenses offset part operating profit network infrastructure product sales periods presented operating profit network infrastructure product group declined slightly fiscal 2004 due mostly increased operating expense levels primarily related headcount growth research development sales marketing operating profit network infrastructure product sales increased fiscal 2003 due part successful launch new platform modular ethernet switches reduced overall operating loss corporate investments year liquidity capital resources american jobs creation act 2004 cash balances held numerous locations throughout world including substantial amounts held outside united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws hp provided united states federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states american jobs creation act 2004 enacted october 22 2004 jobs act provides temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction would result approximate 525 federal tax rate repatriated earnings qualify deduction earnings must reinvested united states pursuant domestic reinvestment plan established companys chief executive officer approved board directors certain criteria jobs act must satisfied well maximum amount hps foreign earnings qualify temporary deduction 145 billion hp oneyear period qualifying distributions made fiscal 2005 hp process evaluating whether repatriate foreign earnings repatriation provisions jobs act amount repatriate range reasonably possible amounts hp considering repatriation would eligible temporary deduction zero 145 billion hp awaiting issuance regulatory guidance passage statutory technical corrections respect certain provisions jobs act prior determining amounts repatriate regulatory guidance technical corrections favorable hp likely repatriate amounts high end range hp expects determine amounts sources foreign earnings repatriated third quarter fiscal 2005 use funds governed domestic reinvestment plan required jobs act repatriation maximum amount eligible temporary deduction 145 billion could result additional united states federal income tax expense hp currently estimates 850 million 925 million fiscal 2005 repatriation also would substantially increase liquidity united states although use additional liquidity would restricted domestic reinvestment plan would corresponding reduction liquidity hps foreign subsidiaries foreign subsidiaries would required borrow order repatriate earnings us expect hps significant positive foreign cash flows would sufficient repay foreign debt replenish foreign cash balances time hp decide repatriate foreign earnings jobs act would meet united states liquidity needs ongoing cash flows external borrowing utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed financial condition total cash equivalents declined approximately 11 127 billion october 31 2004 142 billion end fiscal 2003 yearoveryear net borrowings also declined 58 440 million 71 billion october 31 2004 improved net earnings fiscal 2004 helped generate 51 billion cash operating activities cash generated operations fiscal 2004 funded nearly 77 66 billion fiscal 2004 investing financing activities remaining 23 coming cash reserves due strong cash position 66 billion used investing financing activities includes 44 billion share repurchases acquisitions fiscal 2004 compared 900 million share repurchases acquisitions fiscal 2003 cash position remains strong previously discussed liquidity united states may improve fiscal 2005 due hps alternatives repatriation provisions jobs act key performance metrics days sales outstanding accounts receivable dso measures average number days receivables outstanding dso calculated dividing accounts receivable net allowance doubtful accounts 90day average net revenue days supply inventory dos measures average number days procurement sale product dos calculated dividing inventory 90day average cost goods sold days purchases outstanding accounts payable dpo measures average number days accounts payable balances outstanding dpo calculated dividing accounts payable 90day average cost goods sold working capital requirements depend upon effective management cash conversion cycle represents effectively number days purchase raw materials collection cash customers cash conversion cycle sum dso dos less dpo 2004 compared 2003 operating activities net cash provided operating activities declined 16 fiscal 2004 although cash position benefited higher earnings lower payments restructuring actions decreased pension postretirement contributions improvements sufficient offset increase cash conversion cycle rose 30 days fiscal 2004 compared 21 days fiscal 2003 lengthening cash conversion cycle due largely 23 billion increase accounts receivable inventory october 31 2004 compared prior year timing accounts payable payments accounts receivable impacted unfavorably currency fluctuations us dollar weakened euro change mix accounts receivable portfolio october 31 2004 portfolio included larger portion us retail european direct receivables generally longer payment terms compared shorter payment terms commercial receivables higher inventory levels october 31 2004 reflect planned increases certain inventories preparation 2004 holiday season well change timing new product rollouts particularly within ipg psg hp introduced products staggered basis latter half fiscal 2004 certain ipg products rolled first month fiscal 2005 compared focused marketing rollout third quarter fiscal 2003 addition ess inventory levels increased due primarily backlog associated industry standard servers occurred result component availability quarter end investing activities net cash used investing activities rose 62 primarily due 11 billion spent several business acquisitions including triaton gmbh synstar plc digital globalsoft limited fiscal 2004 compared 149 million spent acquisitions fiscal 2003 capital expenditures increased slightly 7 fiscal 2004 increase mostly offset asset disposition activities financing activities significant increase net cash used financing activities fiscal 2004 resulted higher level share repurchases compared fiscal 2003 increase share repurchases 2004 reflects confidence longterm growth profitability repurchase shares common stock systematic program manage dilution created shares issued employee stock plans purposes program authorizes repurchases open market private transactions fiscal year 2004 hps board directors authorized 50 billion future repurchases outstanding shares including 30 billion authorized fourth quarter fiscal 2004 completed share repurchases approximately 172 million shares 33 billion fiscal 2004 including approximately 72 million shares accelerated share repurchase program compared repurchases 40 million shares 751 million fiscal 2003 november 2004 first quarter fiscal 2005 closed accelerated share repurchase program final average purchase price 1882 per share price levels repurchasing shares believe hp shares represent attractive investment intend continue repurchase shares opportunistically means returning cash stockholders well offsetting dilution issuance shares employee benefit plans october 31 2004 remaining authorization approximately 29 billion future share repurchases proceeds issuance stock options shares sold employees stock purchase plan 570 million 18 higher fiscal 2004 compared fiscal 2003 mainly higher overall market prices fiscal 2004 also fiscal 2004 borrowing activity compared prior fiscal year significantly reduced net debt repayments fiscal 2004 totaled 448 million reflected lower net levels commercial paper borrowings current maturities payable fiscal 2003 borrowings activity included issuance debt well repayments net repayment basis totaled 303 million 2003 compared 2002 operating activities increase net cash provided operations fiscal 2003 compared fiscal 2002 resulted primarily higher earnings compared loss fiscal 2002 well increase accounts payable improved management payables function contract manufacturing transition laptop products china contributed increase accounts payable end fiscal 2003 increases inventory continued severance payments restructuring programs pension contributions increases receivables contract manufacturers offset partially increases cash flow provided operations investing activities change net cash flows investing activities fiscal 2003 compared fiscal 2002 due primarily 36 billion cash acquired compaq acquisition fiscal 2002 well 879 million recorded upon dissolution equity method investment liquidity management corporation lmc became whollyowned subsidiary november 1 2001 addition net capital expenditures 16 billion fiscal 2003 compared 13 billion fiscal 2002 capital expenditure increases fiscal 2003 related mainly assets lease hpfs third parties continued investment ipg manufacturing equipment fiscal 2002 capital expenditures related primarily financing assets manufacturing investments across businesses hpfs capital expenditures fiscal 2003 fiscal 2002 increased primarily result acquisition compaq third quarter fiscal 2002 financing activities slight decrease net cash used financing activities fiscal 2003 compared fiscal 2002 due primarily decrease net repayments total debt approximately 303 million fiscal 2003 compared net repayments 472 million fiscal 2002 lesser extent increase cash generated issuances common stock various employee stock plans increases offset part increase repurchases approximately 40 million shares 751 million fiscal 2003 40 million shares 671 million fiscal 2002 liquidity previously discussed use cash generated operations primary source liquidity since believe internally generated cash flows sufficient support business operations capital expenditures payment stockholder dividends addition level discretionary investments share repurchases able supplement near term liquidity necessary broad access capital markets credit line facilities various foreign subsidiaries well us financial institutions maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities overall cost capital outstanding debt fiscal year end 2004 decreased 71 billion compared 76 billion fiscal year end 2003 bearing weighted average interest rates 53 52 respectively shortterm borrowings increased 25 billion october 31 2004 11 billion october 31 2003 increase reflects 15 billion global notes maturing 2005 addition fiscal 2004 issued 41 billion repaid 43 billion commercial paper hp issue longterm debt fiscal 2004 although hp assumed insignificant amounts association acquisitions entered sixyear revolving agreement third quarter fiscal 2004 sell certain trade receivables without recourse sold receivables collected third party sales receivables limited outstanding maximum balance receivables yet collected third party trade receivables approximately 680 million euros sold fiscal 2004 primarily fourth quarter october 31 2004 aggregate receivables sold yet collected third party approximately 253 million euros compared maximum amount 600 million euros permitted agreement date implementation agreement material impact hps dso utilization program limited certain customer receivables hp already managed alternative prompt payment program fees associated program differ materially cash discounts offered customers alternative prompt payment program following resources available obtain shortterm longterm financings need additional liquidity securities issuable 2002 registration statement include notes due dates nine months issuance hp uses us credit facilities general corporate purposes including support us commercial paper program begun talks lenders renegotiate replace 364day credit facility expiring march 2005 lines credit uncommitted primarily available various foreign subsidiaries rating downgrade triggers would accelerate maturity material amount debt however downgrade credit rating would increase cost borrowings credit facilities also downgrade credit rating could limit case significant downgrade preclude ability issue commercial paper current programs occurs would seek alternative sources funding including issuance notes existing shelf registration statement euro mediumterm note programme credit facilities hp hpfs financing business issued assumed vast majority hps total outstanding debt hpfs financial services organization like financial services companies business model assetintensive nature therefore debtdependent business segments october 31 2004 hpfs approximately 71 billion net portfolio assets include short longterm financing receivables operating lease assets contractual obligations impact contractual obligations october 31 2004 expected liquidity cash flow future periods follows 1amounts represent expected cash payments longterm debt include fair value adjustment included longterm debt approximately 54 million capital lease obligations secured certain equipment 2purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty purchase obligations related principally cost sales inventory items 3as result approved restructuring plans expect future cash expenditures approximately 294 million primarily employee severance employee benefits facilities costs amount 288 million recorded consolidated balance sheet october 31 2004 6 million expensed future periods costs incurred requirements record costs liability met addition contractual obligations noted table also following funding commitments fiscal 2004 made contributions approximately 564 million pension plans 49 million postretirement benefit plans total 613 million compared total approximately 12 billion fiscal 2003 estimate contribute total approximately 910 million pension postretirement plans fiscal 2005 funding policy contribute cash pension plans meet minimum contribution requirements established local government funding taxing authorities current fiscal year continue contribute cash global pension plans amounts consistent local funding requirements tax considerations issued approximately 53 million nontransferable contingent value rights cvrs connection acquisition indigo entitle holder onetime contingent cash payment 450 per cvr based achievement certain cumulative revenue results threeyear period future cash payout cvrs payable threeyear period began april 1 2002 could result maximum obligation 237 million hp incurred liability associated cvrs october 31 2004 offbalance sheet arrangements part ongoing business participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes october 31 2004 involved material unconsolidated spe transactions indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial factors could affect future results following factors well variables affecting operating results past financial performance may reliable indicator future performance historical trends used anticipate results trends future periods competitive pressures face could harm revenue gross margin prospects encounter aggressive competition numerous varied competitors areas business competitors may target key market segments compete primarily basis technology performance price quality reliability brand distribution range products services account relationships customer service support security availability application software products services support cost structure enable us compete successfully based criteria could harm operations results prospects may continue lower prices many products services stay competitive time trying maintain improve revenue gross margin business model based providing innovative high quality products may spend proportionately greater amount research development competitors cannot proportionately decrease cost structure timely basis response competitive price pressures gross margin therefore profitability could adversely affected addition pricing factors sufficiently competitive adverse reaction product decisions may lose market share certain areas could adversely affect revenue prospects even able maintain increase market share particular product revenue could decline due increased competition types products product maturing industry consolidation may affect competition creating larger homogeneous potentially stronger competitors markets compete competitors also may affect business entering exclusive arrangements existing potential customers suppliers cannot continue develop manufacture market products services meet customer requirements innovation quality revenue gross margin may suffer process developing new high technology products services enhancing existing products services complex costly uncertain failure us anticipate customers changing needs emerging technological trends accurately could significantly harm market share results operations must make longterm investments develop obtain appropriate intellectual property commit significant resources knowing whether predictions accurately reflect customer demand products services develop product must able manufacture appropriate volumes quickly low costs accomplish must accurately forecast volumes mix products configurations meet customer requirements may succeed within given products life cycle delay development production marketing new product could result among first market could harm competitive position addition course conducting business must adequately address quality issues associated products services including defects engineering design manufacturing processes well defects third party components included products order address quality issues work extensively customers suppliers engage product testing determine cause problem determine appropriate solutions however may limited ability control quality issues particularly respect faulty components manufactured third parties unable determine cause find appropriate solution offer temporary fix patch may delay shipment customers would delay revenue recognition could adversely affect revenue reported results finding solutions quality issues expensive may result additional warranty replacement costs adversely affecting profits addition quality issues impair relationships new existing customers adversely affect reputation could material adverse effect operating results effectively manage product services transitions revenue may suffer many industries compete characterized rapid technological advances hardware performance software functionality features frequent introduction new products short product life cycles continual improvement product price characteristics relative product performance make effective transition existing products services future offerings revenue may decline among risks associated introduction new products services delays development manufacturing variations costs delays customer purchases anticipation new introductions difficulty predicting customer demand new offerings effectively managing inventory levels line anticipated demand risks associated customer qualification evaluation new products risk new products may quality defects may supported adequately application software revenue gross margin also may suffer due timing product service introductions suppliers competitors especially challenging product short life cycle competitor introduces new product introduction furthermore sales new products services may replace sales result discounting current offerings offsetting benefit even successful introduction also may overlaps current products services hp portfolios acquired mergers acquisitions must manage addition may difficult ensure performance new customer contracts accordance revenue margin cost estimates achieve operational efficiencies embedded estimates given competitive nature industry risks materialize future demand products services results operations may suffer revenue cost sales expenses may suffer cannot continue license enforce intellectual property rights business depends third parties assert violate intellectual property rights rely upon patent copyright trademark trade secret laws united states similar laws countries agreements employees customers suppliers parties establish maintain intellectual property rights technology products used operations however direct indirect intellectual property rights could challenged invalidated circumvented intellectual property rights may sufficient permit us take advantage current market trends otherwise provide competitive advantages could result costly product redesign efforts discontinuance certain product offerings competitive harm laws certain countries protect proprietary rights extent laws united states therefore certain jurisdictions may unable protect proprietary technology adequately unauthorized thirdparty copying use could adversely affect competitive position also rapid pace technological change information technology industry much business many products rely key technologies developed licensed third parties may able obtain continue obtain licenses technologies third parties reasonable terms third parties may demand crosslicenses third parties also may claim customers indemnified us infringing upon intellectual property rights even believe claims without merit claims timeconsuming costly defend divert managements attention resources away business claims intellectual property infringement also might require us redesign affected products enter costly settlement license agreements pay costly damage awards even agreement indemnify us costs indemnifying party may unable uphold contractual agreements us cannot license infringed technology reasonable terms substitute similar technology another source operations could suffer costs operations could affected ongoing basis imposition copyright levies similar fees rights holders collection agencies certain jurisdictions primarily europe addition possible consequence merger acquisition transaction third parties may obtain licenses intellectual property rights business may subject certain restrictions place prior transaction consequently may lose competitive advantage respect intellectual property rights may required enter costly arrangements order terminate limit agreements economic uncertainty could affect adversely revenue gross margin expenses revenue gross margin depend significantly general economic conditions demand computing imaging products services markets compete economic weakness constrained spending previously resulted may result future decreased revenue gross margin earnings growth rates problems ability manage inventory levels realize customer receivables addition customer financial difficulties previously resulted could result future increases bad debt writeoffs additions reserves receivables portfolio inability lessees make required lease payments reduction value leased equipment upon return us compared value estimated lease inception also experienced may experience future gross margin declines certain businesses reflecting effect items competitive pricing pressures inventory writedowns charges associated cancellation planned production line expansion increases pension postretirement benefit expenses economic downturns also may lead restructuring actions associated expenses impairment investments uncertainty future economic conditions makes difficult forecast operating results make decisions future investments delays reductions information technology spending could material adverse effect demand products services consequently results operations prospects stock price terrorist acts conflicts wars may seriously harm business revenue costs expenses financial condition stock price terrorist acts conflicts wars wherever located around world may cause damage disruption hp employees facilities partners suppliers distributors resellers customers could significantly impact revenue costs expenses financial condition terrorist attacks create many economic political uncertainties may materially harm business results operations potential future attacks national international responses attacks perceived threats national security actual potential conflicts wars including ongoing military operations iraq created many economic political uncertainties could adversely affect business results operations stock price ways cannot presently predict addition major multinational company headquarters significant operations located united states actions united states may impact business employees predominantly uninsured losses interruptions caused terrorist acts conflicts wars due international nature business political economic changes factors could harm future revenue costs expenses financial condition sales outside united states make half revenue future revenue gross margin expenses financial condition also could suffer due variety international factors including •ongoing instability changes countrys regions economic political conditions including inflation recession interest rate fluctuations actual anticipated military political conflicts •currency fluctuations particularly euro japanese yen contribute variations sales products services impacted jurisdictions also affect reported results expressed us dollars •longer accounts receivable cycles financial instability among customers •trade regulations procedures actions affecting production pricing marketing products •local labor conditions regulations •changes regulatory legal environment •differing technology standards customer requirements •import export business licensing requirements relating making foreign direct investments could affect ability obtain favorable terms components lead penalties restrictions •difficulties associated repatriating cash generated held abroad taxefficient manner changes tax laws •fluctuations freight costs disruptions important geographic points exit entry •natural disasters earthquakes tsunamis typhoons •medical disasters severe acute respiratory syndrome factors described also could disrupt product component manufacturing key suppliers located outside united states example rely manufacturers taiwan production notebook computers suppliers asia product assembly manufacture business disruptions could seriously harm future revenue financial condition increase costs expenses worldwide operations could subject natural disasters business disruptions could seriously harm revenue financial condition increase costs expenses corporate headquarters portion research development activities located california critical business operations suppliers located california asia near major earthquake faults ultimate impact us significant suppliers general infrastructure located near major earthquake faults unknown revenue profitability financial condition could suffer event major earthquake related natural disasters addition areas including california parts east coast midwest united states previously experienced may experience future major power shortages blackouts could cause disruptions operations suppliers distributors resellers customers predominantly selfinsured losses interruptions caused earthquakes power shortages telecommunications failures water shortages tsunamis floods typhoons fires extreme weather conditions natural manmade disasters fail manage distribution products services properly revenue gross margin profitability could suffer use variety different distribution methods sell products services including thirdparty resellers distributors direct indirect sales enterprise accounts consumers successfully managing interaction direct indirect channel efforts reach potential customer segments products services complex process moreover since distribution method distinct risks gross margins failure implement advantageous balance delivery model products services could adversely affect revenue gross margins therefore profitability distribution risks described •our financial results could materially adversely affected due channel conflicts financial conditions channel partners weaken future operating results may adversely affected conflicts might arise various sales channels loss deterioration alliance distribution arrangement loss retail shelf space moreover wholesale retail distributors may insufficient financial resources may able withstand changes business conditions including economic weakness industry consolidation revenue indirect sales could suffer could experience disruptions distribution distributors financial conditions operations weaken •our inventory management complex continue sell significant mix products distributors must manage inventory effectively particularly respect sales distributors involves forecasting demand pricing issues distributors may increase orders periods product shortages cancel orders inventory high delay orders anticipation new products distributors also may adjust orders response supply products competitors seasonal fluctuations enduser demand reliance upon indirect distribution methods may reduce visibility demand pricing issues therefore make forecasting difficult excess inventory may reduce prices write inventory moreover use indirect distribution channels may limit willingness ability adjust prices quickly otherwise respond pricing changes competitors also may limited ability estimate future product rebate redemptions order price products effectively depend third party suppliers revenue gross margin could suffer fail manage supplier issues properly manufacturing operations depend ability anticipate needs components products suppliers ability deliver sufficient quantities quality components products reasonable prices time us meet critical manufacturing distribution schedules given wide variety systems products services offer large number suppliers contract manufacturers dispersed across globe long lead times required manufacture assemble deliver certain components products problems could arise planning production managing inventory levels could seriously harm us also rely third party suppliers provision contingent workers failure manage use workers effectively could adversely affect results operations also could exposed various legal claims relating status supplier problems could face include component shortages excess supply risks related fixedprice contracts would require us pay open market price described •shortages occasionally may experience shortage delay receiving certain supplies result strong demand capacity constraints problems experienced suppliers shortages delays persist price supplies may increase may exposed quality issues supplies may available may able secure enough supplies reasonable prices acceptable quality build products provide services timely manner quantities specifications needed accordingly revenue gross margin could suffer could lose timesensitive sales incur additional freight costs unable pass price increases customers cannot adequately address supply issues might reengineer products service offerings resulting costs delays •oversupply order secure supplies provision products services secure workers critical areas times may make advance payments suppliers may enter noncancelable commitments vendors fail anticipate customer demand properly temporary oversupply could result excess obsolete components could oversupply workers certain areas could adversely affect gross margin ability manage size costs associated contingent workforce may subject additional constraints imposed local laws •longterm pricing commitments result binding price purchase commitments vendors may obligated purchase supplies services retain workers prices higher available current market limited ability respond changing market conditions event become committed purchase supplies retain workers prices excess current market price may disadvantage competitors access components workers lower prices gross margin could suffer use single source suppliers certain components could exacerbate supplier issues obtain significant number components single sources due technology availability price quality considerations addition new products introduce may utilize custom components obtained one source initially evaluated whether need additional suppliers performance single source suppliers may affect quality quantity price supplies hp impairment investment portfolio could harm net earnings investment portfolio includes minority equity debt investments cases attempt reduce eliminate market exposure investments may incur losses related impairment investments therefore charges net earnings investments public privatelyheld companies still startup development stage inherent risks technologies products development never may become successful furthermore values investments publiclytraded companies subject significant market price volatility often couple investments technology companies strategic commercial relationship commercial agreements companies may sufficient allow us obtain integrate products services offerings otherwise benefit relationship third parties including competitors subsequently may acquire companies economic weakness could impact investment portfolio future revenue profitability operations historically varied revenue profit margins vary among products services customer groups geographic markets therefore different future periods current revenue profit margins overall gross margins profitability given period dependent partially product customer geographic mix reflected periods net revenue particular ipg certain business units printer supplies contribute significantly profitability certain segments ess particular higher fixed cost structure others may experience significant operating profit volatility quarterly basis addition newer geographic markets may relatively less profitable due investments associated entering markets local pricing pressures market trends competitive pressures seasonal rebates increased component shipping costs regulatory impacts factors may result reductions revenue pressure gross margins given period may necessitate adjustments operations unanticipated changes hps tax rates exposure additional income tax liabilities could affect profitability subject income taxes united states various foreign jurisdictions domestic international tax liabilities subject allocation expenses different jurisdictions effective tax rates could adversely affected changes mix earnings countries differing statutory tax rates valuation deferred tax assets liabilities tax laws material audit assessments could affect profitability particular carrying value deferred tax assets predominantly united states dependent ability generate future taxable income united states addition amount income taxes pay subject ongoing audits various jurisdictions material assessment governing tax authority could affect profitability elect repatriate cash held outside united states pursuant american jobs creation act 2004 tax rate may increase even lesser amount without legislation sales cycle makes planning inventory management difficult future financial results less predictable quarterly sales reflected pattern disproportionate percentage quarters total sales occur toward end quarter trend become pronounced recent periods uneven sales pattern makes prediction revenue earnings working capital financial period difficult increases risk unanticipated variations quarterly results financial condition places pressure inventory management logistics systems predicted demand substantially greater orders excess inventory alternatively orders substantially exceed predicted demand may able fulfill orders received last weeks quarter developments late quarter systems failure component pricing movements global logistics disruptions could adversely impact inventory levels results operations manner disproportionate number days quarter affected addition experience seasonal trends sale products example sales governments particularly sales us government often stronger third calendar quarter consumer sales often stronger fourth calendar quarter many customers whose fiscal calendar years spend remaining capital budget authorizations fourth calendar quarter prior new budget constraints first calendar quarter following year european sales often weaker summer months demand spring early summer also may adversely impacted market anticipation seasonal trends moreover extent introduce new products anticipation seasonal demand trends discounting existing products may adversely affect gross margin prior shortly product launches overall third fiscal quarter typically weakest fourth fiscal quarter strongest many factors create affect seasonal trends beyond control failure us execute planned cost reductions successfully could result total costs expenses greater expected historically undertaken restructuring plans bring operational expenses appropriate levels businesses simultaneously implementing extensive new companywide expensecontrol programs connection compaq acquisition cost alignment efforts announced workforce restructurings well reductions early retirement programs involving approximately 26200 employees worldwide fiscal 2003 2002 hiring key areas offset workforce reductions expect additional workforce reductions first half 2005 may workforce reductions future significant risks associated actions workforce management issues may impair ability achieve anticipated cost reductions may otherwise harm business include delays implementation anticipated workforce reductions highly regulated locations outside united states particularly europe asia redundancies among restructuring programs decreases employee morale failure meet operational targets due loss employees particularly sales employees order successful must retain motivate key employees failure could seriously harm us order successful must retain motivate executives key employees including managerial technical sales marketing support positions particular hiring retaining qualified engineers skilled solutions providers support business qualified sales representatives critical future competition experienced management technical sales marketing support personnel industry intense loss key employees could significant impact operations stock price also must continue motivate employees keep focused hps strategies goals decreased effectiveness equity compensation could adversely affect ability attract retain employees proposed changes accounting equity compensation could adversely affect earnings historically used stock options forms equityrelated compensation key components total rewards employee compensation program order align employees interests stockholders encourage employee retention provide competitive compensation packages recent periods many hps employee stock options exercise prices excess hps stock price reduces value employees could affect ability retain attract present prospective employees addition financial accounting standards board agencies finalized changes us generally accepted accounting principles require hp companies record charge earnings employee stock option grants equity incentives moreover applicable stock exchange listing standards relating obtaining stockholder approval equity compensation plans could make difficult expensive us grant options employees future result may incur increased compensation costs change equity compensation strategy find difficult attract retain motivate employees could materially adversely affect business hps stock price historically fluctuated may continue fluctuate hps stock price like technology companies volatile factors affect stock price •the announcement new products services technological innovations us competitors •quarterly increases decreases revenue gross margin earnings changes business organizational structure operations prospects hp business units •changes quarterly revenue earnings estimates investment community variations actual anticipated financial results •speculation press investment community strategic position financial condition financial reporting results operations business acquisitions significant transactions general industryspecific market conditions stock market performance domestic international macroeconomic geopolitical factors unrelated hps performance also may affect price hp common stock reasons investors rely recent trends predict future stock prices financial condition results operations cash flows addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources system security risks systems integration issues could disrupt internal operations information technology services provided customers could harm revenue increase expenses harm reputation stock price experienced computer programmers hackers may able penetrate network security misappropriate confidential information third parties create system disruptions cause shutdowns result could incur significant expenses addressing problems created security breaches network moreover could lose existing potential customers information technology outsourcing services information technology solutions incur significant expenses connection customers system failures addition sophisticated hardware operating system software applications produce procure third parties may contain defects design manufacture including bugs problems unexpectedly interfere operation system costs eliminate alleviate security problems viruses bugs could significant efforts address problems could result interruptions delays cessation service may impede sales manufacturing distribution critical functions portions infrastructure also may experience interruptions delays cessations service produce errors connection ongoing systems integration work particular connection compaq integration process implementing new general ledger order management data warehouse systems replace current systems part effort rationalizing various legacy systems upgrading existing software applications implementing new data management applications administer business information may successful implementing new systems transitioning data aspects process could expensive time consuming disruptive resource intensive disruptions may occur implementation new systems future systems could adversely affect ability report accurate timely manner results consolidated operations business segment results financial position cash flows disruptions systems also could adversely impact ability fulfill orders interrupt operational processes delayed sales lower margins lost customers resulting disruptions could adversely affect financial results stock price reputation failure us manage acquisitions divestitures significant transactions successfully could harm financial results business prospects part business strategy frequently engage discussions third parties regarding enter agreements relating possible acquisitions strategic alliances joint ventures divestitures outsourcing transactions order business objectives many cases manage product technology portfolios order pursue strategy successfully must identify suitable candidates transactions complete transactions may large complex manage postclosing issues integration acquired companies employees integration risks acquisitions strategic alliances joint ventures outsourcing transactions pronounced larger complicated transactions multiple transactions pursued simultaneously however fail identify complete successfully transactions strategic objectives may required expend resources develop products technology internally may competitive disadvantage may adversely affected negative market perceptions may material adverse effect revenue selling general administrative expenses integration issues complex timeconsuming expensive without proper planning implementation could significantly disrupt business challenges involved integration include •combining product offerings entering new markets experienced •convincing customers distributors transaction diminish client service standards business focus preventing customers distributors deferring purchasing decisions switching suppliers could result incurring additional obligations order address customer uncertainty coordinating sales marketing distribution efforts •consolidating rationalizing corporate infrastructure may include multiple legacy systems various acquisitions integrating software code •minimizing diversion management attention ongoing business concerns •persuading employees business cultures compatible maintaining employee morale retaining key employees integrating employees hp correctly estimating employee benefit costs implementing restructuring programs •coordinating combining administrative manufacturing research development operations subsidiaries facilities relationships third parties accordance local laws obligations maintaining adequate standards controls procedures •achieving savings supply chain integration •managing integration issues shortly pending completion independent transactions evaluate enter significant transactions including acquisitions strategic alliances joint ventures divestitures outsourcing agreements ongoing basis may fully realize anticipated benefits transaction extent anticipated timeframe achieving benefits transaction may depend partially upon actions employees suppliers third parties addition pricing terms contracts significant transactions require us make estimates assumptions time enter contracts course due diligence may identify factors necessary estimate costs accurately increased unexpected costs unanticipated delays failure achieve contractual obligations could make agreements less profitable unprofitable managing acquisitions outsourcing transactions strategic alliances joint ventures divestitures requires varying levels management resources may divert attention business operations transactions also resulted future may result significant costs expenses charges earnings including related severance pay early retirement costs employee benefit costs asset impairment charges elimination duplicative facilities contracts iprd charges inventory adjustments legal accounting financial advisory fees required payments executive officers key employees retention plans moreover hp incurred incur additional depreciation amortization expense useful lives certain assets acquired connection transactions extent value goodwill intangible assets indefinite lives acquired connection transaction becomes impaired may required incur additional material charges relating impairment assets order complete acquisition may issue common stock potentially creating dilution existing stockholders borrow affecting financial condition potentially credit ratings prior future downgrades credit rating associated acquisition could adversely affect ability borrow result restrictive borrowing terms addition hps effective tax rate ongoing basis uncertain extraordinary transactions could impact effective tax rate result completed pending future transactions may contribute financial results differ investment communitys expectations given quarter unforeseen environmental costs could impact future net earnings operations use substances regulated various federal state international laws governing environment including governing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites many products subject various federal state international laws governing chemical substances products including regulating manufacture distribution chemical substances restricting presence certain substances electronics products could incur substantial costs including cleanup costs fines civil criminal sanctions thirdparty property damage personal injury claims violate become liable environmental laws products become noncompliant environmental laws also face increasing complexity product design procurement operations adjust new future requirements relating materials composition products including restrictions lead certain substances apply specified electronics products put market european union july 1 2006 restriction hazardous substances directive similar legislation currently proposed china ultimate costs environmental laws timing costs difficult predict liability environmental laws relating contaminated sites imposed retroactively joint several basis also could face significant costs liabilities connection product takeback legislation european union finalized waste electrical electronic equipment directive makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products deadline enact implement directive individual european union governments generally august 13 2004 although extensions granted countries legislation together directive weee legislation producers financially responsible weee legislation beginning august 2005 hps potential liability resulting weee legislation may substantial similar legislation may enacted geographies including united states japan cumulative impact could significant policy apply strict standards environmental protection sites inside outside united states even subject local government regulations record liability environmental remediation environmental costs consider costs probable amount costs reasonably estimated antitakeover provisions contained certificate incorporation bylaws well provisions delaware law could impair takeover attempt provisions certificate incorporation bylaws could effect rendering difficult discouraging acquisition deemed undesirable board directors include provisions •authorizing blank check preferred stock could issued voting liquidation dividend rights superior common stock •limiting liability providing indemnification directors officers •specifying stockholders may take action duly called annual special meeting stockholders otherwise accordance bylaws limiting ability stockholders call special meetings •requiring advance notice stockholder proposals business conducted meetings hp stockholders nominations candidates election board directors •requiring twothirds stockholder vote amend certain bylaws relating stockholder meetings board directors indemnification •controlling procedures conduct board stockholder meetings election appointment removal directors provisions alone together could deter delay hostile takeovers proxy contests changes control management hp delaware corporation hp also subject provisions delaware law including section 203 delaware general corporation law prevents stockholders engaging certain business combinations without approval holders substantially hps outstanding common stock provision certificate incorporation bylaws delaware law effect delaying deterring change control could limit opportunity stockholders receive premium shares hp common stock also could affect price investors willing pay hp common stock item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global technology company generate net revenue earn profits sale products technologies solutions services consumers businesses governments portfolio broad includes personal computers handheld computing devices home business imaging printing devices publishing systems storage servers wide array information technology services software solutions seven business segments enterprise storage servers ess hp services hps software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments ess hps software structured beneath broader technology solutions group tsg operating segment sometimes provide financial data aggregating segments within tsg order provide supplementary view business product geographic breadth requires us focus strategic imperatives within individual product categories manage across portfolio order drive growth optimizing cost structure financial results also impacted ability predict respond industrywide trends instance trend significant business financial results shift toward standardized products presents revenue opportunities certain businesses presents ongoing challenge margins help address potential margin impact standardization take ongoing actions related revenue generation cost structure management sales marketing area programs designed improve rates sell highermargin configurations options also continue focus managing procurement labor expenses key overall efforts delivering superior products maintaining worldclass cost structure increasingly global nature technology expertise trend allowing us develop global delivery structure take advantage regions advanced technical expertise available lower costs part effort continually evaluate workforce make adjustments deem appropriate fourth quarter fiscal 2005 board directors approved restructuring plan recommended ceo senior management restructuring plan expect terminate approximately 15300 employees workforce restructurings early retirement programs first quarter fiscal 2007 approximately 4700 employees exited hp october 31 2005 expect approximately half cost savings actions reinvested businesses used offset market forces make adjustments workforce may incur incremental expenses associated workforce reductions delay benefit efficient workforce structure believe fundamental shift global delivery crucial maintaining longterm competitive cost structure information restructuring plan see note 7 consolidated financial statements item 8 terms execution translated financial performance key fiscal 2005 financial metrics follows cash equivalents fiscal year ended october 31 2005 totaled 139 billion increase 12 billion october 31 2004 balance 127 billion increase fiscal 2005 due primarily net cash provided operating activities proceeds received shares issued connection employee stock plans partially reduced repayment debt repurchases common stock intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements fair values undelivered elements known uncertainties regarding customer acceptance resolved customernegotiated refund return rights affecting revenue recognized delivered elements changes allocation sales price elements might impact timing revenue recognition would change total revenue recognized contract recognize revenue work progresses certain fixed price contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue result revisions cost estimates income period facts give rise revision become known record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience number customers actually redeem incentive restructuring engaged may continue engage restructuring actions require management utilize significant estimates related expenses severance employee separation costs realizable values assets made redundant obsolete lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 7 consolidated financial statements item 8 incorporated herein reference taxes earnings calculate current deferred tax provisions based estimates assumptions could differ actual results reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third quarter subsequent year us federal state provisions recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would charge adjustment deferred tax assets earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments hp undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2018 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states sixty foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges determining income tax expense potential assessments recording related assets liabilities requires significant management judgments estimates evaluate income tax contingencies accordance statement financial accounting standards sfas 5 accounting contingencies believe reserve income tax liabilities including related interest adequate relation potential additional tax assessments amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve income tax liabilities attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations material adjustments likely occur fiscal years major ongoing audits irs audits closed addition tax contingency reserve includes certain amounts potential tax assessments preacquisition tax years acquired companies released impact carrying value goodwill attributable acquired company allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers also record specific provisions individual accounts become aware customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position circumstances related customers change would adjust estimates recoverability receivables either upward downward annual provision doubtful accounts approximately 01 net revenue last three fiscal years using thirdparty credit risk model october 31 2005 50 basis point deterioration either weighted average default probabilities significant customers overall mix portfolio would resulted approximately 23 million increase trade allowance end fiscal year 2005 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates valuation goodwill indefinitelived purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill intangible assets provisions sfas 142 require perform twostep impairment test goodwill first step compare fair value reporting unit carrying value reporting units consistent reportable segments identified note 18 consolidated financial statements item 8 determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference sfas 142 also requires fair value purchased intangible assets indefinite lives estimated compared carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2005 result impairment charge excess fair value carrying value hps reporting units august 1 2005 annual testing date ranged approximately 600 million approximately 371 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 400 million approximately 328 billion hps reporting units warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates service delivery costs postsales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days partsonly three years parts labor depending upon product last three fiscal years annual warranty provision averaged approximately 4 annual net product revenue actual annual warranty costs also averaged approximately 4 annual net product revenue retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions primarily relate discount rates salary growth longterm return plan assets medical cost trend rates base discount rate assumption current investment yields high quality fixed income investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment well target asset allocations medical cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends actual results differ assumptions accumulated generally amortized estimated future working life plan participants major assumptions vary plan weighted average rates used set forth note 15 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved direction last several years fiscal 2005 change weighted average rates would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 24 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 50 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 38 million recent accounting pronouncements see note 1 consolidated financial statements item 8 full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference results operations results operations dollars percentage net revenue follows following fiscal years ended october 31 1cost products cost services financing interest 2certain reclassifications made prior year amounts order conform current year presentation net revenue components weighted average net revenue growth follows following fiscal years ended october 31 fiscal 2005 hp net revenue increased approximately 8 prior year period 6 constant currency basis favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period us net revenue 305 billion fiscal 2005 increase 4 prior year international net revenue increased 11 562 billion psg net revenue increased across regions result 13 volume increase consumer commercial clients volume increase partially offset decline 4 average selling prices asps notebook pc sales leading contributor net revenue growth psg hps achieved net revenue growth across businesses fiscal 2005 due large part impact acquisitions primarily benefiting technology services favorable currency impacts additionally managed services net revenue increased due new contract signings additional contract revenue installed base fiscal 2005 ess net revenue growth result primarily continued strong sales industry standard servers particularly proliant server line due volume increases higher asps resulting improved option attach rates ipg net revenue growth fiscal 2005 result increased unit growth printer supplies particularly laserjet toner result increasing demand colorrelated products demand colorrelated products also added revenue growth commercial hardware software hpfs contributed hp net revenue growth fiscal 2005 growing acceptance openview product offerings contributed software revenue growth higher used equipment sales higher mix operating leases benefited hpfs fiscal 2004 hp net revenue increased 9 prior year period 3 constant currency basis favorable currency impact due primarily weakening dollar euro us net revenue remained flat 294 billion international net revenue increased 15 505 billion compared fiscal 2003 psg experienced net revenue growth across businesses customer demand resulting significant volume increases desktop notebook pcs overall volume increase offset slight decline overall asps due mix shift lowerend products well component cost declines ipg net revenue growth fiscal 2004 driven continued volume growth printer supplies toner supplies color laser printers experienced strong volume growth due growing demand colorrelated products digital photography hps achieved net revenue growth across businesses fiscal 2004 impact major outsourcing deals lesser extent acquisition triaton gmbh triaton france sas triaton na inc usa collectively triaton second half year contributed growth managed services technology services fiscal 2004 ess net revenue growth generated sales industry standard servers primarily proliant server line revenue declines competitive pressures storage business critical servers moderated overall ess segment net revenue growth slight decrease hpfs net revenue fiscal 2004 due primarily lower levels revenuegenerating assets gross margin weighted average components change gross margin percentage net revenue follows following fiscal years ended october 31 total company gross margin decreased fiscal 2005 compared fiscal 2004 ipg gross margin decline fiscal 2005 attributable primarily mix shift within supplies inkjet cartridges laserjet toner continuing decreases asps within hardware due strategic pricing actions gross margin decline hps fiscal 2005 reflects primarily competitive pricing pressures portfolio mix shifts within technology services along higher employee bonus costs second half fiscal year fiscal 2005 ess gross margin increased slightly benefits improved option attach rates industry standard servers improved performance storage helped offset unfavorable impact continued mix shift towards industry standard servers within segment mix shift lower margin products within business critical systems gross margin contribution hpfs software increased slightly fiscal 2005 lower bad debt expense increased gross margin hpfs increase openview opencall gross margins benefited software business gross margin improvement psg fiscal 2005 resulted component cost declines product mix shift towards higher margin notebook pcs reduced warranty costs competitive pricing pressures contributed significantly gross margin decline ess hps psg fiscal 2004 compared fiscal 2003 ess competitive environment contributed gross margin decline standards based server group along storage group addition competitive pricing pressures gross margin decline hps reflected mix shifts lower margin contracts technology services large outsourcing contracts managed services typically lower margins early stages life cycles competitive pricing pressures particularly europe contributed gross margin decline psg ipg gross margin remained flat fiscal 2004 favorable impact cost reductions increased shipments supplies offset mix shift lower margin products hpfs gross margin increased fiscal 2004 due higher portfolio profitability primarily endoflease transactions generally higher gross margin fiscal 2004 gross margin also favorably impacted currency effects net revenue resulting primarily weakening dollar euro operating expenses research development fiscal 2005 total research development expense percentage net revenue declined period prior year due primarily savings resulting workforce reductions tight expense controls savings partially offset increased costs company bonus costs associated workforce rebalancing actions taken first half fiscal year percentage net revenue segments experienced decrease research development expense current year work focus investments manage realignment also continuing drive new technologies business opportunities decreases resulted part cost control measures including benefit workforce reduction actions ess consolidation realignment certain ipg research development infrastructure lower program spending fiscal 2004 total research development spending decreased percentage net revenue major segments decrease result focus investing categories business yield stronger longterm returns marketplace curtailing spending mature categories business particularly within ess addition fiscal 2004 continued realize synergies compaq acquisition shifted business towards standardsbased products leveraging research development technology partners decreases percentage net revenue moderated increased research development spending ipg related strategic initiatives unfavorable currency impacts resulting primarily weakening dollar euro ipgs increase research development spending due primarily investment inkjet technology selling general administrative selling general administrative sga expense decreased slightly percentage net revenue fiscal 2005 net revenue growth higher growth sga due part tight companywide expense controls absolute basis sga spending increased 66 current fiscal year due primarily higher employee bonuses earned second half fiscal 2005 unfavorable currency impacts decline sga expense percentage net revenue fiscal 2004 compared fiscal 2003 due primarily increase net revenue outpacing expense growth part result effective expense controls workforce reduction measures unfavorable currency impacts moderated decline due weakening dollar euro pension curtailment conjunction managements plan restructure certain operations discussed note 7 consolidated financial statements item 8 hp modified us retirement programs closely align industry practice effective january 1 2006 hp cease pension accruals eliminate eligibility subsidized retiree medical program current employees meet defined criteria based age years service result recognized curtailment gain 199 million fourth quarter fiscal 2005 stemming elimination future benefit accruals affected employee group information plan design changes see note 15 consolidated financial statements item 8 incorporated herein reference restructuring charges fourth quarter fiscal 2005 board directors approved restructuring plan recommended chief executive officer senior management designed simplify structure reduce costs place greater focus customers plan terminated expect terminate approximately 15300 employees first quarter fiscal 2007 fourth quarter fiscal year 2005 recorded pretax restructuring charge 157 billion expect record additional charge 30 million connection plan approximately 4700 employees left hp october 31 2005 connection restructuring plan including 3200 us employees elected take early retirement estimate fourth quarter restructuring actions changes made us retirement programs result gross savings 900 million 10 billion fiscal 2006 estimate annual gross savings approximately 20 billion beginning fiscal 2007 expect approximately half cost savings used offset market forces reinvested business strengthen competitiveness anticipate remainder flow operating profit third quarter fiscal 2005 management approved restructuring plan recorded charge 109 million related severance related costs associated termination approximately 1450 employees left hp october 31 2005 initial restructuring amount paid 87 million october 31 2005 expect remainder paid end fiscal 2006 restructuring costs fiscal 2004 mainly reflect certain charges relating fiscal 2003 restructuring plan described meet recognition requirements fiscal 2003 well changes original estimates fiscal 2003 plan fiscal 2002 restructuring plan fiscal 2003 management approved implemented plans restructure certain operations entered plans intent better managing cost structure aligning certain operations current business conditions connection plans recorded restructuring charge 752 million restructuring liabilities 12 billion october 31 2005 composed primarily remaining cash payments made severance relating fiscal 2005 restructuring plan certain nonus severance benefits contract termination costs including canceled facility leases restructuring plans expect make majority severance payments fiscal 2006 settle nonseverance obligations end fiscal 2010 information restructuring charges see note 7 consolidated financial statements item 8 incorporated herein reference following table summarizes major restructuring activities aggregate fiscal years 2005 2004 2003 fiscal 2005 workforce rebalancing addition restructuring activities described fiscal 2005 incurred approximately 236 million workforce rebalancing charges resulting actions taken certain business segments severance related costs workforce rebalancing costs included segment results recorded costs six months ended april 30 2005 result workforce rebalancing actions approximately 3000 employees left hp october 31 2005 workforce rebalancing charges paid 209 million october 31 2005 expect pay remainder end fiscal 2006 amortization purchased intangible assets increase amortization expense fiscal 2005 compared fiscal 2004 due primarily amortization intangible assets related acquisitions triaton april 2004 synstar plc synstar october 2004 sac llc snapfish april 2005 well accelerated amortization related early termination certain acquired customer contracts increase amortization expense fiscal 2004 compared fiscal 2003 due primarily amortization intangible assets related acquisition triaton april 2004 inprocess research development charges record inprocess research development iprd charges connection acquisitions accounted business combinations fully described note 5 consolidated financial statements item 8 fiscal 2005 2004 2003 recorded iprd charges 2 million 37 million 1 million respectively related acquisitions years interest net interest net increased 154 million fiscal 2005 fiscal 2004 increase fiscal 2005 result primarily higher shortterm us interest rates increased interest income cash balances reduced cost associated foreign exchange hedges increased interest expense charge related sales use tax audit compaq prior acquisition hp years 19982002 partially offset increase interest net fiscal 2005 interest net increased 14 million fiscal 2004 fiscal 2003 increase fiscal 2004 result lower interest expense offset partially higher currency losses balance sheet remeasurement related hedging strategies losses gains investments net loss fiscal 2005 resulted primarily impairment charges equity investments publiclytraded privatelyheld investment portfolios partially offsetting losses gains attributable sale investments net gain fiscal 2004 attributable mainly realization contingent gain associated prior period divestiture realized gains sale investments excess impairment charges net losses fiscal 2003 resulted mainly impairment charges excess gains realized investment portfolio dispute settlement fiscal 2005 recorded net total 106 million dispute settlement charges reached legal settlement 141 million patent infringement case intergraph hardware technologies company intergraph recorded charge 116 million related crosslicense agreement intergraph products shipped prior years partially offsetting amount 10 million recovery individual related prior period settlement government canada cost audits certain contracts fiscal 2004 recorded 70 million settlement costs dispute government canada see note 17 consolidated financial statements item 8 full description matters incorporated herein reference provision taxes effective tax rate 323 167 121 fiscal 2005 2004 2003 respectively increase overall tax rate fiscal 2005 fiscal 2004 related primarily tax expense associated repatriation 145 billion provisions american jobs creation act 2004 jobs act partially offset increase tax benefit derived lower rates jurisdictions increase overall tax rate fiscal 2004 fiscal 2003 result primarily decline tax benefit lower rates jurisdictions fiscal 2004 jobs act enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction results approximate 525 federal tax rate repatriated earnings fiscal 2005 recorded 697 million income tax expense related items unique year tax expense result primarily 792 million associated repatriation 145 billion jobs act 76 million related additional distributions received foreign subsidiaries tax expenses offset part tax benefits 177 million resulting agreements internal revenue service governmental authorities fiscal 2004 tax rate benefited net favorable adjustments previously estimated tax liabilities 207 million decreased provision taxes approximately 007 per share significant favorable adjustments related resolution california state income tax audit net favorable revision estimated tax accruals upon filing 2003 us income tax return reduction taxes foreign earnings due change regulatory policy favorable adjustments offset part net effect smaller adjustments income tax liabilities various jurisdictions fiscal 2003 tax rate benefited primarily lower tax rates nonus jurisdictions full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 12 consolidated financial statements item 8 incorporated herein reference segment information description products services well financial data segment found note 18 consolidated financial statements item 8 incorporated herein reference restated segment financial data fiscal years ended october 31 2004 2003 reflect changes hps organizational structure occurred beginning first quarter fiscal 2005 describe changes fully note 18 consolidated financial statements item 8 presented business segments form 10k based management organizational structure october 31 2005 distinct nature various businesses future changes organizational structure may result changes reportable segments disclosed discussions include results segments technology solutions group ess hps software structured beneath broader technology solutions group tsg described results business segments tsg detail enterprise storage servers components weighted average net revenue growth business unit follows following fiscal years ended october 31 ess net revenue increased 11 fiscal 2005 fiscal 2004 constant currency basis ess net revenue increased 9 fiscal 2005 fiscal 2004 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period fiscal 2005 ess net revenue growth due primarily volume increases improved average selling prices asps industry standard servers result unit growth increased option attach rates proliant server line fiscal 2005 net revenue growth rate industry standard servers benefited internal execution problems described unfavorably impacted business second half prior year storage net revenue increased 5 fiscal 2005 compared fiscal 2004 due new product introductions contributed strong performance midrange eva products improved storage sales specialist coverage fiscal 2005 storage area networks sans net revenue improved revenue growth tape supplies businesses remained flat fiscal 2005 storage net revenue growth rates comparison growth rates prior year benefited business challenges unfavorably impacted storage business second half prior year business critical systems net revenue increased 1 fiscal 2005 compared fiscal 2004 integrity server net revenue growth period offset partially revenue decline risc product line planned revenue decline alpha server product line integrity server product line posted net revenue growth year representing 20 total business critical systems revenue mix 11 prior year fiscal 2005 hpux server net revenue increased 5 prior year nonstop server net revenue declined due mature installed base fiscal 2005 ess earnings operations percentage net revenue increased 38 percentage points compared fiscal 2004 due primarily 35 percentage point decrease operating expenses percentage net revenue combined 03 percentage point increase gross margin recorded 57 million workforce reduction costs first two quarters fiscal 2005 reduced operating expenses reflect benefits measures well management controls expense spending offset impact higher employee bonus accruals recorded second half year improvement margin due primarily higher option attach rates improved discount management offset partially continued mix shift towards industry standard servers within segment well ongoing mix shift lower margin products within business critical systems business integrity products assumed greater percentage business critical systems net revenue addition yearoveryear industry standard servers storage gross margins comparisons favorably impacted execution issues business challenges unfavorably impacted performance industry standard servers storage second half fiscal 2004 ess net revenue increased 4 fiscal 2004 fiscal 2003 revenue constant currency basis decreased 2 favorable currency impact due primarily weakening dollar euro fiscal 2004 ess performance hurt third fiscal quarter execution issues namely systems migration us channel management issues emea weakness storage however ess net revenue growth helped industry standard servers unit growth 22 translated 12 net revenue increase fiscal 2003 category net revenue business critical systems declined 2 fiscal 2004 compared fiscal 2003 reflecting ongoing decline alphaserver product line risc integrity servers experienced revenue growth introduced midrange highend itanium®based products widely fiscal 2004 sales continued increase year integrity servers representing 13 business critical systems including nonstop servers fourth fiscal quarter hpux server revenue increased 2 fiscal 2003 offset declines alpha transitioned customers nonalpha products nonstop server net revenue declined 1 prior year reflecting maturing installed base storage net revenue declined 7 fiscal 2004 declines overall array tape businesses net revenue declines fiscal 2003 due primarily exposure declining tape market aggressive pricing inadequate storage sales specialist coverage product updates occurred late fiscal 2004 growth storage software network attached storage offset partially revenue decline primary product groups ess earnings operations percentage net revenue fiscal 2004 improved 01 percentage points reflecting 36 percentage point decrease operating expenses relation revenue resulting effective cost management increased volume industry standard server business decline gross margin 35 percentage points offset decline operating expenses volume growth gross margin decline result competitive pressures impacting industry standard servers group storage business along mix shift lower margin products within business critical servers group generally continued mix shift towards industry standard servers within segment fiscal 2004 business continued focus increasing direct sales improving option attach rates reducing warranty costs order optimize gross margins additionally execution issues third quarter led operating loss quarter negatively impacted full year performance hp services components weighted average net revenue growth business unit follows following fiscal years ended october 31 hps net revenue increased 12 fiscal 2005 fiscal 2004 constant currency basis hps net revenue increased 9 fiscal 2005 fiscal 2004 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period excluding acquisitions made since first quarter fiscal 2004 hps net revenue growth fiscal 2005 8 net revenue technology services increased 9 fiscal 2005 excluding acquisitions made since first quarter fiscal 2004 technology services net revenue growth fiscal 2005 4 fiscal 2005 managed services net revenue increased 24 prioryear result increase new contracts well additional revenue installed base large customer contracts full year contribution triaton acquisition completed april 2004 favorable currency impacts excluding triaton managed services net revenue growth 22 fiscal 2005 compared prior fiscal year net revenue consulting integration increased 13 fiscal 2005 prior year due strong order growth emea asia pacific well favorable impact currency additionally triaton acquisition added revenue growth hps earnings operations percentage net revenue fiscal 2005 declined 19 percentage points operating margin decline result combination decline gross margin offset partially decrease operating expense percentage net revenue gross margin decline hps reflected primarily competitive pricing pressures portfolio mix shifts within technology services well cost higher employee bonus costs recorded second half fiscal year absorption workforce reduction costs first half year amounted 89 million technology services portfolio continues evolve higher margin proprietary support lower margin areas multivendor integrated support network environmental services managed services gross margin increased due improvements delivery cost management across installed base consulting integration gross margin improved due higher revenues continued operational improvement presales delivery cost management fiscal 2005 reductions efficiencies operating expense structure contributed decline operating expenses percentage net revenue despite 11 million workforce reduction costs first half fiscal year impact employee bonuses granted second half fiscal year hps net revenue increased 12 fiscal 2004 compared fiscal 2003 constant currency basis net revenue increased 5 fiscal 2004 favorable currency impact due primarily weakening dollar euro yen growth technology services net revenue driven primarily favorable currency impacts triaton acquisition well strength integrated support desktop lifecycle mission critical support solutions fiscal 2004 growth managed services due increased net revenue new large outsourcing deals expansion services existing customers well triaton acquisition increase core consulting integration services contributed slight growth consulting integration business fiscal 2004 decrease sales complementary thirdparty products negatively impacted net revenue hps earnings operations percentage net revenue declined 17 percentage points fiscal 2004 due part continued growth managed services lowermargin business becoming increasingly larger part hps operating profit ratio declines managed services technology services business contributed overall segment operating profit ratio decline fiscal 2004 large outsourcing contracts early stages life cycle lower margins fiscal 2004 causing decline managed services operating profit ratio technology services business competitive pricing pressures renewals new contracts mix shift higher margin support agreements eg unix® lower margin contracts eg networking installations integrated multivendor support offerings affected technology services operating profit ratio lesser degree costs related integration recent acquisitions also negatively affected technology services operating profit ratio overall operating profit ratio decline moderated somewhat operating profit ratio improvement consulting integration business result sales force focus hps adaptive enterprise offerings customer relationship management continued process improvements software fiscal 2005 software net revenue increased 15 12 without acquisitions fiscal 2004 13 constant currency basis favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period openview management solutions software product line represented 12 percentage points net revenue growth weighted average basis fiscal 2005 opencall telecommunications solutions product line represented 3 percentage points growth weighted average net revenue basis fiscal 2005 openview net revenue growth result increases larger contracts license fees lesser extent acquisitions opencall net revenue growth result increase licenses operating margin improvement 112 percentage points fiscal 2005 compared fiscal 2004 result primarily increase gross margin decrease operating expense percentage net revenue gross margin improvement due higher margin rates core businesses favorable product mix due openview license revenue decrease operating expense percentage net revenue due slower growth operating expense attributable cost management efforts related principally decreased research development costs slower growth marketing costs percentage revenue despite employee bonus recorded second half fiscal 2005 acquisition integration costs fiscal 2004 software net revenue increased 19 16 without acquisitions 13 constant currency basis fiscal 2003 majority currency impact resulted weakening dollar euro overall 19 net revenue increase openview represented 13 percentage points growth 10 without acquisitions weighted average net revenue basis opencall contributed remaining 6 percentage points net revenue increase openview net revenue growth result market share gains growing market along impact acquisitions growth opencall due increased spending telecommunications industry associated adoption next generation network infrastructure operating margin improvement 97 percentage points fiscal 2004 fiscal 2003 result primarily decrease operating expense percentage net revenue decrease operating expense attributable effective cost management operating expenses particularly marketing research development costs grew slowly net revenue despite unfavorable impact currency increased acquisitionrelated costs gross margin decline resulting increasingly competitive pricing environment personal systems group components weighted average net revenue growth business unit follows following fiscal years ended october 31 psg net revenue increased 9 fiscal 2005 fiscal 2004 constant currency basis psgs net revenue increased 7 fiscal 2005 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period fiscal 2005 net revenue increased across regions result 13 volume increase particularly consumer commercial clients double digit unit growth asia pacific emea drove revenue increase fiscal 2005 net revenue increases notebook desktop pcs 16 2 respectively consumer clients commercial clients increased 10 7 respectively prior year revenue increases consumer commercial clients offset partially decline handhelds revenue performance digital entertainment products apple ipod hp added growth net revenue fiscal year fourth quarter fiscal 2005 discontinued reselling apple ipod impact revenue growth rates digital entertainment products future periods psg volume increase moderated decline 4 asps consumer clients commercial clients declining 8 5 respectively fiscal 2005 declines notebook desktop asps offset slightly digital entertainment mix increase handheld workstation asps decline asps due mainly changes notebook product lineup leveraged declines component costs competitive pressures consumer pcs psg earnings operations percentage net revenue increased 17 percentage points fiscal 2005 fiscal 2004 increase result gross margin improvement combined flat operating expenses percentage revenue gross margin improvement due primarily component cost declines product mix shift toward higher margin notebook pcs reduced warranty costs favorable currency impacts operating expense percentage revenue flat impact employee bonuses recorded second half year offset continued cost control measures psg net revenue increased 16 fiscal 2004 fiscal 2003 constant currency basis increase 10 favorable currency impact due primarily weakening dollar euro fiscal 2004 net revenue increase across businesses result primarily overall 17 volume increase volume increases result strong market growth consumer commercial clients reentry china market introduction new products media center pcs widescreen notebook pcs converged devices broader product line offering penbased ipaqs fiscal 2004 consumer commercial desktop pc volumes increased 15 11 respectively notebook pc volume increased 22 volume increase moderated slight decline asps asp decline due mix shift toward lowerend personal workstations ipaq handhelds well component cost declines offset partially strong monitor attach rate business pcs yearoveryear net revenue increases consumer commercial desktop pcs 15 12 respectively notebook pc net revenue increased 22 psg earnings operations percent net revenue 08 fiscal 2004 compared 01 fiscal 2003 increase result volume increases decline operating expenses 13 percentage points offset decline gross margin 05 percentage points operating expense decline due headcount reductions tightening administrative costs lower research development spending scale efficiencies selling marketing costs gross margin decline due primarily continued competitive pressures europe expansion developing markets shift towards lowerend products imaging printing group components weighted average net revenue growth business unit follows following fiscal years ended october 31 ipg net revenue increased 4 fiscal 2005 fiscal 2004 constant currency basis net revenue increase 2 fiscal 2005 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period fiscal 2005 growth supplies net revenue attributable primarily unit growth laserjet toner due primarily increased sales colorrelated products growth commercial hardware net revenue fiscal 2005 attributable unit volume growth color laserjet printers multifunction printers digital press business new product introductions added net revenue growth multifunction printers effect commercial hardware volume increase offset partially decreasing asps fiscal 2005 consumer hardware net revenue decreased decline result continuing decreases asps due strategic pricing actions continued mix shift demand lowerpriced products intense competition allinone single function inkjet printers ongoing decline scanner market fiscal 2005 ipg earnings operations percentage net revenue declined 23 percentage points due 24 percentage point decline gross margin offset partially 01 percentage point decline operating expenses gross margin decline attributable mix shift within supplies inkjet cartridges laserjet toner lowend mix shift consumer hardware voluntary severance incentive charges strategic pricing actions operating expense percentage net revenue remained relatively flat yearoveryear slight increase spending due voluntary severance incentive charges taken first half fiscal year second half year employee bonus expense offsetting favorable impact headcount reductions lower program spending research development ipg net revenue increased 7 fiscal 2004 fiscal 2003 constant currency basis net revenue increase 2 fiscal 2004 favorable currency impact due primarily weakening dollar euro growth printer supplies net revenue fiscal 2004 reflected higher volumes result continued expansion printer hardware installed base due primarily strong performance colorrelated products digital photography initiatives fiscal 2004 growth commercial printer hardware net revenue attributable unit volume growth color laserjet printers business inkjet printers monochrome laserjet printers increasing demand multifunction printers continued shift demand lowerpriced products competitive pricing environment moderated net revenue increase business printer hardware period net revenue remained unchanged digital imaging products result growth camera unit shipments offset decrease sales scanners due declining market decline consumer printer hardware result decreases asps due continued shift demand lowerpriced products particularly sub200 allinone market well decline sales singlefunction devices fiscal 2004 earnings operations percentage net revenue 159 consistent fiscal 2003 percentage net revenue operating expense gross margin remained flat fiscal 2004 compared fiscal 2003 gross margin improvement supplies due part cost reductions volume increases moderated mix shift lower margin products gross margin improvement also result favorable mix shifts consumer printer hardware gross margin declines digital imaging commercial printer hardware due part shift lower margin products increasingly competitive pricing environment moderated improvement within total operating expense slight increase administrative expense offset slight decline selling costs research development costs marketing costs percentage net revenue remained flat fiscal 2004 hp financial services hpfs net revenue increased 11 fiscal 2005 compared fiscal 2004 net revenue increase result primarily higher used equipment sales higher mix leases classified operating leases fiscal 2005 35 percentage point increase earnings operations percentage net revenue consisted 36 percentage point increase gross margin partially offset 01 percentage point increase operating expense gross margin increase resulted primarily lower bad debt expense offset partially higher mix lower margin operating lease assets decrease bad debt expense due part release fiscal 2005 40 million reserves related aged receivables emea since collected reserves established fourth quarter fiscal 2004 recoveries accounts latin america previously writtenoff lower credit losses reduction reserves resulting stronger portfolio risk profile also contributed decrease bad debt expense slight increase operating expense percentage net revenue result mainly 62 million net reduction revenue resulting reclassification certain leases operating leases capital leases reclassification result review leasing portfolio appropriate lease classification hp completed fourth quarter hpfs net revenue decreased 1 fiscal 2004 compared fiscal 2003 decrease resulted primarily lower average levels revenuegenerating assets lower used equipment sales decrease average assets due portfolio amortization asset sales exceeding new lease originations throughout fiscal year lower interest rates also contributed net revenue decrease fiscal 2004 25 percentage point increase earnings operations percentage net revenue consisted 13 percentage point increase gross margin 12 percentage point decrease operating expense gross margin improvement result higher portfolio profitability resulting primarily end lease transactions lesser extent lower interest costs percentage net revenue gross margin increase offset part higher reserves related certain aged receivables particularly emea fourth quarter fiscal 2004 cost savings achieved continued cost controls offset part unfavorable currency impact caused decline operating expenses percentage net revenue financing originations new financing originations include intercompany activity increased 7 fiscal 2005 fiscal 2004 increase resulted improved integration engagement hps sales marketing efforts favorable currency impact originations increased 2 fiscal 2004 fiscal 2003 due higher levels financing asia pacific favorable currency impact offset part lower penetration rate hp sales portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived hps internal management reporting system accounting policies used derive amounts substantially used hp consolidated basis however certain intercompany loans accounts reflected segment balances eliminated hps consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include financing receivables 50 billion october 31 2005 53 billion october 31 2004 net equipment operating leases 13 billion october 31 2005 14 billion october 31 2004 disclosed note 9 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 400 million october 31 2005 october 31 2004 intercompany leases approximately 400 million october 31 2005 300 million october 31 2004 eliminated consolidation 2hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs portfolio assets october 31 2005 decreased 4 october 31 2004 decrease resulted primarily collections billed receivables decline exchange rate euro dollar writeoff assets covered specific reserves overall percentage portfolio assets reserved decreased due primarily writeoff assets covered specific reserves release 40 million reserves aged receivables emea since collected lower reserves resulting stronger portfolio risk profile hpfs funds operations mainly combination intercompany debt equity increase debt equity ratio reflects planned increase portfolio leverage corporate investments fiscal 2005 majority net revenue corporate investments related network infrastructure products increased 20 fiscal 2004 result continued product enhancements particularly gigabit ethernet switch products expenses related corporate development global alliances hp labs increased 5 fiscal 2005 fiscal 2004 increase due higher spending strategic initiatives incubation programs expenses contributed majority loss operations corporate investments offset part operating profit network infrastructure product sales corporate investments loss operations fiscal 2005 decreased slightly prior fiscal year due increase operating profit network infrastructure products result increasing operating margins offset partially increase operating expenses related corporate development global alliances hp labs increase gross margin due primarily favorable product mix lower trade discounts percentage net revenue network infrastructure products fiscal 2004 majority net revenue segment related network infrastructure products net revenue segment grew 27 fiscal 2003 result continued enhancements overall product portfolio particularly gigabit ethernet switch products fiscal 2004 expenses related corporate development global alliances hp labs increased 10 prior fiscal year increase result part increased investment strategic initiatives operating profit network infrastructure product group declined slightly fiscal 2004 due mostly increased operating expense levels resulting headcount growth research development sales marketing liquidity capital resources cash balances held numerous locations throughout world substantial amounts held outside united states jobs act enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction results approximate 525 federal tax rate repatriated earnings third quarter fiscal 2005 hps chief executive officer board directors approved domestic reinvestment plan required jobs act repatriate 145 billion foreign earnings fiscal 2005 hp repatriated 75 billion jobs act third quarter repatriated remaining 70 billion fourth quarter fiscal 2005 foreign earnings repatriated jobs act increased liquidity united states corresponding reduction liquidity hps foreign subsidiaries utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed financial condition sources uses cash total cash equivalents increased approximately 10 139 billion october 31 2005 127 billion end fiscal 2004 net earnings fiscal 2005 helped generate 80 billion cash operating activities cash generated operations fiscal 2005 funded 68 billion investing financing activities yearoveryear borrowings declined 27 52 billion october 31 2005 net 68 billion used investing financing activities fiscal 2005 included 35 billion share repurchases 20 billion gross investments property plant equipment 18 billion payments debt cash flows financing activities benefited 12 billion proceeds relating employee stock plans cash position remains strong cash balances sufficient cover significant cash outlays expected fiscal 2006 associated restructuring actions company bonus payments key performance metrics days sales outstanding accounts receivable dso measures average number days receivables outstanding dso calculated dividing accounts receivable net allowance doubtful accounts 90day average net revenue days supply inventory dos measures average number days procurement sale product dos calculated dividing inventory 90day average cost goods sold days purchases outstanding accounts payable dpo measures average number days accounts payable balances outstanding dpo calculated dividing accounts payable 90day average cost goods sold working capital requirements depend upon effective management cash conversion cycle represents effectively number days elapse day pay purchase raw materials collection cash customers cash conversion cycle sum dso dos less dpo 2005 compared 2004 operating activities net cash provided operating activities increased 58 fiscal 2005 cash position benefited primarily improved cash conversion cycle decreased 9 days compared fiscal 2004 due primarily improved effectiveness accounts receivable collection efforts improved inventory management cash flow operations also benefited delayed payments restructuring costs company bonuses benefits offset partially higher pension contributions investing activities net cash used investing activities decreased 28 fiscal 2005 due primarily lower cash paid acquisitions reduced expenditures property plant equipment financing activities net cash used financing activities increased 21 fiscal 2005 compared fiscal 2004 increase due primarily maturity debt increased repurchases common stock cash payments offset partially increased proceeds issuance common stock related employee stock plans repaid 18 billion debt fiscal 2005 compared 03 billion fiscal 2004 primarily due maturity 15 billion us dollar global notes 03 billion mediumterm notes assumed compaq acquisition also proceeds issuance common stock employee plans 12 billion fiscal 2005 compared 06 billion fiscal 2004 mainly higher overall market prices fiscal 2005 led increased exercises employee stock options repurchase shares common stock ongoing program manage dilution created shares issued employee stock plans well repurchase shares opportunistically program authorizes repurchases open market private transactions completed share repurchases approximately 150 million shares 148 million shares settled 35 billion fiscal 2005 compared repurchases settlements approximately 172 million shares 33 billion fiscal 2004 addition november 2004 paid 51 million connection completion fiscal 2004 accelerated share repurchase program intend continue repurchase shares means manage dilution issuance shares employee benefit plans repurchase shares opportunistically fiscal 2005 board directors hp authorized additional 40 billion future repurchases hps outstanding shares common stock october 31 2005 remaining authorization approximately 34 billion future share repurchases 2004 compared 2003 operating activities net cash provided operating activities declined 16 fiscal 2004 although cash position benefited higher earnings lower payments restructuring actions decreased pension postretirement contributions improvements sufficient offset increase cash conversion cycle rose 31 days fiscal 2004 21 days fiscal 2003 lengthening cash conversion cycle due largely 23 billion increase accounts receivable inventory october 31 2004 compared prior year timing accounts payable payments accounts receivable impacted unfavorably currency fluctuations us dollar weakened euro change mix accounts receivable portfolio october 31 2004 portfolio included larger portion us retail emea direct receivables generally longer payment terms compared shorter payment terms commercial receivables higher inventory levels october 31 2004 reflected planned increases certain inventories preparation 2004 holiday season well change timing new product rollouts particularly within ipg psg hp introduced products staggered basis latter half fiscal 2004 certain ipg products rolled first month fiscal 2004 compared focused marketing rollout third quarter fiscal 2003 addition ess inventory levels increased due primarily backlog associated industry standard servers backlog occurred result component availability year end investing activities net cash used investing activities rose 62 fiscal 2004 due primarily 11 billion spent several business acquisitions including triaton gmbh synstar plc digital globalsoft limited compared 149 million spent acquisitions fiscal 2003 capital expenditures increased slightly 7 fiscal 2004 increase mostly offset asset disposition activities financing activities significant increase net cash used financing activities fiscal 2004 resulted higher level share repurchases compared fiscal 2003 fiscal 2004 hps board directors authorized 50 billion future repurchases outstanding shares including authorization 30 billion fourth quarter fiscal 2004 completed share repurchases approximately 172 million shares 33 billion fiscal 2004 including approximately 72 million shares accelerated share repurchase program compared repurchases 40 million shares 751 million fiscal 2003 october 31 2004 remaining authorization approximately 29 billion future share repurchases proceeds issuance stock options shares sold employees stock purchase plan 570 million 18 higher fiscal 2004 compared fiscal 2003 mainly higher overall market prices fiscal 2004 also fiscal 2004 borrowing activity compared prior fiscal year significantly reduced net debt repayments fiscal 2004 totaled 448 million reflected lower net levels commercial paper borrowings current maturities payable fiscal 2003 borrowings activity included issuance debt well repayments net repayment basis totaled 303 million liquidity previously discussed use cash generated operations primary source liquidity since believe internally generated cash flows sufficient support business operations capital expenditures payment dividends stockholders addition current levels discretionary investments share repurchases able supplement near term liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities geographic location cash generated operations overall cost capital outstanding debt october 31 2005 decreased 52 billion compared 71 billion october 31 2004 bearing weighted average interest rates 47 53 respectively shortterm borrowings decreased 18 billion october 31 2005 25 billion october 31 2004 decrease reflects primarily repayment 15 billion us dollar global notes 300 million mediumterm notes assumed compaq acquisition offset partially reclassification longterm shortterm 200 million series mediumterm notes maturing december 2005 900 million euro mediumterm notes maturing july 2006 addition fiscal 2005 issued 114 billion repaid 115 billion commercial paper issue material longterm debt fiscal 2005 hp hpfs financing business issued assumed vast majority hps total outstanding debt like financial services companies hpfs explained uses intercompany equity treated debt segment reporting purposes business model assetintensive nature therefore debtdependent business segments october 31 2005 hpfs approximately 69 billion net portfolio assets include short longterm financing receivables operating lease assets october 31 2005 following resources available obtain shortterm longterm financing additional liquidity securities issuable 2002 shelf registration statement include notes due dates nine months issuance december 15 2005 hp two us credit facilities consisting 15 billion 364day credit facility expiring march 2006 15 billion 5year credit facility expiring march 2009 december 15 2005 hp replaced two credit facilities 30 billion 5year credit facility us credit facility available general corporate purposes including support us commercial paper program lines credit uncommitted available primarily various foreign subsidiaries april 2005 hp increased us commercial paper program 60 billion hps credit risk evaluated three independent rating agencies based upon publicly available information well information obtained ongoing discussions standard poors rating services moodys investor service fitch ratings currently rate senior unsecured long term debt a3 shortterm debt a1 prime1 respectively rating downgrade triggers would accelerate maturity material amount debt however downgrade credit rating would increase cost borrowings credit facilities also downgrade credit rating could limit case significant downgrade preclude ability issue commercial paper current programs limited precluded borrowing would seek alternative sources funding including issuance notes existing shelf registration statement euro mediumterm note programme credit facilities revolving trade receivablesbased facilities permitting us sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 12 billion october 31 2005 facility largest volume one subject maximum amount 525 million euros approximately 630 million euro program trade receivables approximately 79 billion sold fiscal 2005 including approximately 54 billion euro program fees associated facilities generally differ materially cash discounts offered customers alternative prompt payment programs october 31 2005 approximately 571 million available programs 357 million relates euro program contractual obligations impact contractual obligations october 31 2005 expected liquidity cash flow future periods follows 1amounts represent expected cash payments longterm debt include fair value adjustments discounts included longterm debt approximately 39 million capital lease obligations secured certain equipment 2purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty purchase obligations related principally cost sales inventory items purchase obligation includes settlement agreement emc corporation emc pursuant hp agreed pay 325 million net amount valuation emcs claims hp less valuation hps claims emc hp satisfy purchase resale internal use complementary emc products equal installments 65 million next five years first installment paid august 29 2005 october 31 2005 remaining payment emc 260 million addition emc purchases hp products fiveyear period hp required purchase equivalent amount additional products services emc aggregate 108 million november 1 2005 hp acquired substantially assets scitex vision ltd market leader superwide digital imaging 230 million cash acquisition expected expand hps leadership printing industrial wideformat market september 19 2005 hp announced signed definitive agreement acquire peregrine systems inc peregrine cash merger 2608 per share representing aggregate equity value 425 million acquisition peregrine completed first quarter fiscal 2006 intended add key asset service management components hp openview portfolio distributed management software suite business operations funding commitments fiscal 2005 made contributions approximately 17 billion pension plans paid approximately 60 million cover claims cost hp postretirement benefit plans fiscal 2006 hp expects contribute approximately 245 million pension plans approximately 40 million cover benefit payments us nonqualified plan participants hp expects pay approximately 80 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash hps pension plans hp meets least minimum contribution requirements established local government funding taxing authorities hp expects use contributions made postretirement plans primarily payment retiree health claims incurred fiscal year expect make significant cash outlays associated companys bonus restructuring plans fiscal 2006 result approved restructuring plans expect future cash expenditures approximately 12 billion exclusive approximately 400 million funded pension plan assets costs associated early retirement 3200 us employees primarily employee severance employee benefits facilities costs amount recorded 119 billion consolidated balance sheet october 31 2005 intend expense 30 million future periods incur costs meet requirements record costs liability expect make cash payments approximately 10 billion fiscal 2006 approximately 200 million next five fiscal years offbalance sheet arrangements part ongoing business participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes october 31 2005 involved material unconsolidated spes indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments hp made related indemnifications immaterial item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global technology company generate net revenue earn profits sale products technologies solutions services consumers businesses governments portfolio broad includes personal computers handheld computing devices home business imaging printing devices publishing systems storage servers wide array information technology services software solutions seven business segments enterprise storage servers ess hp services hps software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments ess hps software structured beneath broader technology solutions group tsg operating segment sometimes provide financial data aggregating segments within tsg order provide supplementary view business product geographic breadth requires us focus strategic imperatives within individual product categories manage across portfolio order drive growth optimizing cost structure financial results also impacted ability predict respond industrywide trends instance trend significant business financial results shift toward standardized products presents revenue opportunities certain businesses presents ongoing challenge margins help address potential margin impact standardization take ongoing actions related revenue generation cost structure management sales marketing area programs designed improve rates sell highermargin configurations options also continue focus managing procurement labor expenses key overall efforts delivering superior products maintaining worldclass cost structure increasingly global nature technology expertise trend allowing us develop global delivery structure take advantage regions advanced technical expertise available lower costs part efforts improve efficiencies reduce costs continually evaluate workforce infrastructure make adjustments deem appropriate make adjustments workforce infrastructure may incur incremental expenses delay benefit efficient workforce structure believe fundamental shift efficient global delivery crucial maintaining longterm competitive cost structure recent adjustments include •our plans announced may 2006 reduce spending consolidating 85 data centers worldwide six stateoftheart centers three us cities •our plans announced july 2006 reduce real estate costs consolidating several hundred real estate locations worldwide fewer core sites next four years continue implement 2005 restructuring plan approved board directors fourth quarter fiscal 2005 part plan announced june 2006 would integrate activities carried global operations organization directly business segments 2005 restructuring plan expect eliminate approximately 15200 positions workforce restructuring early retirement programs approximately 14200 positions eliminated october 31 2006 majority remaining 1000 positions expected eliminated fiscal 2007 expect reinvest significant portion savings actions back business operations use savings offset market forces information restructuring plan see note 8 consolidated financial statements item 8 incorporated herein reference terms execution translated financial performance following provides overview key fiscal 2006 financial metrics cash equivalents october 31 2006 totaled 164 billion increase 25 billion october 31 2005 balance 139 billion increase fiscal 2006 related primarily 114 billion net cash provided operating activities 25 billion proceeds shares issued connection employee stock plans increase partially offset 61 billion paid repurchase common stock 20 billion net investments property plant equipment 17 billion prepayment common stock repurchased future 09 billion cash dividends 09 billion net cash paid business acquisitions intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements fair values undelivered elements known uncertainties regarding customer acceptance resolved customernegotiated refund return rights affecting revenue recognized delivered elements changes allocation sales price elements might impact timing revenue recognition would change total revenue recognized contract recognize revenue work progresses certain fixedprice contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue result revisions cost estimates income period facts give rise revision become known record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience number customers actually redeem incentive restructuring engaged may continue engage restructuring actions require management utilize significant estimates related expenses severance employee separation costs realizable values assets made redundant obsolete lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 8 consolidated financial statements item 8 incorporated herein reference stockbased compensation expense effective november 1 2005 adopted fair value recognition provisions statement financial accounting standards sfas 123 revised 2004 sharedbased payment sfas 123r using modified prospective transition method therefore restated prior periods results method recognize stockbased compensation expense sharebased payment awards granted november 1 2005 granted prior yet vested november 1 2005 accordance sfas 123r fair value recognition provisions sfas 123r recognize stockbased compensation expense net estimated forfeiture rate recognize compensation cost shares expected vest straightline basis requisite service period award prior sfas 123r adoption accounted sharebased payment awards accounting principles board opinion 25 accounting stock issued employees apb 25 accordingly generally recognized compensation expense granted options discounted exercise price determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected life sharebased payment awards stock price volatility management determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility therefore expected volatility fiscal years 2006 2005 based marketbased implied volatility assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application management judgment result factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period see note 2 consolidated financial statements item 8 discussion stockbased compensation taxes earnings calculate current deferred tax provisions based estimates assumptions could differ actual results reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third fourth quarters subsequent year us federal state provisions respectively recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would increase valuation allowance make corresponding charge earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments hp undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2019 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states sixty foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges determining income tax expense potential assessments recording related assets liabilities requires significant management judgments estimates evaluate income tax contingencies accordance sfas 5 accounting contingencies believe reserve income tax liabilities including related interest adequate relation potential additional tax assessments amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve income tax liabilities attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations material adjustments likely occur fiscal years major ongoing audits internal revenue service irs closed addition tax contingency reserve includes certain amounts potential tax assessments preacquisition tax years acquired companies released impact carrying value goodwill attributable acquired company allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers also record specific provisions individual accounts become aware customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position circumstances related customers change would adjust estimates recoverability receivables either upward downward annual provision doubtful accounts approximately 003 net revenue last three fiscal years using thirdparty credit risk model october 31 2006 50basispoint deterioration either weighted average default probabilities significant customers overall mix portfolio would resulted approximately 26 million increase trade allowance end fiscal year 2006 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates valuation goodwill indefinitelived purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill intangible assets provisions sfas 142 require perform twostep impairment test goodwill first step compare fair value reporting unit carrying value reporting units consistent reportable segments identified note 18 consolidated financial statements item 8 determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference sfas 142 also requires fair value purchased intangible assets indefinite lives estimated compared carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2006 result impairment charge excess fair value carrying value hps reporting units august 1 2006 annual testing date ranged approximately 350 million approximately 414 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 200 million approximately 366 billion hps reporting units warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates service delivery costs postsales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days partsonly three years parts labor depending upon product last three fiscal years annual warranty provision averaged approximately 36 annual net product revenue actual annual warranty costs averaged approximately 34 annual net product revenue retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates salary growth longterm return plan assets medical cost trend rates base discount rate assumption current investment yields high quality fixed income investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment well target asset allocations medical cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends actual results differ assumptions accumulated amortized generally estimated future working life plan participants major assumptions vary plan weighted average rates used set forth note 15 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved direction last several years fiscal 2006 changes weighted average rates would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 31 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 49 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 27 million recent accounting pronouncements see note 1 consolidated financial statements item 8 full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference results operations results operations dollars percentage net revenue follows following fiscal years ended october 31 1cost products cost services financing interest 2certain reclassifications made prior year amounts order conform current year presentation net revenue components weighted average net revenue growth follows following fiscal years ended october 31 fiscal 2006 hp net revenue increased approximately 6 prior year period 7 constant currency basis unfavorable currency impact fiscal 2006 due primarily movement dollar euro yen us net revenue 322 billion fiscal 2006 increase 6 prior year international net revenue increased 6 594 billion psg net revenue increased across regions result 15 volume increase volume increase resulted strong growth consumer commercial markets significant improvement emerging markets partially offset 6 7 declines average selling prices asps consumer commercial clients respectively ipg net revenue growth fiscal 2006 due mainly increased shipment volumes printer supplies resulting continued expansion printer hardware placements strong performance colorrelated products ess net revenue growth result primarily strong unit growth industry standard servers business iss blade revenue growth increased option attach rates proliant server line continued strong performance midrange eva products within storage business revenue increases integrity servers ess growth moderated revenue declines tape business parisc alpha server product lines net revenue growth software fiscal 2006 due primarily growth openview business result peregrine acquisition increase support service contracts hps net revenue increased fiscal 2006 due primarily revenue increases management services driven new business existing account growth offset declines technology services business resulting competitive pricing pressures changes mix platforms serviced hpfs net revenue decline fiscal 2006 due primarily lower used equipment sales fiscal 2005 hp net revenue increased approximately 8 prior year period 6 constant currency basis favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period us net revenue 305 billion fiscal 2005 increase 4 prior year international net revenue increased 11 562 billion psg net revenue increased across regions result 13 volume increase consumer commercial clients volume increase partially offset decline 4 asps notebook pc sales leading contributor net revenue growth psg hps achieved net revenue growth across businesses fiscal 2005 due large part impact acquisitions benefiting primarily technology services favorable currency impacts additionally managed services net revenue increased due new contract signings additional contract revenue installed base fiscal 2005 ess net revenue growth result primarily continued strong sales industry standard servers particularly proliant server line due volume increases higher asps resulting improved option attach rates ipg net revenue growth fiscal 2005 result increased unit growth printer supplies particularly laserjet toner result increasing demand colorrelated products demand colorrelated products also added revenue growth commercial hardware software hpfs contributed hp net revenue growth fiscal 2005 growing acceptance openview product offerings contributed software revenue growth higher used equipment sales higher mix operating leases benefited hpfs stockbased compensation expense effective november 1 2005 adopted fair value recognition provisions sfas 123r using modified prospective transition method therefore restated results prior periods results operations fiscal 2006 impacted recognition noncash expense related fair value sharebased payment awards fiscal 2006 recorded 536 million pretax stockbased compensation expense based sfas 123r 144 million included cost sales 70 million included research development expense 322 million included sales general administrative expense total stockbased compensation expense sfas 123r net taxes fiscal 2006 376 million addition recognized adjustment 14 million reduce noncash stockbased compensation expense included part restructuring expenses stockbased compensation expense related hpgranted employee stock options employee stock purchase plan recorded corporate level therefore impact segment results see note 2 consolidated financial statements item 8 incorporated herein reference gross margin weighted average components change gross margin follows following fiscal years ended october 31 total company gross margin increased fiscal 2006 compared fiscal 2005 improvement ess gross margin fiscal 2006 due primarily favorable unit mix improved discount management lower component costs hps gross margin increase driven mainly continued focus cost structure improvement delivery efficiencies cost controls partially offset continued competitive environment solutions services business higher fiscal 2006 bonus accruals ipg gross margin increased fiscal 2006 due primarily improved supplies margins favorable portfolio mix shift hardware supplies partially offset unfavorable consumer hardware margins improvement software gross margin fiscal 2006 due primarily increase revenue effective management support services costs openview opencall gross margin improvement psg resulted primarily reduced warranty expense supply chain costs percentage revenue component cost declines hpfs gross margin impacted unfavorably fiscal 2006 due primarily competitor pricing pressures higher mix lower margin operating lease assets lower recoveries bad debts partially offset lower credit losses fiscal 2006 total company gross margin decreased fiscal 2005 compared fiscal 2004 ipg gross margin decline fiscal 2005 attributable primarily mix shift within supplies inkjet cartridges laserjet toner continuing decreases asps within hardware due strategic pricing actions gross margin decline hps fiscal 2005 reflected primarily competitive pricing pressures portfolio mix shifts within technology services along higher employee bonus costs second half fiscal year fiscal 2005 ess gross margin increased slightly benefits improved option attach rates industry standard servers improved performance storage helped offset unfavorable impact continued mix shift towards industry standard servers within segment mix shift lower margin products within business critical systems gross margin contribution hpfs software increased slightly fiscal 2005 lower bad debt expense increased gross margin hpfs increase openview opencall gross margins benefited software business gross margin improvement psg fiscal 2005 resulted component cost declines product mix shift towards higher margin notebook pcs reduced warranty costs operating expenses research development total research development rd expense percentage net revenue decreased slightly fiscal 2006 compared fiscal 2005 due primarily revenue growing faster rd expense rd expense increased fiscal 2006 due primarily higher bonus accruals stockbased compensation expense partially offset expense controls cost savings restructuring actions percentage net revenue major segments experienced yearoveryear decrease rd expense fiscal 2006 fiscal 2005 total rd expense percentage net revenue declined period prior year due primarily savings resulting workforce reductions tight expense controls savings partially offset increased costs company bonus costs associated workforce rebalancing actions taken first half fiscal year percentage net revenue segments experienced decrease research development expense fiscal 2005 worked focus investments manage realignment also continuing drive new technologies business opportunities decreases resulted part cost control measures including benefit workforce reduction actions ess consolidation realignment certain ipg research development infrastructure lower program spending selling general administrative selling general administrative sga expense declined percentage net revenue fiscal 2006 due primarily increase net revenue outpacing sga expense growth total sga expense increased slightly fiscal 2006 higher bonus accruals stockbased compensation expenses well increased marketing spending offset part savings expense controls restructuring actions favorable currency impacts due movement dollar euro yen percentage net revenue segments experienced yearoveryear decrease change sga expense fiscal 2006 sga expense decreased slightly percentage net revenue fiscal 2005 net revenue growth higher growth sga due part tight companywide expense controls absolute basis sga spending increased 66 fiscal 2005 due primarily higher employee bonuses earned second half fiscal 2005 unfavorable currency impacts pension curtailment conjunction managements plan restructure certain operations discussed note 8 consolidated financial statements item 8 modified us retirement programs align closely industry practice effective january 1 2006 ceased pension accruals eliminated eligibility subsidized retiree medical program current employees meet defined criteria based age years service result recognized curtailment gain 199 million fourth quarter fiscal 2005 stemming elimination future benefit accruals affected employee group fiscal 2006 recognized additional curtailment gains included restructuring charges described information plan design changes see note 15 consolidated financial statements item 8 incorporated herein reference restructuring charges restructuring charges fiscal year 2006 158 million included net charge 233 million related trueups severance related restructuring charges restructuring plans 6 million termination benefits expense 3 million settlement curtailment loss nonus pension plans related fiscal 2005 restructuring plan approved board directors fourth quarter fiscal 2005 charges partially offset 46 million settlement gain us pension plans 24 million curtailment gain us retiree medical program 14 million adjustment reduce noncash stockbased compensation expense related fiscal 2005 restructuring plan approved fourth quarter fiscal 2005 fiscal 2005 restructuring plan designed simplify structure reduce costs place greater focus customers included original estimates 15300 positions eliminated fiscal 2005 restructuring plan subsequent initial estimate reduced number total positions eliminated 15200 approximately 14200 positions eliminated october 31 2006 connection restructuring plan including 3200 us employees elected take early retirement restructuring charges fiscal 2005 17 billion included 16 billion charge fiscal 2005 restructuring plan approved fourth quarter fiscal 2005 also total charges fiscal 2005 109 million related severance related costs associated termination approximately 1450 employees connection restructuring plan approved management third quarter fiscal 2005 employees restructuring plan terminated october 31 2005 initial restructuring amount paid substantially october 31 2006 restructuring costs fiscal 2004 mainly reflected certain charges relating fiscal 2003 restructuring plan meet recognition requirements fiscal 2003 well changes original estimates fiscal 2003 plan fiscal 2002 restructuring plan restructuring liabilities 638 million october 31 2006 composed primarily remaining cash payments made severance relating fiscal 2005 restructuring plan certain nonus severance benefits contract termination costs including canceled facility leases restructuring plans expect make majority remaining severance payments end fiscal 2007 settle nonseverance obligations end fiscal 2010 information restructuring charges see note 8 consolidated financial statements item 8 incorporated herein reference following table summarizes major restructuring activities aggregate fiscal years 2006 2005 2004 fiscal 2005 workforce rebalancing addition restructuring activities described fiscal 2005 incurred approximately 236 million workforce rebalancing charges resulting actions taken certain business segments severance related costs workforce rebalancing costs included segment results recorded costs six months ended april 30 2005 result workforce rebalancing actions reduced headcount approximately 3000 employees certain business segments october 31 2005 initial restructuring amount paid substantially october 31 2006 amortization purchased intangible assets decrease amortization expense fiscal 2006 compared fiscal 2005 due primarily decrease amortization expense related certain intangible assets associated prior acquisitions including compaq computer corporation compaq acquisition reached end amortization period partially offset increase amortization expense related primarily scitex vision ltd scitex peregrine systems inc peregrine outerbay technologies inc outerbay acquisitions fiscal year 2006 increase amortization expense fiscal 2005 compared fiscal 2004 due primarily amortization intangible assets related acquisitions triaton april 2004 synstar plc synstar october 2004 sac llc snapfish april 2005 well accelerated amortization related early termination certain acquired customer contracts information amortization purchased intangibles assets see note 7 consolidated financial statements item 8 incorporated herein reference acquisitionrelated charges acquisitionrelated charges fiscal 2004 consisted costs related compaq acquisition included primarily amortization deferred compensation mergerrelated inventory adjustments professional fees inprocess research development charges record inprocess research development iprd charges connection acquisitions accounted business combinations fully described note 6 consolidated financial statements item 8 fiscal 2006 2005 2004 recorded iprd charges 52 million 2 million 37 million respectively related acquisitions years interest net interest net increased 417 million fiscal 2006 fiscal 2005 increase fiscal 2006 resulted primarily higher net interest income prior year related higher shortterm interest rates fiscal 2006 net gains sales certain real estate properties lower interest expenses due lower average debt balances increase fiscal 2006 also attributable charge recorded fiscal 2005 estimated sales use taxes related interest associated preacquisition compaq sales use tax audits described interest net increased 154 million fiscal 2005 fiscal 2004 increase fiscal 2005 result primarily higher shortterm us interest rates increased interest income cash balances reduced cost associated foreign exchange hedges increased interest expense charge related sales use tax audit compaq prior acquisition hp fiscal years 19982002 partially offset increase interest net fiscal 2005 gains losses investments net gains fiscal 2006 resulted primarily gains sale investments offset part impairment charges investment portfolio net losses fiscal 2005 resulted primarily impairment charges equity investments publiclytraded privatelyheld investment portfolios partially offsetting losses gains attributable sale investments net gains fiscal 2004 attributable mainly realization contingent gain associated prior period divestiture realized gains sale investments excess impairment charges dispute settlement fiscal 2005 recorded net total 106 million dispute settlement charges reached legal settlement 141 million patent infringement case intergraph hardware technologies company intergraph recorded charge 116 million related crosslicense agreement intergraph products shipped prior years partially offsetting amount 10 million recovery individual related prior period settlement government canada fiscal 2004 recorded 70 million settlement costs dispute government canada settlement matters see note 17 consolidated financial statements item 8 incorporated herein reference provision taxes effective tax rate 138 323 167 fiscal 2006 2005 2004 respectively decrease overall tax rate fiscal 2006 fiscal 2005 related part income tax adjustments 599 million fiscal 2006 included net favorable tax adjustments 565 million income tax accruals result settlement irs examinations us income tax returns fiscal years 1993 1998 reductions net income tax accruals years related primarily resolution issues respect puerto rico manufacturing tax incentives export tax incentives issues involving nonus operations addition decrease overall tax rate 2006 fiscal 2005 attributable part 697 million income tax expense related items unique fiscal 2005 tax expense result primarily 792 million associated repatriation 145 billion american jobs creation act 2004 jobs act 76 million related additional distributions received foreign subsidiaries tax expenses offset part tax benefits 177 million resulting agreements irs governmental authorities increase overall tax rate fiscal 2005 fiscal 2004 related primarily tax expense associated repatriation 145 billion provisions jobs act partially offset increase tax benefit derived lower rates jurisdictions jobs act enacted october 22 2004 provided temporary 85 dividend received deduction certain foreign earnings repatriated oneyear period deduction resulted approximate 525 federal tax rate repatriated earnings fiscal 2004 tax rate benefited net favorable adjustments previously estimated tax liabilities 207 million decreased provision taxes significant favorable adjustments related resolution california state income tax audit net favorable revision estimated tax accruals upon filing 2003 us income tax return reduction taxes foreign earnings due change regulatory policy favorable adjustments offset part net effect smaller adjustments income tax liabilities various jurisdictions full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 13 consolidated financial statements item 8 incorporated herein reference segment information description products services well financial data segment found note 18 consolidated financial statements item 8 incorporated herein reference restated segment financial data fiscal years ended october 31 2005 2004 reflect changes hps organizational structure occurred beginning first quarter fiscal 2006 describe changes fully note 18 consolidated financial statements item 8 presented business segments form 10k based management organizational structure october 31 2006 distinct nature various businesses future changes organizational structure may result changes reportable segments disclosed discussions include results segments technology solutions group ess hps software structured beneath broader technology solutions group tsg describe results business segments tsg detail enterprise storage servers components weighted average net revenue growth business unit follows following fiscal years ended october 31 ess net revenue increased 4 fiscal 2006 fiscal 2005 constant currency basis ess net revenue increased 5 fiscal 2006 fiscal 2005 unfavorable currency impact fiscal 2006 due primarily movement dollar euro yen net revenue growth industry standard servers 6 fiscal 2006 compared fiscal 2005 driven strong unit growth blade revenue well increased option attach rates proliant server line storage net revenue increased 4 fiscal 2006 compared fiscal 2005 due continued strong performance midrange eva products within storage area networks offerings tape business decline moderated overall storage growth business critical systems net revenue decreased 4 fiscal 2006 compared fiscal 2005 decrease due primarily revenue declines parisc product line planned phase alpha server product line declines partially offset net revenue growth integrity servers posted strong net revenue growth reaching 37 business critical systems revenue mix fiscal 2006 20 prior fiscal year revenue mix integrity servers continue grow customers migrated parisc alpha products integrity server revenue fiscal 2006 also included revenue montecitobased integrity servers first shipped fourth quarter fiscal 2006 nonstop server net revenue decreased 2 fiscal 2006 prior year due primarily revenue decrease discontinued product line partially offset nonstop integrity product revenue growth fiscal 2006 ess earnings operations percentage net revenue increased 36 percentage points compared fiscal 2005 due primarily increase gross margin combined decrease operating expenses percentage net revenue improvement gross margin due primarily favorable unit mix improved discount management lower component costs increase partially offset continued mix shift towards industry standard servers within segment ongoing mix shift lowermargin integrity products within business critical systems decrease operating expense percentage net revenue fiscal 2006 resulted primarily increased revenue decreased operating expenses fiscal 2006 decreased operating expenses reflected benefits expense controls partially offset higher bonus accruals fiscal 2006 ess net revenue increased 11 fiscal 2005 fiscal 2004 constant currency basis ess net revenue increased 9 fiscal 2005 fiscal 2004 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period fiscal 2005 ess net revenue growth due primarily volume increases improved average selling prices asps industry standard servers result unit growth increased option attach rates proliant server line fiscal 2005 net revenue growth rate industry standard servers benefited certain internal execution problems unfavorably impacted business second half fiscal 2004 storage net revenue increased 5 fiscal 2005 compared fiscal 2004 due new product introductions contributed strong performance midrange eva products improved storage sales specialist coverage fiscal 2005 storage area networks sans net revenue improved revenue growth tape supplies businesses remained flat fiscal 2005 storage net revenue growth rates comparison growth rates prior year benefited business challenges unfavorably impacted storage business second half prior year business critical systems net revenue increased 1 fiscal 2005 compared fiscal 2004 integrity server net revenue growth period offset partially revenue decline risc product line planned revenue decline alpha server product line integrity server product line posted net revenue growth year representing 20 total business critical systems revenue mix 11 prior year fiscal 2005 hpux server net revenue increased 5 prior year nonstop server net revenue declined due mature installed base fiscal 2005 ess earnings operations percentage net revenue increased 38 percentage points compared fiscal 2004 due primarily combination decrease operating expenses percentage net revenue increase gross margin recorded 57 million workforce reduction costs first two quarters fiscal 2005 reduced operating expenses reflected benefits measures well management controls expense spending offset impact higher employee bonus accruals recorded second half year improvement margin due primarily higher option attach rates improved discount management offset partially continued mix shift towards industry standard servers within segment well ongoing mix shift lower margin products within business critical systems business integrity products assumed greater percentage business critical systems net revenue addition yearoveryear industry standard servers storage gross margins comparisons favorably impacted execution issues business challenges unfavorably affected performance industry standard servers storage second half fiscal 2004 hp services components weighted average net revenue growth business unit follows following fiscal years ended october 31 hps net revenue increased 1 fiscal 2006 fiscal 2005 constant currency basis hps net revenue increased 2 fiscal 2006 fiscal 2005 fiscal year 2006 unfavorable currency impact due primarily movement dollar euro yen net revenue technology services decreased 2 fiscal 2006 prior year due primarily declines related competitive pricing pressures changes mix platforms serviced decline moderated growth solutions business integrated support services fiscal 2006 6 growth managed services net revenue prior year driven mainly new business existing account growth continued focus making strategic portfolio decisions improve profitability net revenue consulting integration increased 2 fiscal 2006 prior year due primarily improved performance asia pacific europe middle east africa emea hps earnings operations percentage net revenue fiscal 2006 increased 22 percentage points operating margin increase result combination increase gross margin decrease operating expenses percentage net revenue gross margin increase hps due primarily continued focus cost structure improvement delivery efficiencies cost controls partially offset continued competitive environment solutions services business higher fiscal 2006 bonus accruals fiscal year 2006 improved efficiencies operating expense structure contributed decline operating expenses percentage net revenue compared fiscal year 2005 despite impact higher bonus accruals fiscal 2006 technology services operating margin fiscal 2006 continued benefit improved delivery efficiencies cost controls well portfolio decisions made improve profitability offset part impact ongoing portfolio mix shift higher margin proprietary support lower margin areas multivendor integrated support solution services managed services operating margin increased fiscal 2006 due delivery efficiencies reduced operating expenses strategic portfolio decisions made improve profitability consulting integration operating margin improved fiscal 2006 due efficient utilization consultants reduced operating expenses hps net revenue increased 12 fiscal 2005 fiscal 2004 constant currency basis hps net revenue increased 9 fiscal 2005 fiscal 2004 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period excluding acquisitions made since first quarter fiscal 2004 hps net revenue growth fiscal 2005 8 net revenue technology services increased 9 fiscal 2005 excluding acquisitions made since first quarter fiscal 2004 technology services net revenue growth fiscal 2005 4 fiscal 2005 managed services net revenue increased 24 prioryear result increase new contracts well additional revenue installed base large customer contracts full year contribution triaton acquisition completed april 2004 favorable currency impacts excluding triaton managed services net revenue growth 22 fiscal 2005 compared prior fiscal year net revenue consulting integration increased 13 fiscal 2005 prior year due strong order growth emea asia pacific well favorable impact currency additionally triaton acquisition added revenue growth hps earnings operations percentage net revenue fiscal 2005 declined 19 percentage points operating margin decline result combination decline gross margin offset partially decrease operating expense percentage net revenue gross margin decline hps reflected primarily competitive pricing pressures portfolio mix shifts within technology services well cost higher employee bonuses recorded second half fiscal year absorption workforce reduction costs first half year amounted 89 million technology services portfolio continues evolve higher margin proprietary support lower margin areas multivendor integrated support network environmental services managed services gross margin increased due improvements delivery cost management across installed base consulting integration gross margin improved due higher revenues continued operational improvement presales delivery cost management fiscal 2005 reductions efficiencies operating expense structure contributed decline operating expenses percentage net revenue despite 11 million workforce reduction costs first half fiscal year impact employee bonuses granted second half fiscal year software fiscal 2006 software net revenue increased 23 8 excluding impact acquisitions 24 constant currency basis fiscal 2005 unfavorable currency impact due primarily movement dollar euro yen fiscal 2006 peregrine acquired december 2005 represented 147 percentage points softwares net revenue growth fiscal 2006 net revenue associated peregrine acquisition included results openview management solutions software product line represented 20 percentage points growth weighted average net revenue basis fiscal 2006 opencall telecommunications solutions product line contributed remaining 3 percentage points weighted average net revenue increase fiscal 2006 openview net revenue growth result acquisitions increases support services contracts opencall net revenue growth result increased product sales licenses well larger contracts operating margin improvement fiscal 2006 111 percentage points compared fiscal 2005 result primarily decrease operating expense percentage net revenue increase gross margin decrease operating expense percentage net revenue attributable growth field selling costs research development marketing expenses attributable cost management efforts slower revenue growth cost reductions partially offset high integration costs associated acquisition peregrine well higher bonus accruals improvement gross margin driven increase revenue effective management support services costs openview opencall improved margins opencall product line resulting favorable product mix shift towards higher margin products fiscal 2005 software net revenue increased 15 12 without acquisitions fiscal 2004 13 constant currency basis favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period openview represented 12 percentage points net revenue growth weighted average basis fiscal 2005 opencall represented 3 percentage points growth weighted average net revenue basis fiscal 2005 openview net revenue growth result increases larger contracts license fees lesser extent acquisitions opencall net revenue growth result increase licenses operating margin improvement 119 percentage points fiscal 2005 compared fiscal 2004 result primarily increase gross margin decrease operating expense percentage net revenue gross margin improvement due higher margin rates core businesses favorable product mix due openview license revenue decrease operating expense percentage net revenue due slower growth operating expense attributable cost management efforts related principally decreased research development costs slower growth marketing costs percentage revenue despite employee bonus recorded second half fiscal 2005 acquisition integration costs personal systems group components weighted average net revenue growth business unit follows following fiscal years ended october 31 psg net revenue increased 9 fiscal 2006 fiscal 2005 constant currency basis psgs net revenue increased 10 fiscal 2006 unfavorable currency impact due primarily movement dollar euro yen fiscal 2006 net revenue increased across regions business unit exception handhelds due primarily overall volume increase 15 volume increase fiscal 2006 result strong growth consumer commercial markets significant improvement emerging markets net revenue notebook pcs increased 23 net revenue desktop pcs increased slightly fiscal 2006 prior year net revenue consumer clients commercial clients increased 19 4 respectively prior year revenue increases consumer commercial clients partially offset decrease handhelds revenue due decline personal digital assistant pda product market coupled product transition converged devices psg volume increase fiscal 2006 moderated decline 6 consumer client asps 7 commercial client asps asp declines due pricing decisions resulting lower component costs well competitive pricing pressures partially offset strong monitor attach rate commercial desktops pcs psg earnings operations percentage net revenue increased 14 percentage points fiscal 2006 fiscal 2005 result gross margin improvement decrease operating expenses percentage revenue gross margin improvement due primarily reduced supply chain costs warranty expense percentage net revenue combined component cost declines operating expense decline percentage net revenue result primarily increased net revenue continued efforts improving cost structure efficiency measures operating expenses decreased slightly fiscal 2006 due primarily savings expense controls partially offset higher bonus accruals fiscal 2006 psg net revenue increased 9 fiscal 2005 fiscal 2004 constant currency basis psgs net revenue increased 7 fiscal 2005 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period fiscal 2005 net revenue increased across regions result 13 volume increase particularly consumer commercial clients double digit unit growth asia pacific emea drove revenue increase fiscal 2005 net revenue increases notebook desktop pcs 16 3 respectively consumer clients commercial clients increased 10 7 respectively prior year revenue increases consumer commercial clients offset partially decline handhelds revenue performance digital entertainment products apple ipod hp added growth net revenue fiscal year fourth quarter fiscal 2005 discontinued reselling apple ipod psg volume increase moderated decline 4 asps consumer clients commercial clients declining 8 5 respectively fiscal 2005 declines notebook desktop asps offset slightly digital entertainment mix increase handheld asps decline asps due mainly changes notebook product lineup leveraged declines component costs competitive pressures consumer pcs psg earnings operations percentage net revenue increased 17 percentage points fiscal 2005 fiscal 2004 increase result gross margin improvement combined flat operating expenses percentage revenue gross margin improvement due primarily component cost declines product mix shift toward higher margin notebook pcs reduced warranty costs favorable currency impacts operating expense percentage revenue flat impact employee bonuses recorded second half year offset continued cost control measures imaging printing group components weighted average net revenue growth business unit follows following fiscal years ended october 31 ipg net revenue increased 6 fiscal 2006 fiscal 2005 constant currency basis net revenue increase 7 fiscal 2006 unfavorable currency impact due primarily movement dollar euro yen fiscal 2006 fiscal 2006 growth printer supplies net revenue reflected higher unit volumes result continued expansion printer hardware placements strong performance colorrelated products growth commercial hardware net revenue fiscal 2006 attributable mainly unit volume growth color laser printers multifunction printers lesser extent revenue large format printing products acquisition scitex november 1 2005 commercial consumer hardware impacted continued shift demand lowerpriced products strategic pricing decisions caused average revenue per unit decline fiscal 2006 ipg earnings operations percentage net revenue increased 13 percentage points compared fiscal 2005 result primarily increase gross margin decrease operating expense percentage net revenue gross margin increase due primarily improved margins supplies due product mix favorable portfolio mix shift hardware supplies partially offset unfavorable consumer hardware margins operating expense percentage net revenue fiscal 2006 declined due mainly realized savings cost structure initiatives coupled increased revenue partially offset higher bonus accruals ipg net revenue increased 4 fiscal 2005 fiscal 2004 constant currency basis net revenue increase 2 fiscal 2005 favorable currency impact due primarily weakening dollar euro yen first three quarters fiscal 2005 lesser extent fourth fiscal quarter dollar strengthened euro yen period fiscal 2005 growth supplies net revenue attributable primarily unit growth laserjet toner due primarily increased sales colorrelated products growth commercial hardware net revenue fiscal 2005 attributable unit volume growth color laserjet printers multifunction printers digital press business new product introductions added net revenue growth multifunction printers effect commercial hardware volume increase offset partially decreasing asps fiscal 2005 consumer hardware net revenue decreased decline result continuing decreases asps due strategic pricing actions continued mix shift demand lowerpriced products intense competition allinone single function inkjet printers ongoing decline scanner market fiscal 2005 ipg earnings operations percentage net revenue declined 23 percentage points due primarily decline gross margin percentage net revenue offset partially decline operating expenses percentage net revenue gross margin decline attributable mix shift within supplies inkjet cartridges laserjet toner lowend mix shift consumer hardware voluntary severance incentive charges strategic pricing actions operating expense percentage net revenue remained relatively flat yearoveryear slight increase spending due voluntary severance incentive charges taken first half fiscal year second half year employee bonus expense offsetting favorable impact headcount reductions lower program spending research development hp financial services hpfs net revenue decreased 1 fiscal 2006 compared fiscal 2005 net revenue decrease due primarily lower used equipment sales endoflease revenue largely offset higher mix leases classified operating leases fiscal 2006 30 percentage point decrease earnings operations percentage net revenue consisted decrease gross margin partially offset decrease operating expense percentage net revenue gross margin decline due primarily competitor pricing pressures higher mix lower margin operating lease assets lower recoveries bad debts partially offset lower credit losses decrease operating expenses percentage net revenue result cost savings achieved continued cost controls hpfs net revenue increased 11 fiscal 2005 compared fiscal 2004 net revenue increase result primarily higher used equipment sales higher mix leases classified operating leases fiscal 2005 35 percentage point increase earnings operations percentage net revenue consisted increase gross margin partially offset increase operating expense percentage net revenue gross margin increase resulted primarily lower bad debt expense partially offset higher mix lower margin operating lease assets decrease bad debt expense due part release fiscal 2005 40 million reserves related aged receivables emea since collected reserves established fourth quarter fiscal 2004 recoveries accounts latin america previously writtenoff lower credit losses reduction reserves resulting stronger portfolio risk profile also contributed decrease bad debt expense slight increase operating expense percentage net revenue fiscal 2005 result mainly 62 million net reduction revenue resulting reclassification certain leases operating leases capital leases reclassification result review leasing portfolio appropriate lease classification financing originations new financing originations represent amounts financing provided customers equipment related software services include intercompany activity decreased 3 fiscal 2006 fiscal 2005 decrease reflects lower financing associated hp product sales financing originations increased 7 fiscal 2005 fiscal 2004 due higher financing hp product sales favorable currency impact portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include financing receivables approximately 49 billion october 31 2006 50 billion october 31 2005 net equipment operating leases 15 billion october 31 2006 13 billion october 31 2005 disclosed note 10 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 400 million october 31 2006 october 31 2005 intercompany leases approximately 500 million october 31 2006 400 million october 31 2005 eliminated consolidation 2hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs portfolio assets october 31 2006 increased 4 october 31 2005 increase resulted favorable currency impact high level financing originations fourth quarter overall percentage portfolio assets reserved decreased due primarily writeoff assets covered specific reserves lower reserves resulting stronger portfolio risk profile hpfs funds operations mainly combination intercompany debt equity increase debt equity ratio reflects planned increase portfolio leverage corporate investments fiscal 2006 majority net revenue corporate investments related network infrastructure products grew 8 result continued increased sales gigabit ethernet switch products corporate investments loss operations fiscal 2006 decreased compared fiscal 2005 due primarily lower operating expenses related global alliances hp labs higher gross profits network infrastructure products decrease operating expenses due primarily savings resulting restructuring actions lower program spending expenses related global alliances hp labs contributed majority loss operations loss offset part operating profit network infrastructure product sales fiscal 2005 majority net revenue corporate investments related network infrastructure products increased 20 fiscal 2004 result continued product enhancements particularly gigabit ethernet switch products expenses related corporate development global alliances hp labs increased 5 fiscal 2005 fiscal 2004 increase due higher spending strategic initiatives incubation programs expenses contributed majority loss operations corporate investments offset part operating profit network infrastructure product sales corporate investments loss operations fiscal 2005 decreased slightly prior fiscal year due increase operating profit network infrastructure products result increasing operating margins offset partially increase operating expenses related corporate development global alliances hp labs increase gross margin due primarily favorable product mix lower trade discounts percentage net revenue network infrastructure products liquidity capital resources cash balances held numerous locations throughout world including substantial amounts held outside united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws hp provided united states federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states repatriation could result additional united states federal income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside united states would meet united states liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed financial condition sources uses cash total cash equivalents increased approximately 18 164 billion october 31 2006 139 billion end fiscal 2005 net earnings fiscal 2006 helped generate 114 billion cash operating activities cash generated operations fiscal 2006 funded 89 billion investing financing activities yearoveryear outstanding debt flat 52 billion october 31 2006 net 89 billion used investing financing activities fiscal 2006 included 61 billion share repurchases 20 billion net investments property plant equipment 17 billion prepayment common stock repurchased future periods 09 billion cash dividends 09 billion cash payments acquisitions cash flows financing activities benefited 25 billion proceeds relating employee stock plans cash position remains strong cash balances sufficient cover significant cash outlays expected fiscal 2007 associated acquisitions restructuring actions company bonus payments key performance metrics days sales outstanding accounts receivable dso measures average number days receivables outstanding dso calculated dividing accounts receivable net allowance doubtful accounts 90day average net revenue days supply inventory dos measures average number days procurement sale product dos calculated dividing inventory 90day average cost goods sold days purchases outstanding accounts payable dpo measures average number days accounts payable balances outstanding dpo calculated dividing accounts payable 90day average cost goods sold working capital requirements depend upon effective management cash conversion cycle represents effectively number days elapse day pay purchase raw materials collection cash customers cash conversion cycle sum dso dos less dpo 2006 compared 2005 operating activities net cash provided operating activities increased 33 billion fiscal 2006 increase cash flow operations due primarily higher earnings lower payments pension taxes partially offset higher payments restructuring costs investing activities net cash used investing activities increased 10 billion fiscal 2006 due primarily higher capital expenditures property plant equipment lower net proceeds maturities sales investments higher cash paid acquisitions financing activities net cash used financing activities increased 11 billion fiscal 2006 compared fiscal 2005 increase due primarily 25 billion increase repurchases common stock 17 billion prepayment common stock repurchased future periods expenditures partially offset 16 billion net increase financing activities resulting higher borrowings lower debt payments 14 billion increased proceeds issuance common stock related employee stock plans mainly due increased exercises employee stock options result higher market prices common stock fiscal 2006 repurchase shares common stock ongoing program manage dilution created shares issued employee benefit plans well repurchase shares opportunistically program authorizes repurchases open market private transactions fiscal 2006 completed share repurchases approximately 188 million shares approximately 190 million shares settled 61 billion included 2 million shares repurchased transactions executed fiscal 2005 settled fiscal 2006 compared approximately 150 million shares repurchased 148 million shares settled 35 billion fiscal 2005 addition shares repurchased received approximately 34 million shares aggregate price 11 billion prepaid variable share purchase program pvspp entered thirdparty investment bank first quarter 2006 pvspp prepaid 17 billion first quarter fiscal 2006 exchange right receive variable number shares common stock weekly one year period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 recorded payment prepaid stock repurchase stockholders equity section consolidated balance sheet included payment cash flows financing activities consolidated statement cash flows connection program investment bank purchased continue trade shares common stock open market time prepaid funds expended ratably term program pvspp prices purchase shares subject minimum maximum price determined advance repurchases completed program thereby effectively hedging repurchase price minimum maximum number shares could receive program 52 million shares 70 million shares respectively exact number shares repurchased based upon volume weighted average market price shares weekly settlement period subject minimum maximum price well regulatory limitations number shares permitted repurchase decrease shares outstanding settlement period shares physically received retire shares repurchased pvspp longer deem shares outstanding intend continue repurchase shares means manage dilution issuance shares employee benefit plans purchase shares opportunistically fiscal 2006 board directors authorized additional 100 billion future repurchases outstanding shares common stock october 31 2006 remaining authorization approximately 56 billion future share repurchases previously authorized share repurchases approximately 600 million also made pvspp remaining available balance exhausted second quarter fiscal 2007 2005 compared 2004 operating activities net cash provided operating activities increased 58 fiscal 2005 cash position benefited primarily improved cash conversion cycle decreased 9 days compared fiscal 2004 due primarily improved effectiveness accounts receivable collection efforts improved inventory management cash flow operations also benefited delayed payments restructuring costs company bonuses benefits offset partially higher pension contributions investing activities net cash used investing activities decreased 28 fiscal 2005 due primarily lower cash paid acquisitions reduced expenditures property plant equipment financing activities net cash used financing activities increased 21 fiscal 2005 compared fiscal 2004 increase due primarily maturity debt increased repurchases common stock cash payments offset partially increased proceeds issuance common stock related employee stock plans repaid 18 billion debt fiscal 2005 compared 03 billion fiscal 2004 primarily due maturity 15 billion us dollar global notes 03 billion mediumterm notes assumed compaq acquisition also proceeds issuance common stock employee plans 12 billion fiscal 2005 compared 06 billion fiscal 2004 mainly higher overall market prices fiscal 2005 led increased exercises employee stock options repurchase shares common stock ongoing program manage dilution created shares issued employee stock plans well repurchase shares opportunistically program authorizes repurchases open market private transactions completed share repurchases approximately 150 million shares 148 million shares settled 35 billion fiscal 2005 compared repurchases settlements approximately 172 million shares 33 billion fiscal 2004 addition november 2004 paid 51 million connection completion fiscal 2004 accelerated share repurchase program intend continue repurchase shares means manage dilution issuance shares employee benefit plans repurchase shares opportunistically fiscal 2005 board directors hp authorized additional 40 billion future repurchases outstanding shares common stock october 31 2005 remaining authorization approximately 34 billion future share repurchases liquidity previously discussed use cash generated operations primary source liquidity since believe internally generated cash flows sufficient support business operations capital expenditures payment stockholder dividends addition level discretionary investments share repurchases able supplement near term liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities overall cost capital outstanding debt remained 52 billion october 31 2006 compared october 31 2005 bearing weighted average interest rates 51 47 respectively shortterm borrowings increased 27 billion october 31 2006 18 billion october 31 2005 increase due primarily reclassification longterm shortterm 20 billion us dollar global notes 10 billion matured december 2006 10 billion mature july 2007 increase offset partially repayment 200 million series mediumterm notes december 2005 750 million euro mediumterm notes july 2006 well decrease 18 million commercial paper fiscal 2006 issued repaid approximately 54 billion commercial paper october 31 2006 164 million total borrowings collateralized certain financing receivable assets hp hpfs financing business issued vast majority total outstanding debt like financial services companies hpfs business model assetintensive nature therefore debtdependent business segments october 31 2006 hpfs approximately 72 billion net portfolio assets included shortand longterm financing receivables operating lease assets revolving trade receivablesbased facilities permitting us sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 477 million october 31 2006 approximately 150 million available programs fiscal 2006 another facility subject maximum amount 525 million euros euro program terminated october 31 2006 sold approximately 86 billion trade receivables fiscal 2006 including approximately 59 billion euro program fees associated facilities generally differ materially cash discounts offered customers previous alternative prompt payment programs following shortterm longterm financings available need additional liquidity may 2006 filed shelf registration statement securities exchange commission sec enable us offer sell time one offerings debt securities common stock preferred stock depositary shares warrants may 23 2006 issued 10 billion floating rate global notes registration statement used portion proceeds received repay 525 euro mediumterm notes due july 2006 maturity used remainder net proceeds general corporate purposes securities issuable 2002 shelf registration statement include notes due dates nine months issuance lines credit uncommitted available primarily various foreign subsidiaries april 2005 increased us commercial paper program 60 billion 30 billion us credit facility expiring december 2010 credit facility senior unsecured committed borrowing arrangement primarily support us commercial paper program ability us commercial paper outstanding balance exceeds 30 billion committed credit facility subject number factors including liquidity conditions business performance credit risk evaluated three independent rating agencies based upon publicly available information well information obtained ongoing discussions standard poors ratings services moodys investors service fitch ratings currently rate senior unsecured long term debt a3 shortterm debt a1 prime1 respectively rating downgrade triggers would accelerate maturity material amount debt however downgrade credit rating would increase cost borrowings credit facilities also downgrade credit rating could limit case significant downgrade preclude ability issue commercial paper current programs occurs would seek alternative sources funding including credit facility issuance notes existing shelf registration statements euro mediumterm note programme december 15 2006 repaid 10 billion global notes due december 2006 maturity contractual obligations impact contractual obligations october 31 2006 expected liquidity cash flow future periods follows 1amounts represent expected cash payments longterm debt include fair value adjustments discounts included longterm debt approximately 52 million capital lease obligations secured certain equipment 2purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty purchase obligations related principally cost sales inventory items purchase obligation includes settlement agreement emc corporation emc pursuant agreed pay 325 million net amount valuation emcs claims us less valuation claims emc satisfy purchase resale internal use complementary emc products equal installments 65 million next five years first installment paid august 29 2005 october 31 2006 remaining payment emc 260 million addition emc purchases products fiveyear period required purchase equivalent amount additional products services emc aggregate 108 million november 2006 completed acquisition mercury aggregate purchase price approximately 48 billion consisting cash paid outstanding stock value vested employee stock options estimated direct transaction costs acquisition combine mercurys application management application delivery governance capabilities broad portfolio management solutions funding commitments fiscal 2006 made approximately 270 million 31 million contributions pension plans us nonqualified plan participants respectively paid 67 million cover benefit claims postretirement benefit plans fiscal 2007 expect contribute approximately 120 million pension plans approximately 15 million cover benefit payments us nonqualified plan participants expect pay approximately 80 million cover benefit claims postretirement benefit plans funding policy contribute cash pension plans meet least minimum contribution requirements established local government funding taxing authorities expect use contributions made postretirement plans primarily payment retiree health claims incurred fiscal year make significant cash payment associated fiscal 2006 bonus programs bonus programs designed reward employees upon achievement annual performance objectives bonuses calculated based formula targets set beginning fiscal year formula targets approved board directors fiscal 2006 substantially outperformed targets result bonus payout first quarter fiscal 2007 significantly larger prior years resulting corresponding reduction cash flow operations quarter bonus accrued expensed earned throughout fiscal 2006 also reducing cash flow operation fiscal 2007 significant payments associated restructuring plans result approved restructuring plans expect future cash expenditures approximately 640 million majority amount recorded consolidated balance sheet october 31 2006 expect make cash payments approximately 549 million fiscal 2007 remaining amount approximately 91 million next five fiscal years pending acquisitions december 2006 agreed acquire knightsbridge solutions holdings corporation privately held services company specializing information management areas business intelligence data warehousing data integration information quality transaction subject certain closing conditions expected completed first quarter fiscal 2007 also december 2006 agreed acquire bitfone corporation privately held global software services company develops software solutions mobile device management wireless industry transaction subject certain closing conditions expected completed february 2007 offbalance sheet arrangements part ongoing business participate transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes october 31 2006 involved material unconsolidated spes indemnifications ordinary course business enter contractual arrangements may agree indemnify thirdparty arrangement losses incurred relating services perform behalf us losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including public education sectors offerings span •personal computing access devices •imaging printingrelated products services •enterprise information technology infrastructure including enterprise storage server technology software optimizes business technology investments •multivendor customer services including technology support maintenance consulting integration outsourcing services seven business segments enterprise storage servers ess hp services hps hp software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments ess hps hp software structured beneath broader technology solutions group tsg operating segment sometimes provide financial data aggregating segments within tsg order provide supplementary view business operating framework manage businesses guide strategies based disciplined management three business levers targeted growth operational efficiency capital strategy although made progress towards goals recent periods still many areas believe improve implement operating framework focused following initiatives •we engaged process examining every function every business company order optimize efficiency reduce cost •we process consolidating 85 data centers worldwide six stateoftheart centers three us cities consolidating several hundred real estate locations worldwide fewer core sites order reduce spending real estate costs •we reinvesting portion cost savings initiatives expanding sales force aligning resources order build market share emerging markets expanding coverage drive growth mature markets •we developing training programs sales forces designed enhance ability provide solutions customers build customer loyalty •we building expanding services organization support technology businesses provide comprehensive solutions customers •we developing global delivery structure take advantage regions advanced technical expertise available lower costs •we expanding ethics compliance programs enhancing corporate governance ensure actions consistent hps values •we repurchasing shares common stock ongoing program manage dilution created shares issued employee stock plans well repurchase shares opportunistically continue grow business organically strategic acquisitions fiscal 2007 acquired ten companies among two largest mercury interactive corporation mercury opsware inc expect continue make strategic acquisitions periodically future february 2007 announced decision modify us defined benefit pension plan remaining number us employees still accruing benefits program effective january 1 2008 employees cease accruing pension benefits instead receive increased 401k match 6 percent 4 percent eligible earnings final pension benefit amount calculated based pay service december 31 2007 addition future eligibility pre2003 hp retiree medical program limited employees within five years satisfying programs eligibility criteria june 30 2007 actions reduced us defined benefit postretirement plan obligations result recorded onetime curtailment gain 542 million fiscal 2007 conjunction announcement provided eligible affected employees opportunity participate 2007 us enhanced early retirement program 2007 eer recorded restructuring charge 354 million fiscal 2007 total 3080 employees participated 2007 eer including 595 persons included previous restructuring programs voluntarily left company since november 30 2006 employees participated 2007 eer left company may 31 2007 information see notes 8 15 consolidated financial statements item 8 incorporated herein reference terms execution translated financial performance following provides overview key fiscal 2007 financial metrics cash equivalents october 31 2007 totaled 113 billion decrease 51 billion october 31 2006 balance 164 billion decrease fiscal 2007 related primarily 109 billion paid repurchase common stock 68 billion net cash paid business acquisitions 25 billion net investments property plant equipment partially offset 96 billion cash provided operations 31 billion proceeds issuance common stock employee stock plans 26 billion net increase debt commercial paper intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements delivered elements standalone value fair values undelivered elements known uncertainties regarding customer acceptance resolved customernegotiated refund return rights affecting revenue recognized delivered elements changes allocation sales price elements might impact timing revenue recognition would change total revenue recognized contract recognize revenue work progresses certain fixedprice contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue result revisions cost estimates income period facts give rise revision become known record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience number customers actually redeem incentive restructuring engaged may continue engage restructuring actions require management utilize significant estimates related expenses severance employee separation costs realizable values assets made redundant obsolete lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 8 consolidated financial statements item 8 incorporated herein reference stockbased compensation expense effective november 1 2005 adopted fair value recognition provisions statement financial accounting standards sfas 123 revised 2004 sharebased payment sfas 123r using modified prospective transition method therefore restated prior periods results method recognize stockbased compensation expense sharebased payment awards granted november 1 2005 granted prior yet vested november 1 2005 accordance sfas 123r fair value recognition provisions sfas 123r recognize stockbased compensation expense net estimated forfeiture rate recognize compensation cost shares expected vest straightline basis requisite service period award prior sfas 123r adoption accounted sharebased payment awards accounting principles board opinion 25 accounting stock issued employees apb 25 accordingly generally recognized compensation expense granted options discounted exercise price determining appropriate fair value model calculating fair value sharebased payment awards require subjective assumptions including expected life sharebased payment awards stock price volatility management determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility therefore expected volatility fiscal years 2007 2006 2005 based marketbased implied volatility assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application management judgment result factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period see note 2 consolidated financial statements item 8 discussion stockbased compensation taxes earnings calculate current deferred tax provisions based estimates assumptions could differ actual results reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third fourth quarters subsequent year us federal state provisions respectively recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would increase valuation allowance make corresponding charge earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments hp undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2019 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states sixty foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges determining income tax expense potential assessments recording related assets liabilities requires significant management judgments estimates evaluate income tax contingencies accordance sfas 5 accounting contingencies believe reserve income tax liabilities including related interest adequate relation potential additional tax assessments amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve income tax liabilities attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations material adjustments likely occur fiscal years major ongoing audits internal revenue service irs closed addition tax contingency reserve includes certain amounts potential tax assessments preacquisition tax years acquired companies released impact carrying value goodwill attributable acquired company allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers also record specific provisions individual accounts become aware customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position circumstances related customers change would adjust estimates recoverability receivables either upward downward annual provision doubtful accounts averaged approximately 001 net revenue last three fiscal years using thirdparty credit risk model october 31 2007 50basispoint deterioration weightedaverage default probabilities significant customers would resulted approximately 84 million increase trade allowance end fiscal year 2007 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates valuation goodwill indefinitelived purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill intangible assets provisions sfas 142 require perform twostep impairment test goodwill first step compare fair value reporting unit carrying value reporting units consistent reportable segments identified note 18 consolidated financial statements item 8 determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference sfas 142 also requires fair value purchased intangible assets indefinite lives estimated compared carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2007 result impairment charge excess fair value carrying value hps reporting units august 1 2007 annual testing date ranged approximately 520 million approximately 46 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 360 million approximately 41 billion hps reporting units warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates service delivery costs postsales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty provision averaged approximately 34 annual net product revenue actual annual warranty costs averaged approximately 32 annual net product revenue retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates salary growth longterm return plan assets medical cost trend rates base discount rate assumption current investment yields high quality fixed income investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment well target asset allocations beginning fiscal 2008 implemented liabilitydriven investment strategy us defined benefit pension plan frozen december 31 2007 currently overfunded part strategy transitioned equity allocation predominantly fixed income assets expected return plan assets used calculating net benefit cost reduced 83 63 fiscal 2008 reflect changes asset allocation policy medical cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends actual results differ assumptions accumulated amortized generally estimated future working life plan participants major assumptions vary plan weightedaverage rates used set forth note 15 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved direction last several years fiscal 2007 changes weightedaverage rates would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 33 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 51 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 21 million recent accounting pronouncements july 2006 financial accounting standards board fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 fin 48 clarifies accounting uncertainty income taxes prescribing recognition threshold tax position required meet recognized financial statements also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 required adopted us first quarter fiscal 2008 cumulative effects applying fin 48 recorded adjustment retained earnings beginning period adoption additionally may 2007 fasb published fasb staff position fin 481 definition settlement fasb interpretation 48 fsp fin 481 fsp fin 481 amendment fin 48 clarifies enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits fsp fin 481 effective upon initial adoption fin 48 therefore adopted us first quarter fiscal 2008 still evaluating impact adoption fin 48 fsp fin 481 consolidated financial statements estimate adoption fin 48 fsp fin 481 result net increase retained earnings range 500 million 900 million estimate subject revision management completes analysis september 2006 fasb issued statement financial accounting standards sfas 157 fair value measurements sfas 157 sfas 157 provides guidance using fair value measure assets liabilities also responds investors requests expanded information extent companies measure assets liabilities fair value information used measure fair value effect fair value measurements earnings sfas 157 applies whenever standards require permit assets liabilities measured fair value expand use fair value new circumstances sfas 157 effective financial statements issued fiscal years beginning november 15 2007 required adopted us first quarter fiscal 2009 currently evaluating effect adoption sfas 157 consolidated results operations financial condition yet position determine effects september 2006 fasb issued sfas 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r sfas 158 sfas 158 requires funded status defined benefit postretirement plans recognized companys balance sheet changes funded status reflected comprehensive income effective fiscal years ending december 15 2006 adopted fiscal 2007 see note 15 consolidated financial statements item 8 effect applying provision consolidated financial statements sfas 158 also requires companies measure funded status plan date fiscal year end effective fiscal years ending december 15 2008 expect adopt measurement provisions sfas 158 effective october 31 2009 february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 sfas 159 sfas 159 expands use fair value accounting affect existing standards require assets liabilities carried fair value sfas 159 company may elect use fair value measure accounts loans receivable availableforsale heldtomaturity securities equity method investments accounts payable guarantees issued debt eligible items include firm commitments financial instruments otherwise would recognized inception noncash warranty obligations warrantor permitted pay third party provide warranty goods services use fair value elected upfront costs fees related item must recognized earnings cannot deferred debt issuance costs fair value election irrevocable generally made instrumentbyinstrument basis even company similar instruments elects measure based fair value adoption date unrealized gains losses existing items fair value elected reported cumulative adjustment beginning retained earnings subsequent adoption sfas 159 changes fair value recognized earnings sfas 159 effective fiscal years beginning november 15 2007 required adopted us first quarter fiscal 2009 currently determining whether fair value accounting appropriate eligible items cannot estimate impact sfas 159 consolidated results operations financial condition june 2007 fasb also ratified eitf 073 accounting nonrefundable advance payments goods services received use future research development activities eitf 073 eitf 073 requires nonrefundable advance payments goods services used rendered future research development activities deferred capitalized recognized expense goods delivered related services performed eitf 073 effective prospective basis fiscal years beginning december 15 2007 adopted us first quarter fiscal 2009 expect adoption eitf 073 material effect consolidated results operations financial condition december 2007 fasb issued sfas 141 revised 2007 business combinations sfas 141r sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r effective beginning entitys fiscal year begins december 15 2008 adopted us first quarter fiscal 2010 currently evaluating potential impact adoption sfas 141r consolidated results operations financial condition december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51 sfas 160 sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parents ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective beginning entitys fiscal year begins december 15 2008 adopted us first quarter fiscal 2010 currently evaluating potential impact adoption sfas 160 consolidated results operations financial condition addition sfas 158 adoption mentioned adopted following accounting standards fiscal 2007 none material effect consolidated results operations period financial condition end period •sfas 154 accounting changes error corrections •staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements •eitf 055 accounting early retirement postemployment programs specific features terms specified altersteilzeit early retirement arrangements •eitf 069 reporting change elimination previously existing difference fiscal year end parent company consolidated entity reporting period investor equity method investee results operations results operations dollars percentage net revenue follows following fiscal years ended october 31 1cost products cost services financing interest 2certain reclassifications made prior year amounts order conform current year presentation net revenue components weightedaverage net revenue growth compared prioryear periods follows following fiscal years ended october 31 fiscal 2007 hp net revenue increased approximately 14 prior year period 10 constant currency basis favorable currency impact fiscal 2007 due primarily movement dollar euro us net revenue 348 billion fiscal 2007 increase 8 prior year international net revenue increased 17 695 billion psg doubledigit net revenue growth across regions result overall unit volume increases 28 unit volume increases resulted strong growth notebooks significant improvements emerging markets impact increases partially offset declines average selling prices asps commercial consumer clients 5 1 respectively ipg net revenue growth fiscal 2007 due mainly increased unit volumes printer supplies resulting continued expansion printer hardware placements strong performance supplies colorrelated products ess net revenue growth fiscal 2007 result primarily strong blade revenue unit growth industry standard servers business increased option attach rates proliant server line continued strong performance midrange eva products growth commercial storage area networks revenue increases integrity servers ess growth partially moderated revenue declines tape business highend arrays parisc alpha server product lines fiscal 2007 net revenue growth hp software fiscal 2007 due primarily growth openview business result mercury acquisition increases revenue license support contracts hps net revenue fiscal 2007 increased due primarily favorable currency impacts revenue increases outsourcing services driven existing accounts growth new business revenue increases consulting integration associated acquisitions made fiscal 2007 hpfs net revenue increase fiscal 2007 due primarily operating lease growth higher endoflease activity fiscal 2006 hp net revenue increased approximately 6 prior year period 7 constant currency basis unfavorable currency impact fiscal 2006 due primarily movement dollar euro yen us net revenue 322 billion fiscal 2006 increase 6 prior year international net revenue increased 6 594 billion psg net revenue increased across regions result 15 volume increase volume increase resulted strong growth consumer commercial markets significant improvement emerging markets partially offset 6 7 declines asps consumer commercial clients respectively ipg net revenue growth fiscal 2006 due mainly increased shipment volumes printer supplies resulting continued expansion printer hardware placements strong performance colorrelated products ess net revenue growth result primarily strong unit growth industry standard servers business blade revenue growth increased option attach rates proliant server line continued strong performance midrange eva products within storage business revenue increases integrity servers ess growth moderated revenue declines tape business parisc alpha server product lines net revenue growth hp software fiscal 2006 due primarily growth openview business result peregrine acquisition increase support service contracts hps net revenue increased fiscal 2006 due primarily revenue increases management services driven new business existing account growth offset declines technology services business resulting competitive pricing pressures changes mix platforms serviced hpfs net revenue decline fiscal 2006 due primarily lower used equipment sales stockbased compensation expense see note 2 consolidated financial statements item 8 incorporated herein reference gross margin weightedaverage components change gross margin compared prioryear periods follows following fiscal years ended october 31 total company gross margin increased slightly fiscal 2007 fiscal 2006 improvement hp software gross margin fiscal 2007 due primarily favorable change revenue mix driven inclusion revenue mercury licenses support typically higher gross margin offerings within segment hps gross margin increased fiscal 2007 fiscal 2006 due primarily continued focus cost structure improvements delivery efficiencies cost controls gross margin increase partially offset impact continued competitive pricing environment fiscal 2007 ess contributed unfavorably total companys weightedaverage change gross margin ess gross margin remained stable stability due primarily improved cost management offset ongoing mix shift lowermargin integrity products within business critical systems continued mix shift towards industry standard servers hpfs gross margin decline fiscal 2007 caused primarily increased bad debt expenses lower bad debt recoveries well lower margins leases used equipment sales fiscal 2007 psg contributed unfavorably total companys weightedaverage change gross margin result higher growth segments however psg gross margin increased primarily result component cost declines improvements supply chain costs per unit partially offset asp declines fiscal 2007 ipg gross margin decreased due primarily unfavorable hardware margins increased costs associated new product introductions change product mix total company gross margin increased fiscal 2006 compared fiscal 2005 improvement ess gross margin fiscal 2006 due primarily favorable unit mix improved discount management lower component costs hps gross margin increase driven mainly continued focus cost structure improvement delivery efficiencies cost controls impact partially offset continued competitive environment solutions services business higher fiscal 2006 bonus accruals ipg gross margin increased fiscal 2006 due primarily improved supplies margins favorable portfolio mix shift hardware supplies partially offset unfavorable consumer hardware margins improvement hp software gross margin fiscal 2006 due primarily increase revenue effective management support services costs openview opencall gross margin improvement psg resulted primarily reduced warranty expense supply chain costs percentage revenue component cost declines hpfs gross margin impacted unfavorably fiscal 2006 due primarily competitor pricing pressures higher mix lower margin operating lease assets lower recoveries bad debts partially offset lower credit losses fiscal 2006 operating expenses research development total research development rd expense increased fiscal 2007 due primarily additional rd expense result mercury acquisition first quarter fiscal 2007 percentage net revenue major segments experienced yearoveryear decrease rd expense fiscal 2007 total rd expense increased fiscal 2006 due primarily higher bonus accruals stockbased compensation expense impact partially offset expense controls cost savings restructuring actions percentage net revenue major segments experienced yearoveryear decrease rd expense fiscal 2006 selling general administrative total sga expense increased fiscal 2007 due primarily additional expense result acquisition mercury first quarter fiscal 2007 unfavorable currency impacts related movement dollar euro additional investments sales forces percentage net revenue ess hps psg ipg segments experienced yearoveryear decrease sga expense fiscal 2007 hp software experienced yearoveryear increase sga expense total sga expense increased slightly fiscal 2006 higher bonus accruals stockbased compensation expenses well increased marketing spending offset part savings expense controls restructuring actions favorable currency impacts due movement dollar euro yen percentage net revenue segments experienced yearoveryear decrease change fiscal 2006 amortization purchased intangible assets increase amortization expense fiscal 2007 compared fiscal 2006 due primarily amortization expense related acquisition mercury first quarter fiscal 2007 increase partially offset decrease amortization expense related certain intangible assets associated prior acquisitions including compaq computer corporation compaq acquisition reached end amortization period decrease amortization expense fiscal 2006 compared fiscal 2005 due primarily decrease amortization expense related certain intangible assets associated prior acquisitions including compaq acquisition reached end amortization period decrease partially offset increase amortization expense related primarily acquisitions scitex vision ltd scitex peregrine systems inc peregrine outerbay technologies inc outerbay fiscal year 2006 information amortization purchased intangibles assets see note 7 consolidated financial statements item 8 incorporated herein reference inprocess research development charges record inprocess research development iprd charges connection acquisitions accounted business combinations fully described note 6 consolidated financial statements item 8 fiscal 2007 2006 2005 recorded iprd charges 190 million 52 million 2 million respectively related acquisitions years increase iprd fiscal 2007 due primarily acquisition mercury first quarter fiscal 2007 restructuring charges restructuring charges fiscal 2007 387 million included 354 million expenses related severance benefit costs associated employees elected participate 2007 eer net charge 33 million relating adjustments fiscal 2005 2003 2002 2001 restructuring programs restructuring charges fiscal year 2006 158 million included net charge 233 million related trueups severance related restructuring charges restructuring plans 6 million termination benefits expense 3 million settlement curtailment loss nonus pension plans related fiscal 2005 restructuring plan approved board directors fourth quarter fiscal 2005 charges partially offset 46 million settlement gain us pension plans 24 million curtailment gain us retiree medical program 14 million adjustment reduce noncash stockbased compensation expense related fiscal 2005 restructuring plan approved fourth quarter fiscal 2005 restructuring charges fiscal 2005 17 billion included 16 billion charge fiscal 2005 restructuring plan approved fourth quarter fiscal 2005 fiscal 2005 restructuring plan designed simplify structure reduce costs place greater focus customers initially estimated 15300 positions would eliminated fiscal 2005 restructuring plan subsequent initial estimate reduced number total positions eliminated 14985 substantially completed eliminating positions october 31 2007 remaining charge fiscal 2005 109 million related severance related costs associated termination approximately 1450 employees connection restructuring plan approved management third quarter fiscal 2005 employees restructuring plan terminated october 31 2005 paid costs associated fiscal 2005 third quarter restructuring plan january 31 2007 information restructuring charges see note 8 consolidated financial statements item 8 incorporated herein reference workforce rebalancing part ongoing business operations incur workforce rebalancing charges severance related costs within certain business segments workforce rebalancing activities considered part normal operations continue optimize cost structure included business segment results expect incur additional workforce rebalancing costs future pension curtailments pension settlements net fiscal 2007 recognized net gain pension curtailments settlements 517 million relating primarily 542 million curtailment gain associated modification us defined benefit pension plan postretirement benefit plan curtailment gain offset partially net settlement losses related pension plan design changes conjunction managements plan restructure certain operations modified us retirement programs align closely industry practice effective january 1 2006 ceased pension accruals eliminated eligibility subsidized retiree medical program employees meet defined criteria based age years service result recognized curtailment gain 199 million fiscal 2005 stemming elimination future benefit accruals affected employee group information plan design changes see note 15 consolidated financial statements item 8 incorporated herein reference interest net interest net decreased 162 million fiscal 2007 fiscal 2006 decrease due primarily higher interest expense resulting higher average debt balances interest net increased 523 million fiscal 2006 fiscal 2005 increase fiscal 2006 resulted primarily higher net interest income prior year related higher shortterm interest rates fiscal 2006 net gains sales certain real estate properties lower interest expense due lower average debt balances increase fiscal 2006 also attributable net 106 million dispute settlement charge related interest charge recorded fiscal 2005 fiscal 2005 reached legal settlement 141 million patent infringement case intergraph hardware technologies company intergraph recorded charge 116 million related crosslicense agreement intergraph products shipped prior years partially offsetting amount 10 million recovery individual related prior period settlement government canada gains losses investments net gains investment fiscal 2007 fiscal 2006 resulted primarily gains sale equity investments offset part impairment charges investment portfolio net losses fiscal 2005 resulted primarily impairment charges equity investments publiclytraded privatelyheld investment portfolios partially offsetting losses gains attributable sale investments provision taxes effective tax rates 208 138 323 fiscal 2007 2006 2005 respectively increase overall tax rate fiscal 2007 fiscal 2006 related part favorable income tax adjustments 599 million recorded fiscal 2006 included net favorable tax adjustments 565 million income tax accruals result settlement irs examinations us income tax returns fiscal years 1993 1998 reductions net income tax accruals years related primarily resolution issues respect puerto rico manufacturing tax incentives export tax incentives issues involving nonus operations addition decrease overall tax rate 2006 fiscal 2005 attributable part 697 million income tax expense related items unique fiscal 2005 tax expense result primarily 792 million associated repatriation 145 billion american jobs creation act 2004 jobs act 76 million related additional distributions received foreign subsidiaries tax expenses offset part tax benefits 177 million resulting agreements irs governmental authorities jobs act enacted october 22 2004 provided temporary 85 dividend received deduction certain foreign earnings repatriated oneyear period deduction resulted approximate 525 federal tax rate repatriated earnings full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 13 consolidated financial statements item 8 incorporated herein reference segment information description products services well financial data segment found note 18 consolidated financial statements item 8 incorporated herein reference realigned segment financial data fiscal years ended october 31 2006 2005 reflect changes hps organizational structure occurred beginning first quarter fiscal 2007 describe changes fully note 18 consolidated financial statements item 8 presented business segments annual report form 10k based management organizational structure october 31 2007 distinct nature various businesses future changes organizational structure may result changes reportable segments disclosed discussions include results segments technology solutions group ess hps hp software structured beneath broader technology solutions group tsg describe results business segments tsg detail enterprise storage servers components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 constant currency basis ess net revenue increased 5 fiscal 2007 fiscal 2006 favorable currency impact fiscal 2007 due primarily movement dollar euro industry standard servers revenue grew 14 fiscal 2007 compared fiscal 2006 result strong growth blade revenue units well increased option attach rates proliant server line storage net revenue increased 4 fiscal 2007 compared fiscal 2006 increase driven primarily midrange eva products commercial products within storage area networks offerings well improved revenue growth storage software increase partially moderated revenue declines tape business highend arrays business critical systems net revenue decreased 3 fiscal 2007 compared fiscal 2006 decrease due primarily revenue declines parisc product line planned phase alpha server product line declines partially offset strong net revenue growth integrity servers represented 64 business critical systems revenue mix fiscal 2007 37 fiscal 2006 expect revenue mix integrity servers continue grow customers migrate parisc alpha products fiscal 2007 ess earnings operations percentage net revenue increased 21 percentage points compared fiscal 2006 due primarily decrease operating expenses percentage net revenue gross margin remained stable fiscal 2007 compared fiscal 2006 due primarily improved cost management improved cost management offset ongoing mix shift lowermargin integrity products within business critical systems continued mix shift towards industry standard servers decrease operating expense percentage net revenue fiscal 2007 due primarily cost structure improvements constant currency basis ess net revenue increased 5 fiscal 2006 fiscal 2005 unfavorable currency impact fiscal 2006 due primarily movement dollar euro yen net revenue growth industry standard servers 6 fiscal 2006 compared fiscal 2005 driven strong unit growth blade revenue well increased option attach rates proliant server line storage net revenue increased 4 fiscal 2006 compared fiscal 2005 due continued strong performance midrange eva products within storage area networks offerings tape business decline moderated overall storage growth business critical systems net revenue decreased 4 fiscal 2006 compared fiscal 2005 decrease due primarily revenue declines parisc product line planned phase alpha server product line declines partially offset net revenue growth integrity servers posted strong net revenue growth reaching 37 business critical systems revenue mix fiscal 2006 20 prior fiscal year revenue mix integrity servers continued grow customers migrated parisc alpha products integrity server revenue fiscal 2006 also included revenue montecitobased integrity servers first shipped fourth quarter fiscal 2006 nonstop server net revenue decreased 2 fiscal 2006 prior year due primarily revenue decrease discontinued product line partially offset nonstop integrity product revenue growth fiscal 2006 ess earnings operations percentage net revenue increased 36 percentage points compared fiscal 2005 due primarily increase gross margin combined decrease operating expenses percentage net revenue improvement gross margin due primarily favorable unit mix improved discount management lower component costs increase partially offset continued mix shift towards industry standard servers within segment ongoing mix shift lowermargin integrity products within business critical systems decrease operating expense percentage net revenue fiscal 2006 due primarily efficient expense management hp services components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 1reflects name change managed services outsourcing services effective fiscal 2007 constant currency basis hps net revenue increased 3 fiscal 2007 fiscal 2006 fiscal 2007 favorable currency impact due primarily movement dollar euro net revenue technology services increased 4 fiscal 2007 prior year due primarily favorable currency impacts growth solution support services extended warranty revenue impact partially offset competitive pricing pressures revenue erosion installed base contracts net revenue outsourcing services increased 10 fiscal 2007 prior year increase driven mainly favorable currency impacts existing account growth new business partially offset installed base revenue erosion pricing pressures net revenue consulting integration increased 9 fiscal 2007 prior year due mainly acquisitions made fiscal 2007 favorable currency impacts hps earnings operations percentage net revenue fiscal 2007 increased 14 percentage points operating margin increase result increase gross margin decrease operating expenses percentage net revenue gross margin increase fiscal 2007 due primarily continued focus cost structure improvements generated delivery efficiencies cost controls impact partially offset impact continued competitive pricing environment fiscal 2007 continued efficiency improvements operating expense structure contributed decline operating expenses percentage net revenue compared prior year technology services operating margin fiscal 2007 continued benefit improved delivery efficiencies cost controls impact offset part impact ongoing portfolio mix shift higher margin proprietary support lower margin areas solution services outsourcing services operating margin increased fiscal 2007 due primarily improved delivery efficiencies reduced operating expenses partially offset contractual pricing pressure consulting integration operating margin decreased fiscal 2007 due mainly increased customer project losses acquisition related costs impact partially offset efficient utilization consultants operating expense improvement constant currency basis hps net revenue increased 2 fiscal 2006 fiscal 2005 fiscal 2006 unfavorable currency impact due primarily movement dollar euro yen net revenue technology services decreased 3 fiscal 2006 prior year due primarily declines related competitive pricing pressures changes mix platforms serviced fiscal 2006 7 growth outsourcing services net revenue prior year driven mainly new business existing account growth continued focus making strategic portfolio decisions improve profitability net revenue consulting integration increased 2 fiscal 2006 prior year due primarily improved performance asia pacific europe middle east africa hps earnings operations percentage net revenue fiscal 2006 increased 22 percentage points operating margin increase result combination increase gross margin decrease operating expenses percentage net revenue gross margin increase hps due primarily continued focus cost structure improvement delivery efficiencies cost controls impact partially offset continued competitive environment solutions services business higher fiscal 2006 bonus accruals fiscal 2006 improved efficiencies operating expense structure contributed decline operating expenses percentage net revenue compared fiscal year 2005 despite impact higher bonus accruals fiscal 2006 technology services operating margin fiscal 2006 continued benefit improved delivery efficiencies cost controls well portfolio decisions made improve profitability benefit offset part impact ongoing portfolio mix shift higher margin proprietary support lower margin areas solution services outsourcing services operating margin increased fiscal 2006 due delivery efficiencies reduced operating expenses strategic portfolio decisions made improve profitability consulting integration operating margin improved fiscal 2006 due efficient utilization consultants reduced operating expenses hp software constant currency basis hp software revenue increased 74 fiscal 2007 compared fiscal 2006 favorable currency impact due primarily movement dollar euro excluding results mercury hp softwares revenue grew 5 fiscal 2007 net revenue associated acquisition mercury included results openview increased 121 fiscal 2007 15 respective period without mercury openview net revenue growth also result increases revenue license support contracts net revenue opencall telecommunications solutions product line decreased 16 fiscal 2007 decrease opencall net revenue due primarily platform shift resulted transfer hardware revenue ess operating margin improvement 84 percentage points fiscal 2007 compared fiscal 2006 result primarily increase gross margin lesser degree decrease operating expense percentage net revenue fiscal 2007 improvement gross margin result favorable change revenue mix driven inclusion revenue mercury licenses support typically higher gross margin offerings segment lesser degree effective management support costs openview opencall operating expense percentage net revenue fiscal 2007 decreased due primarily cost controls synergy savings mercury acquisition fiscal 2006 software net revenue increased 23 8 excluding impact acquisitions 24 constant currency basis fiscal 2005 unfavorable currency impact due primarily movement dollar euro yen fiscal 2006 peregrine hp acquired december 2005 represented 147 percentage points hp softwares net revenue growth fiscal 2006 net revenue associated peregrine acquisition included results openview management solutions software product line represented 20 percentage points growth weightedaverage net revenue basis fiscal 2006 opencall contributed remaining 3 percentage points weightedaverage net revenue increase fiscal 2006 openview net revenue growth result acquisitions increases support services contracts opencall net revenue growth result increased product sales licenses well larger contracts operating margin improvement 111 percentage points fiscal 2006 fiscal 2005 result primarily decrease operating expense percentage net revenue increase gross margin decrease operating expense percentage net revenue attributable growth field selling costs research development marketing expenses attributable cost management efforts slower revenue growth cost reductions partially offset high integration costs associated acquisition peregrine well higher bonus accruals improvement gross margin driven increase revenue effective management support services costs openview opencall improved margins opencall product line resulting favorable product mix shift towards higher margin products personal systems group components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 constant currency basis psgs net revenue increased 21 fiscal 2007 fiscal 2006 favorable currency impact due primarily movement dollar euro unit volumes increased 28 fiscal 2007 driving doubledigit net revenue growth across regions unit volume increase result strong growth notebooks significant improvements emerging markets fiscal 2007 net revenue notebook pcs increased 47 net revenue desktop pcs increased 8 prioryear period fiscal 2007 net revenue consumer clients increased 39 net revenue commercial clients increased 16 prioryear period net revenue increase psg fiscal 2007 related primarily improvements extended warranty sales revenue increase partially offset decreases handhelds revenue due declines personal digital assistant pda product market partially offset new converged device travel companion products fiscal 2007 positive revenue impact psg unit volume increase compared fiscal 2006 also moderated 5 decline commercial client asps 1 decline consumer client asps declined prior year result price erosion related component cost reductions impact partially offset increased notebook mix monitor attach rates psg earnings operations percentage net revenue increased 14 percentage points fiscal 2007 fiscal 2006 result decreases operating expenses percentage net revenue coupled increase gross margin increased gross margin primarily result component cost declines improvements supply chain costs per unit impact partially offset asp declines operating expense decline percentage net revenue fiscal 2007 result primarily increased net revenue continued efforts improve cost structure efficiency measures constant currency basis psgs net revenue increased 10 fiscal 2006 unfavorable currency impact due primarily movement dollar euro yen fiscal 2006 net revenue increased across regions business unit exception handhelds due primarily overall volume increase 15 volume increase fiscal 2006 result strong growth consumer commercial markets significant improvement emerging markets net revenue notebook pcs increased 23 net revenue desktop pcs increased slightly fiscal 2006 prior year net revenue consumer clients commercial clients increased 19 4 respectively prior year revenue increases consumer commercial clients partially offset decrease handhelds revenue due decline pda product market coupled product transition converged devices psg volume increase fiscal 2006 moderated decline 6 consumer client asps 7 commercial client asps asp declines due pricing decisions resulting lower component costs well competitive pricing pressures impact partially offset strong monitor attach rate commercial desktops pcs psg earnings operations percentage net revenue increased 14 percentage points fiscal 2006 fiscal 2005 result gross margin improvement decrease operating expenses percentage revenue gross margin improvement due primarily reduced supply chain costs warranty expense percentage net revenue combined component cost declines operating expense decline percentage net revenue result primarily increased net revenue continued efforts improving cost structure efficiency measures operating expenses decreased slightly fiscal 2006 due primarily savings expense controls savings partially offset higher bonus accruals fiscal 2006 imaging printing group components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 constant currency basis net revenue increased 4 fiscal 2007 fiscal 2006 favorable currency impact due primarily movement dollar euro fiscal 2007 growth printer supplies net revenue fiscal 2007 fiscal 2006 reflected higher unit volumes supplies result continued expansion printer hardware placements strong performance supplies colorrelated products growth commercial hardware net revenue fiscal 2007 attributable mainly unit volume growth multifunction printers revenue digital press large format printing products slight increase consumer hardware net revenue fiscal 2007 attributable increased unit volumes improved average revenue per unit performance mix shift single function products allinones impact partially offset continued shift demand lower priced products strategic pricing decisions ipg earnings operations percentage net revenue increased 03 percentage points fiscal 2007 fiscal 2006 driven decrease operating expenses percentage net revenue partially offset decrease gross margin gross margin decreased due primarily unfavorable hardware margins increased costs associated new product introductions change product mix operating expenses percentage net revenue decreased due primarily higher prioryear research development expenses associated product introduction costs coupled higher revenue effective spending controls constant currency basis net revenue increased 7 fiscal 2006 fiscal 2005 unfavorable currency impact due primarily movement dollar euro yen fiscal 2006 fiscal 2006 growth printer supplies net revenue reflected higher unit volumes result continued expansion printer hardware placements strong performance colorrelated products growth commercial hardware net revenue fiscal 2006 attributable mainly unit volume growth color laser printers multifunction printers lesser extent revenue large format printing products acquisition scitex november 2005 commercial consumer hardware revenue unfavorably impacted continued shift demand lowerpriced products strategic pricing decisions caused average revenue per unit decline ipg earnings operations percentage net revenue increased 13 percentage points fiscal 2006 fiscal 2005 result primarily increase gross margin decrease operating expense percentage net revenue gross margin increase due primarily improved margins supplies due product mix favorable portfolio mix shift hardware supplies impact partially offset unfavorable consumer hardware margins operating expense percentage net revenue fiscal 2006 declined due mainly realized savings cost structure initiatives coupled increased revenue partially offset higher bonus accruals hp financial services hpfs net revenue increased 12 fiscal 2007 fiscal 2006 net revenue increase due primarily operating lease growth higher endoflease activity financing lease growth increased used equipment sales lesser extent also contributed revenue growth hpfs earnings operations percentage net revenue decreased 05 percentage point fiscal 2007 fiscal 2006 due primarily decrease gross margin partially offset decrease operating expense percentage net revenue gross margin decrease driven primarily increased bad debt expenses lower bad debt recoveries well lower margins leases used equipment sales decline operating expenses percentage net revenue due continued cost controls hpfs net revenue decreased 1 fiscal 2006 fiscal 2005 net revenue decrease due primarily lower used equipment sales endoflease revenue largely offset higher mix leases classified operating leases fiscal 2006 30 percentage point decrease earnings operations percentage net revenue consisted decrease gross margin partially offset decrease operating expense percentage net revenue gross margin decline due primarily competitor pricing pressures higher mix lower margin operating lease assets lower recoveries bad debts impact partially offset lower credit losses decrease operating expenses percentage net revenue result cost savings achieved continued cost controls financing originations new financing originations represent amounts financing provided customers equipment related software services include intercompany activity increased 11 fiscal 2007 fiscal 2006 increase reflects higher financing associated hp product sales resulting improved integration engagement hps sales efforts favorable currency impact financing originations decreased 3 fiscal 2006 fiscal 2005 decrease reflecting lower financing associated hp product sales portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include gross financing receivables approximately 54 billion october 31 2007 49 billion october 31 2006 net equipment operating leases 18 billion october 31 2007 15 billion october 31 2006 disclosed note 10 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 500 million october 31 2007 400 million october 31 2006 intercompany leases approximately 700 million october 31 2007 500 million october 31 2006 eliminated consolidation 2hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs portfolio assets october 31 2007 increased 15 october 31 2006 increase resulted favorable currency impact high level financing originations fiscal 2007 overall percentage portfolio assets reserved decreased due primarily writeoff assets covered specific reserves hpfs funds operations mainly combination intercompany debt equity corporate investments majority net revenue corporate investments relates network infrastructure products sold brand procurve networking fiscal 2007 revenue network infrastructure products increased 33 compared period fiscal 2006 new product introductions continued drive increased sales enterprise class gigabit ethernet switch products corporate investments loss operations fiscal 2007 due primarily expenses associated corporate development global alliances hp labs carried segment yearoveryear decrease operating losses driven primarily higher earnings operations generated network infrastructure products fiscal 2006 majority net revenue corporate investments related network infrastructure products grew 8 fiscal 2005 result increased sales gigabit ethernet switch products corporate investments loss operations fiscal 2006 decreased compared fiscal 2005 due primarily lower operating expenses related global alliances hp labs higher gross profits network infrastructure products decrease operating expenses due primarily savings resulting restructuring actions lower program spending expenses related global alliances hp labs contributed majority loss operations liquidity capital resources cash balances held numerous locations throughout world including substantial amounts held outside united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws provided united states federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states repatriation could result additional united states federal income tax payments future years intent nonus cash balances would remain outside united states would meet united states liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash debt available locations needed financial condition sources uses cash total cash equivalents declined approximately 31 113 billion october 31 2007 164 billion october 31 2006 due primarily increased spending repurchases common stock investment spending acquisitions spending partially offset positive operating cash flows increased borrowings net 147 billion used investing financing activities fiscal 2007 included 109 billion share repurchases 68 billion cash payments connection acquisitions 25 billion net investments property plant equipment partially offsetting cash expenditures 31 billion proceeds relating issuance stock employee stock plans 26 billion net increase debt commercial paper increased borrowings cash position remains strong believe cash balances sufficient cover cash outlays expected fiscal 2008 associated additional stock repurchases acquisitions company bonus payments operating cash requirements key performance metrics days sales outstanding accounts receivable dso measures average number days receivables outstanding dso calculated dividing accounts receivable net allowance doubtful accounts 90day average net revenue days supply inventory dos measures average number days procurement sale product dos calculated dividing inventory 90day average cost goods sold days purchases outstanding accounts payable dpo measures average number days accounts payable balances outstanding dpo calculated dividing accounts payable 90day average cost goods sold working capital requirements depend upon effective management cash conversion cycle represents effectively number days elapse day pay purchase raw materials collection cash customers cash conversion cycle sum dso dos less dpo increase dso due primarily selectively extending payment terms reducing cash discount rates early payments certain customers decrease dos due primarily efficient inventory management higher cost goods sold fourth quarter result increased revenues decrease dpo due primarily purchasing linearity reduced payment terms cash discounts major contract manufacturers changes contributed increase current year cash conversion cycle compared prior year 2007 compared 2006 operating activities net cash provided operating activities decreased 17 billion fiscal 2007 fiscal 2006 decrease due primarily increase accounts receivable decrease accounts payable higher payments bonuses earned fiscal 2006 paid first quarter fiscal 2007 decease cash flow operations partially offset higher earnings fiscal 2007 investing activities net cash used investing activities increased 63 billion fiscal 2007 fiscal 2006 due primarily higher cash payments made connection acquisitions financing activities net cash used financing activities decreased 05 billion fiscal 2007 fiscal 2006 decrease due primarily higher net issuance commercial paper debt impact partially offset increased repurchases common stock common stock repurchases repurchase shares common stock ongoing program manage dilution created shares issued employee benefit plans well repurchase shares opportunistically program authorizes repurchases open market private transactions fiscal 2007 completed share repurchases approximately 209 million shares repurchases approximately 210 million shares settled 91 billion included approximately 1 million shares repurchased transactions executed fiscal 2006 settled fiscal 2007 fiscal 2006 completed share repurchases approximately 188 million shares repurchases approximately 190 million shares settled 61 billion fiscal 2006 including 2 million shares repurchased transactions executed fiscal 2005 settled fiscal 2006 addition transactions entered accelerated share repurchase program asr program thirdparty investment bank second quarter fiscal 2007 pursuant terms asr program purchased 40 million shares common stock investment bank 18 billion purchase price march 30 2007 purchase date decreased shares outstanding reduced outstanding shares used calculate weightedaverage common shares outstanding basic diluted eps purchase date shares delivered us included shares investment bank borrowed third parties investment bank purchased equivalent number shares open market cover position respect borrowed shares contractually specified averaging period began purchase date ended june 6 2007 end averaging period investment banks total purchase cost based volume weightedaverage purchase price shares averaging period approximately 90 million less purchase price accordingly option receive either additional shares common stock cash payment amount difference investment bank june 2007 received approximately 2 million additional shares purchased investment bank open market value approximately equal amount reduced shares outstanding upon receipt shares also entered prepaid variable share purchase program pvspp thirdparty investment bank first quarter 2006 prepaid 17 billion exchange right receive variable number shares common stock weekly oneyear period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 completed repurchases pvspp march 9 2007 date cumulatively received total 53 million shares retired shares repurchased longer deem shares outstanding intend continue repurchase shares means manage dilution issuance shares employee benefit plans purchase shares opportunistically march 15 2007 board directors authorized additional 80 billion future share repurchases october 31 2007 remaining authorization approximately 27 billion future share repurchases november 19 2007 board directors authorized additional 80 billion future share repurchases information share repurchases see item 5 note 14 consolidated financial statements item 8 incorporated herein reference 2006 compared 2005 operating activities net cash provided operating activities increased 33 billion fiscal 2006 increase cash flow operations due primarily higher earnings lower payments pension taxes increase partially offset higher payments restructuring costs investing activities net cash used investing activities increased 10 billion fiscal 2006 due primarily higher capital expenditures property plant equipment lower net proceeds maturities sales investments higher amounts cash paid acquisitions financing activities net cash used financing activities increased 11 billion fiscal 2006 fiscal 2005 increase due primarily 25 billion increase repurchases common stock 17 billion prepayment common stock repurchased future periods expenditures partially offset 16 billion net increase financing activities resulting higher borrowings lower debt payments 14 billion increased proceeds issuance common stock related employee stock plans due mainly increased exercises employee stock options result higher market prices common stock fiscal 2006 common stock repurchases fiscal 2006 completed share repurchases approximately 188 million shares repurchases approximately 190 million shares settled 61 billion included 2 million shares repurchased transactions executed fiscal 2005 settled fiscal 2006 compared approximately 150 million shares repurchased 148 million shares settled 35 billion fiscal 2005 addition shares repurchased received approximately 34 million shares aggregate price 11 billion pvspp described pvspp prepaid 17 billion first quarter fiscal 2006 exchange right receive variable number shares common stock weekly oneyear period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 recorded payment prepaid stock repurchase stockholders equity section consolidated balance sheet included payment cash flows financing activities consolidated statement cash flows connection program investment bank purchased shares common stock open market time prepaid funds expended ratably term program fiscal 2006 board directors authorized additional 100 billion future repurchases outstanding shares common stock october 31 2006 remaining authorization approximately 56 billion future share repurchases liquidity previously discussed use cash generated operations primary source liquidity believe internally generated cash flows sufficient support business operations capital expenditures payment stockholder dividends addition level discretionary investments share repurchases able supplement nearterm liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities overall cost capital outstanding debt increased 82 billion october 31 2007 compared 52 billion october 31 2006 bearing weightedaverage interest rates 52 51 respectively shortterm borrowings increased 32 billion october 31 2007 27 billion october 31 2006 increase shortterm borrowings due primarily net issuance approximately 19 billion commercial paper notes payable reclassification longterm shortterm debt including 500 million us dollar global notes mature march 2008 50 million series mediumterm notes matured repaid december 2007 increase offset partially repayment 10 billion global notes december 2006 10 billion global notes july 2007 fiscal 2007 issued 32 billion repaid 30 billion commercial paper october 31 2007 5 million total borrowings collateralized certain financing receivable assets majority outstanding debt relates hpfs issue debt order finance hpfs needed purposes hpfs business model assetintensive nature therefore fund hpfs debt fund business segments october 31 2007 hpfs approximately 83 billion net portfolio assets included short longterm financing receivables operating lease assets following resources available obtain shortterm longterm financings need additional liquidity 1approximately 151 million amount recorded debt october 31 2007 remaining amount used satisfy business operational requirements addition financing resources listed additional borrowing activities described november 2006 connection mercury acquisition assumed notes issued mercury face value 300 million maturing july 1 2007 bearing interest rate 475 per annum mercury notes july 31 2007 repurchased repaid maturity mercury notes may 2006 filed shelf registration statement 2006 shelf registration statement securities exchange commission sec enable us offer sell time one offerings debt securities common stock preferred stock depositary shares warrants may 23 2006 issued 10 billion floating rate global notes due may 22 2009 2006 shelf registration statement redeemed june 2007 february 22 2007 issued additional 20 billion global notes 2006 shelf registration statement global notes included 600 million notes due march 2012 floating interest rate equal threemonth usd libor plus 011 per annum 900 million notes due march 2012 fixed interest rate 525 per annum 500 million notes due march 2017 fixed interest rate 540 per annum issued 600 million notes par 900 million notes 500 million notes discounts par 99938 99694 respectively used net proceeds note offerings general corporate purposes including funding repurchase mercury notes described repaying shortterm commercial paper june 12 2007 issued additional 20 billion global notes 2006 shelf registration statement global notes included 10 billion notes due june 2009 floating interest rate equal threemonth usd libor plus 001 per annum 10 billion notes due june 2010 floating interest rate equal threemonth usd libor plus 006 per annum issued global notes par used net proceeds offerings general corporate purposes including redemption floating rate global notes due may 22 2009 described june 2007 repayment shortterm commercial paper december 17 2007 repaid 50 million series mediumterm notes due december 2007 maturity 30 billion us credit facility expiring may 2012 credit facility senior unsecured committed borrowing arrangement put place primarily support us commercial paper program ability us commercial paper outstanding balance exceeds 30 billion committed credit facility subject number factors including liquidity conditions business performance credit risk evaluated three independent rating agencies based upon publicly available information well information obtained ongoing discussions standard poors ratings services moodys investors service fitch ratings currently rate senior unsecured longterm debt a2 shortterm debt a1 prime1 respectively rating downgrade triggers would accelerate maturity material amount debt however downgrade credit rating would increase cost borrowings credit facilities also downgrade credit rating could limit ability issue commercial paper current programs occurs would seek alternative sources funding including drawdowns credit facility issuance notes existing shelf registration statements euro mediumterm note programme revolving trade receivablesbased facilities permitting us sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 525 million october 31 2007 sold approximately 22 billion trade receivables fiscal 2007 october 31 2007 approximately 117 million available programs contractual obligations impact expect contractual obligations october 31 2007 liquidity cash flow future periods follows 1amounts represent expected cash payments longterm debt include fair value adjustments discounts included longterm debt approximately 48 million capital lease obligations secured certain equipment 2purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty purchase obligations related principally inventory items funding commitments fiscal 2007 made approximately 133 million contributions nonus pension plans paid 16 million cover benefit payments us nonqualified plan participants paid 58 million cover benefit claims postretirement benefit plans addition used 108 million cash fund distribution subsequent transfer accrued pension benefits us excess benefit plan us executive deferred compensation plan terminated vested plan participants fiscal 2008 expect contribute approximately 145 million pension plans approximately 15 million cover benefit payments us nonqualified plan participants also expect pay approximately 80 million cover benefit claims postretirement benefit plans fiscal 2008 funding policy contribute cash pension plans meet least minimum contribution requirements established local government funding taxing authorities expect use contributions made postretirement benefit plans primarily payment retiree health claims incurred fiscal year conjunction february 2007 announcement modify us defined benefit pension plan pre2003 retiree medical program offered eligible affected employees option participate 2007 eer funded cash expenditures associated 2007 eer primarily using available us pension plan assets made incremental pension contributions pension plan stemming 2007 eer implemented bonus programs designed reward employees upon achievement annual performance objectives calculate bonuses based formula targets set beginning fiscal year board directors approves formula targets fiscal 2007 outperformed targets result significant bonus payout first quarter fiscal 2008 corresponding reduction cash flow operations quarter accrued expensed bonus earned throughout fiscal 2007 result approved restructuring plans expect future cash expenditures 173 million recorded consolidated balance sheet october 31 2007 expect make cash payments approximately 123 million fiscal 2008 majority remaining 50 million 2014 pending subsequent acquisitions pending acquisitions see note 6 consolidated financial statements item 8 incorporated herein reference offbalance sheet arrangements part ongoing business participate transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes october 31 2007 involved material unconsolidated spes indemnifications ordinary course business enter contractual arrangements may agree indemnify thirdparty arrangement losses incurred relating services perform behalf us losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers public education sectors offerings span •personal computing access devices •imaging printingrelated products services •enterprise information technology infrastructure including enterprise storage server technology software optimizes business technology investments •multivendor customer services including technology support maintenance consulting integration outsourcing services seven business segments financial reporting purposes enterprise storage servers ess hp services hps hp software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments ess hps hp software reported collectively broader technology solutions group tsg operating segment sometimes provide financial data aggregating segments within tsg order provide supplementary view business operating framework within manage businesses guides strategies based disciplined management three business levers targeted growth operational efficiency strategic deployment capital although made progress towards goals recent periods still many areas believe improve implement operating framework focused following initiatives •we engaged process examining every function every business company order optimize efficiency reduce cost •we substantially completed consolidation 85 data centers worldwide existence prior acquisition electronic data systems corporation eds six stateoftheart centers three us cities •we consolidating several hundred real estate locations worldwide fewer core sites order reduce spending real estate costs •we aligning resources reinvesting portion cost savings initiatives build market share emerging markets expand sales coverage drive growth mature markets •we developing training programs sales forces designed enhance ability provide solutions customers build customer loyalty hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued •we building expanding services organization substantially augmented acquisition eds support technology businesses enable us provide comprehensive solutions customers •we developing global delivery structure take advantage regions advanced technical expertise available lower costs •we repurchasing shares common stock ongoing program manage dilution created shares issued employee stock plans well repurchase shares opportunistically august 26 2008 completed acquisition eds leading provider information technology services enterprise customers accordingly included results business operations acquired eds consolidated results operations beginning date business operations included business unit within hps financial reporting purposes see note 6 consolidated financial statements item 8 incorporated herein reference additional information eds acquisition believe general strategic benefits eds acquisition enhance competitive position number important industries improving breadth depth service offerings increase extensive experience offering solutions customers areas government healthcare manufacturing financial services energy transportation communications consumer industries retail edss service offerings coupled existing service offerings provide broad capabilities infrastructure technology outsourcing including data center services workplace services networking services managed security business process outsourcing including health claims financial processing crm hr outsourcing applications outsourcing including development modernization management september 2008 announced restructuring plan gain efficiencies following eds acquisition restructuring plan implemented four years includes targeted reduction headcount approximately 24700 employees period majority reductions occurring end fiscal 2009 plan includes replacing roughly half positions order optimize global footprint part plan recorded 18 billion restructuring costs fourth quarter fiscal 2008 15 billion booked goodwill 03 billion recorded restructuring charge continue grow business organically strategic acquisitions fiscal 2008 acquired nine companies largest eds expect continue make strategic acquisitions periodically future hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued terms execution translated financial performance following provides overview key fiscal 2008 financial metrics 1includes results business operations acquired eds beginning august 26 2008 cash equivalents october 31 2008 totaled 102 billion decrease 11 billion october 31 2007 balance 113 billion decrease fiscal 2008 related primarily 112 billion net cash paid business acquisitions 96 billion paid repurchase common stock 26 billion net investments property plant equipment partially offset 146 billion cash provided operations 63 billion net increase outstanding debt commercial paper 18 billion proceeds issuance common stock employee stock plans intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements delivered elements standalone value fair values undelivered elements known uncertainties regarding customer acceptance resolved customernegotiated refund return rights affecting revenue recognized delivered elements changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract recognize revenue work progresses certain fixedprice contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue income result revisions cost estimates period facts give rise revision become known recognize revenue certain design build design development andor construction software andor systems projects using percentageofcompletion method use cost method measurement towards completion determined percentage cost incurred date total estimated costs project circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience number customers actually redeem incentive hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued business combinations allocate purchase price acquired companies tangible assets acquired liabilities assumed intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill engage independent thirdparty appraisal firms assist us determining fair values assets acquired liabilities assumed valuations require management make significant estimates assumptions especially respect intangible assets significant purchased intangible assets recorded hp include customer contracts developed core technology compaq trade name fair values assigned identified intangible assets discussed detail note 7 consolidated financial statements item 8 critical estimates valuing certain intangible assets include limited future expected cash flows customer contracts customer lists distribution agreements acquired developed technologies patents expected costs develop iprd commercially viable products estimating cash flows projects completed compaq brand awareness market position well assumptions period time brand continue used hps product portfolio discount rates managements estimates fair value based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates associated accounting acquisitions may change additional information becomes available regarding assets acquired liabilities assumed fully discussed note 6 consolidated financial statements item 8 restructuring engaged may continue engage restructuring actions require management utilize significant estimates related expenses severance employee separation costs realizable values assets made redundant obsolete lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 8 consolidated financial statements item 8 incorporated herein reference stockbased compensation expense recognize stockbased compensation expense sharebased payment awards granted november 1 2005 granted prior yet vested november 1 2005 accordance sfas 123 revised 2004 sharebased payment sfas 123r fair value recognition provisions sfas 123r recognize stockbased compensation expense net estimated forfeiture rate recognizing compensation cost shares expected vest straightline basis requisite service period award prior sfas 123r adoption accounted sharebased payment awards accounting principles board opinion 25 accounting stock issued employees apb 25 accordingly generally recognized compensation expense granted options discounted exercise price determining appropriate fair value model calculating fair value sharebased payment awards require subjective assumptions including expected life sharebased payment awards stock price volatility utilize blackscholes option pricing model value stock hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued options granted principal option plans implement model examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis identified three employee populations apply blackscholes model determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility therefore expected volatility used blackscholes option pricing model fiscal years 2008 2007 2006 based marketbased implied volatility issue performancebased restricted units prus representing hypothetical shares hp common stock pru award reflects target number shares may issued award recipient determine actual number shares recipient receives end threeyear performance period based results achieved versus goals based annual cash flow operations percentage revenue average total shareholder return tsr relative sp 500 performance period estimate fair value prus using monte carlo simulation model tsr modifier contains market condition update estimated expense net forfeitures cashflow performance goal year end reporting period assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application management judgment result factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period see note 2 consolidated financial statements item 8 discussion stockbased compensation taxes earnings calculate current deferred tax provisions based estimates assumptions could differ actual results reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third fourth quarters subsequent year us federal state provisions respectively recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would increase valuation allowance make corresponding charge earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments hp undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2022 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states sixty foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges accordance financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 determining income tax expense potential assessments recording related assets liabilities requires management judgments estimates evaluate uncertain tax positions accordance fin 48 believe reserve uncertain tax positions including related interest adequate amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations addition tax contingency reserve includes certain amounts potential tax assessments preacquisition tax years acquired companies released prior effective date statement financial accounting standards 141 revised 2007 business combinations sfas 141r impact carrying value goodwill attributable acquired company allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience also record specific provisions individual accounts become aware customers inability meet financial obligations us case bankruptcy filings deterioration customers operating results financial position circumstances related customers change would adjust estimates hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued recoverability receivables either upward downward annual general provision doubtful accounts averaged approximately 003 net revenue last three fiscal years using thirdparty credit risk model october 31 2008 50basispoint deterioration weightedaverage default probabilities significant customers would resulted approximately 105 million increase trade allowance end fiscal year 2008 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates valuation goodwill indefinitelived purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill intangible assets provisions sfas 142 require perform twostep impairment test goodwill first step compare fair value reporting unit carrying value reporting units consistent reportable segments identified note 18 consolidated financial statements item 8 determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference sfas 142 also requires fair value purchased intangible assets indefinite lives estimated compared carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2008 result impairment charge excess fair value carrying value hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hps reporting units august 1 2008 annual testing date ranged approximately 700 million approximately 379 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 500 million approximately 335 billion hps reporting units warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates post sales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty provision averaged approximately 33 annual net product revenue actual annual warranty costs averaged approximately 31 annual net product revenue retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates salary growth longterm return plan assets medical cost trend rates base discount rate assumption current investment yields high quality fixed income investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment well target asset allocations beginning fiscal 2008 implemented liabilitydriven investment strategy hp us defined benefit pension plan frozen effective december 31 2007 part strategy transitioned investment allocation plan predominantly fixed income assets expected return plan assets used calculating net benefit cost 610 fiscal 2009 reflects change asset allocation policy medical cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends actual results differ assumptions accumulated amortized generally estimated future working life plan participants major assumptions vary plan weightedaverage rates used set forth note 15 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued direction last several years fiscal 2008 changes weightedaverage rates hp benefit plans would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 36 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 46 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 12 million recent accounting pronouncements previously reported 2007 annual report form 10k recognized funded status benefit plans october 31 2007 accordance recognition provisions statement financial accounting standards sfas 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r sfas 158 addition recognition provisions sfas 158 also requires companies measure funded status plan date fiscal year end effective fiscal years ending december 15 2008 adopt measurement provisions sfas 158 effective october 31 2009 hp pension post retirements plans expect adoption measurement provisions sfas 158 material impact consolidated results operations financial condition september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 required adopted us first quarter fiscal 2009 february 2008 fasb issued fasb staff position fsp fas 1571 application fasb statement 157 fasb statement 13 accounting pronouncements address fair value measurements purposes lease classification measurement statement 13 also issued fsp 1572 effective date fasb statement 157 collectively remove certain leasing transactions scope sfas 157 partially delay effective date sfas 157 one year certain nonfinancial assets liabilities october 2008 fasb also issued fsp sfas 1573 determining fair value financial asset market asset active clarifies application sfas 157 inactive market illustrates entity would determine fair value market financial asset active although continue evaluate application sfas 157 currently believe adoption sfas 157 material impact consolidated results operations financial condition february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 sfas 159 sfas 159 allows companies elect measure eligible financial instruments certain items fair value required measured fair value sfas 159 requires unrealized gains losses items fair value option elected reported earnings reporting date sfas 159 effective fiscal years beginning november 15 2007 required adopted us first quarter fiscal 2009 currently believe adoption hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued material impact consolidated results operations financial condition since expect apply fair value option existing eligible assets liabilities december 2007 fasb issued sfas 141r sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired connection business combinations sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 adopted us first quarter fiscal 2010 continue evaluate impact adoption sfas 141r consolidated results operations financial condition impact largely dependent size nature business combinations completed adoption statement december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51 sfas 160 sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parents ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 adopted us first quarter fiscal 2010 currently evaluating potential impact adoption sfas 160 consolidated results operations financial condition march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 sfas 161 applies derivative instruments related hedged items accounted sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 161 requires entities provide greater transparency entity uses derivative instruments derivative instruments related hedged items accounted sfas 133 related interpretations derivative instruments related hedged items affect entitys financial position results operations cash flows sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 adopted us second quarter fiscal 2009 expect adoption sfas 161 material effect consolidated results operations financial condition may 2008 fasb issued sfas 162 hierarchy generally accepted accounting principles sfas 162 sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity generally accepted accounting principles gaap hierarchy statement 162 became effective november 15 2008 expect adoption sfas 162 material effect consolidated results operations financial condition may 2008 fasb issued fsp accounting principles board apb 141 accounting convertible debt instruments may settled cash upon conversion including partial cash settlement fsp apb 141 fsp apb 141 requires issuer certain convertible debt instruments may settled cash assets conversion separately account hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued liability debt equity conversion option components instrument manner reflects issuers nonconvertible debt borrowing rate fsp apb 141 effective fiscal years beginning december 15 2008 retroactive basis adopted us first quarter fiscal 2010 currently evaluating potential impact adoption fsp apb 141 consolidated results operations financial condition june 2008 fasb issued fsp emerging issues task force eitf 0361 determining whether instruments granted sharebased payment transactions participating securities fsp eitf 0361 clarifies sharebased payment awards entitle holders receive nonforfeitable dividends dividend equivalents vesting considered participating securities grants restricted stock contain nonforfeitable rights dividends considered participating securities upon adoption fsp eitf 0361 participating securities required include instruments calculation earnings per share eps need calculate eps using twoclass method twoclass method computing eps earnings allocation formula determines eps class common stock participating security according dividends declared accumulated participation rights undistributed earnings fsp eitf 0361 effective fiscal years beginning december 15 2008 retrospective basis adopted us first quarter fiscal 2010 currently evaluating potential impact adoption fsp eitf 0361 could calculation eps november 2008 fasb ratified eitf issue 087 accounting defensive intangible assets eitf 087 eitf 087 applies defensive intangible assets acquired intangible assets acquirer intend actively use intends hold prevent competitors obtaining access assets separately identifiable eitf 087 requires acquiring entity account defensive intangible assets separate unit accounting defensive intangible assets must recognized fair value accordance sfas 141r sfas 157 eitf 087 effective defensive intangible assets acquired fiscal years beginning december 15 2008 adopted us first quarter fiscal 2010 currently evaluating potential impact adoption eitf 087 consolidated results operations financial condition fiscal 2008 adopted fin 48 see note 13 consolidated financial statements item 8 incorporated herein reference effect applying fin 48 results operations following discussion compares historical results operations gaap basis fiscal years ended october 31 2008 2007 2006 discussed included results business operations acquired eds consolidated results operations beginning august 26 2008 closing date eds acquisition included business operations separate business unit within hps financial reporting purposes hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued results operations dollars percentage net revenue follows following fiscal years ended october 31 1cost products cost services financing interest 2certain reclassifications made prior year amounts order conform current year presentation net revenue components weightedaverage net revenue growth compared prioryear periods follows following fiscal years ended october 31 fiscal 2008 hp net revenue increased approximately 13 prioryear period 8 constant currency basis favorable currency impact fiscal 2008 due primarily hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued movement dollar euro us net revenue 369 billion fiscal 2008 increase 6 prior year international net revenue increased 17 814 billion psg net revenue increased fiscal 2008 fiscal 2007 result unit volume increase 22 unit volume increase result strong growth notebooks continued strength emerging markets positive revenue impact unit volume increase moderated declines average selling prices asps commercial consumer clients 7 4 respectively hps net revenue increased fiscal 2008 prior year due primarily acquisition eds august 26 2008 hps net revenue excluding eds also increased fiscal 2008 fiscal 2007 result revenue growth technology services primarily solution support services existing account growth outsourcing services base business growth consulting integration business unit ipg net revenue increased fiscal 2008 fiscal 2007 due growth supplies net revenue result higher unit volumes strong performance colorrelated products fiscal 2008 commercial consumer hardware net revenues declined due primarily competitive pricing pressures slowing economy ess net revenue increased fiscal 2008 prioryear period due primarily strong performance storage due part growth within eva msa product lines revenue growth industry standard servers increased unit volumes blade revenues fiscal 2008 revenues business critical systems flat compared prioryear period hp software net revenue growth fiscal 2008 fiscal 2007 attributable strong growth business technology optimization bto business unit resulting revenue increases support growth license revenue partially result acquisition opsware inc opsware september 2007 lesser extent increased services contract sales hpfs net revenue increased fiscal 2008 prior year due primarily increase mix operating leases portion asset portfolio growth average portfolio assets fiscal 2007 hp net revenue increased approximately 14 prioryear period 10 constant currency basis favorable currency impact fiscal 2007 due primarily movement dollar euro us net revenue 348 billion fiscal 2007 increase 8 prior year international net revenue increased 17 695 billion psg doubledigit net revenue growth fiscal 2007 across regions result overall unit volume increases 28 unit volume increases resulted strong growth notebooks significant improvements emerging markets impact increases partially offset declines asps commercial consumer clients 5 1 respectively hps net revenue fiscal 2007 increased due primarily favorable currency impacts revenue increases outsourcing services driven existing accounts growth new business revenue increases consulting integration associated acquisitions made fiscal 2007 ipg net revenue growth fiscal 2007 due mainly increased unit volumes printer supplies resulting continued expansion printer hardware placements strong performance supplies colorrelated products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued ess net revenue growth fiscal 2007 result primarily strong blade revenue unit growth industry standard servers business increased option attach rates proliant server line continued strong performance midrange eva products growth commercial storage area networks revenue increases integrity servers ess growth partially moderated revenue declines tape business highend arrays parisc alpha server product lines fiscal 2007 net revenue growth hp software fiscal 2007 due primarily growth bto business result acquisition mercury interactive corporation mercury increases revenue license support contracts hpfs net revenue increase fiscal 2007 due primarily operating lease growth higher endoflease activity gross margin weightedaverage components change gross margin compared prioryear periods follows following fiscal years ended october 31 total company gross margin decreased slightly fiscal 2008 fiscal 2007 segment basis increase hp software gross margin small increase ess gross margin offset small gross margin declines hps hpfs flat gross margin growth across remaining segments fiscal 2008 compared fiscal 2007 improvement hp software gross margin primarily result cost savings bto business unit slight improvement ess gross margin fiscal 2008 prior year primarily result improved cost management attach rates industry standard servers fiscal 2008 psg gross margin remained flat due primarily declining asps offset increase attach rate highermargin options ipg gross margin remained flat fiscal 2008 compared fiscal 2007 improved supplies margins resulting mix shifts offset unfavorable hardware margins hps gross margin declined fiscal 2008 prior year due primarily acquisition eds fourth quarter without impact eds acquisition hps gross margin would increased fiscal year hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hpfs gross margin declined slightly fiscal 2008 due primarily higher bad debt expenses effect partially offset increased margins endoflease activity total company gross margin increased slightly fiscal 2007 fiscal 2006 improvement hp software gross margin fiscal 2007 due primarily favorable change revenue mix driven inclusion revenue mercury licenses support typically higher gross margin offerings within segment fiscal 2007 ess contributed unfavorably total companys weightedaverage change gross margin ess gross margin remained stable stability due primarily improved cost management offset ongoing mix shift lowermargin integrity products within business critical systems continued mix shift towards industry standard servers fiscal 2007 psg contributed unfavorably total companys weightedaverage change gross margin result higher growth segments however psg gross margin increased primarily result component cost declines improvements supply chain costs per unit partially offset asp declines fiscal 2007 ipg gross margin decreased due primarily unfavorable hardware margins increased costs associated new product introductions change product mix hps gross margin increased fiscal 2007 fiscal 2006 due primarily continued focus cost structure improvements delivery efficiencies cost controls gross margin increase partially offset impact continued competitive pricing environment hpfs gross margin decline fiscal 2007 caused primarily increased bad debt expenses lower bad debt recoveries well lower margins leases used equipment sales operating expenses research development total research development rd decreased fiscal 2008 compared fiscal 2007 due primarily effective cost controls effect partially offset unfavorable currency impacts related movement dollar euro major segments experienced yearoveryear decrease rd expense percentage net revenue fiscal 2008 total rd expense increased fiscal 2007 due primarily additional rd expense result mercury acquisition first quarter fiscal 2007 percentage net revenue major segments experienced yearoveryear decrease rd expense fiscal 2007 selling general administrative total selling general administrative sga expense increased fiscal 2008 due primarily higher field selling costs result investments sales resources unfavorable currency impacts related movement dollar euro additional expenses related eds acquisition major segments experienced yearoveryear decrease sga expense percentage net revenue fiscal 2008 total sga expense increased fiscal 2007 due primarily additional expense result acquisition mercury first quarter fiscal 2007 unfavorable currency impacts related movement dollar euro additional investments sales forces ess hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hps psg ipg segments experienced yearoveryear decrease sga expense percentage net revenue fiscal 2007 hp software experienced yearoveryear increase sga expense amortization purchased intangible assets increase amortization expense fiscal 2008 compared fiscal 2007 due primarily amortization expenses related eds acquisition well acquisitions made fiscal 2008 increase amortization expense fiscal 2007 compared fiscal 2006 due primarily amortization expense related acquisition mercury first quarter fiscal 2007 increase partially offset decrease amortization expense related certain intangible assets associated prior acquisitions including compaq computer corporation compaq acquisition reached end amortization period information amortization purchased intangibles assets see note 7 consolidated financial statements item 8 incorporated herein reference inprocess research development charges record inprocess research development iprd charges connection acquisitions accounted business combinations fully described note 6 consolidated financial statements item 8 fiscal 2008 2007 2006 recorded iprd charges 45 million 190 million 52 million respectively related acquisitions decrease iprd fiscal 2008 due primarily higher iprd expenses prior year result acquisition mercury first quarter fiscal 2007 restructuring charges restructuring charges fiscal 2008 270 million included 246 million charges due primarily severance facility costs related eds acquisition net charge 24 million relating adjustments existing restructuring programs restructuring charges fiscal 2007 387 million included 354 million expenses related severance benefit costs associated employees elected participate early retirement program implemented fiscal 2007 net charge 33 million relating adjustments previous restructuring programs restructuring charges fiscal year 2006 158 million included net charge 233 million related trueups severance related restructuring charges restructuring plans 6 million termination benefits expense 3 million settlement curtailment loss nonus pension plans related fiscal 2005 restructuring plan approved board directors fourth quarter fiscal 2005 charges partially offset 46 million settlement gain us pension plans 24 million curtailment gain us retiree medical program 14 million adjustment reduce noncash stockbased compensation expense related fiscal 2005 restructuring plan information restructuring charges see note 8 consolidated financial statements item 8 incorporated herein reference hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued workforce rebalancing part ongoing business operations incurred workforce rebalancing charges severance related costs within certain business segments fiscal 2008 workforce rebalancing activities considered part normal operations continue optimize cost structure workforce rebalancing costs included business segment results expect incur additional workforce rebalancing costs future acquisitionrelated charges fiscal 2008 recorded acquisitionrelated charges 41 million consultant integration costs retention bonuses associated acquisition eds pension curtailments pension settlements net fiscal 2007 recognized net gain pension curtailments settlements 517 million relating primarily 542 million curtailment gain associated modification us defined benefit pension plan postretirement benefit plan curtailment gain offset partially net settlement losses related pension plan design changes information retirement postretirement benefit plans see note 15 consolidated financial statements item 8 incorporated herein reference interest net interest net decreased 458 million fiscal 2008 compared fiscal 2007 decrease resulted primarily currency losses balance sheet remeasurement items lower interest income result lower interest rates effect partially offset lower interest expense additionally prioryear period benefited higher gains sale real estate interest net decreased 173 million fiscal 2007 fiscal 2006 decrease due primarily higher interest expense resulting higher average debt balances net gains investment fiscal 2007 fiscal 2006 resulted primarily gains sale equity investments offset part impairment charges investment portfolio provision taxes effective tax rates 205 208 138 fiscal 2008 2007 2006 respectively decrease overall tax rate fiscal 2008 fiscal 2007 related part lower tax rates jurisdictions hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued increase overall tax rate fiscal 2007 fiscal 2006 related part favorable income tax adjustments 599 million recorded fiscal 2006 included net favorable tax adjustments 565 million income tax accruals result settlement internal revenue service irs examinations us income tax returns fiscal years 1993 1998 reductions net income tax accruals years related primarily resolution issues respect puerto rico manufacturing tax incentives export tax incentives issues involving nonus operations full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 13 consolidated financial statements item 8 incorporated herein reference segment information description products services well financial data segment found note 18 consolidated financial statements item 8 incorporated herein reference realigned segment financial data fiscal years ended october 31 2007 2006 reflect changes hps organizational structure occurred beginning first quarter fiscal 2008 describe changes fully note 18 presented business segments annual report form 10k based distinct nature various businesses customer base homogenity products technology discussions include results segments technology solutions group ess hps hp software reported collectively broader technology solutions group describe results business segments tsg detail enterprise storage servers components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 ess net revenue increased 41 decreased 05 adjusted currency fiscal 2008 fiscal 2007 storage net revenue increased 13 fiscal 2008 compared fiscal 2007 strong hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued performance midrange eva entry msa tape media storage software industry standard servers net revenue grew 2 fiscal 2008 compared fiscal 2007 result growth blade revenue unit volumes revenue growth industry standard servers business partially offset decline average unit prices driven market movement lowend product lines component cost declines business critical systems net revenue growth flat fiscal 2008 compared fiscal 2007 integrity servers net revenue grew 22 fiscal 2008 represents 79 business critical systems revenue mix 64 fiscal 2007 increase offset revenue declines parisc product line planned phaseout alpha server product line contribution integrity server revenue business critical systems revenue mix currently within range expected future periods integrity servers revenue fiscal 2008 also included revenue montvalebased integrity servers fiscal 2008 ess earnings operations percentage net revenue increased 18 percentage points compared fiscal 2007 due primarily decrease operating expenses percentage net revenue gross margin increased slightly fiscal 2008 compared fiscal 2007 due primarily cost management improved attach rates industry standard servers effect mostly offset competitive pricing storage industry standard servers mix shift entry level integrity servers decrease operating expense percentage net revenue fiscal 2008 due primarily continued cost structure improvements ess net revenue increased 83 48 adjusted currency fiscal 2007 fiscal 2006 industry standard servers revenue grew 14 fiscal 2007 compared fiscal 2006 result strong growth blade revenue units well increased option attach rates proliant server line storage net revenue increased 4 fiscal 2007 compared fiscal 2006 increase driven primarily midrange eva products commercial products within storage area networks offerings well improved revenue growth storage software increase partially moderated revenue declines tape business highend arrays business critical systems net revenue decreased 3 fiscal 2007 compared fiscal 2006 decrease due primarily revenue declines parisc product line planned phase alpha server product line declines partially offset strong net revenue growth integrity servers represented 64 business critical systems revenue mix fiscal 2007 37 fiscal 2006 expect revenue mix integrity servers continue grow customers migrate parisc alpha products fiscal 2007 ess earnings operations percentage net revenue increased 25 percentage points compared fiscal 2006 due primarily decrease operating expenses percentage net revenue gross margin remained stable fiscal 2007 compared fiscal 2006 due primarily improved cost management improved cost management offset ongoing mix shift lowermargin integrity products within business critical systems continued mix shift towards industry standard servers decrease operating expense percentage net revenue fiscal 2007 due primarily cost structure improvements hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hp services components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 1represents business operations acquired acquisition eds hps net revenue increased 352 prior year 291 adjusted currency primarily due acquisition eds august 26 2008 consolidated statements earnings include results eds since date acquisition eds net revenue includes revenue infrastructure outsourcing services applications services business process outsourcing services accounted approximately 56 30 14 revenues respectively hps net revenue excluding eds increased 119 prior year 58 adjusted currency net revenue technology services increased 10 fiscal 2008 prior year due primarily growth solution support services extended warranty revenue favorable currency impacts impact partially offset competitive pricing pressures net revenue outsourcing services increased 16 fiscal 2008 due primarily existing account growth favorable currency impacts new business partially offset installed base revenue erosion pricing pressures net revenue consulting integration increased 11 fiscal 2008 prior year due mainly favorable currency impacts base business growth additional revenue recent acquisitions hps earnings operations percentage net revenue fiscal 2008 increased 03 percentage points operating margin increase result decrease operating expenses percentage net revenue partially offset decrease gross margin fiscal 2008 continued efficiency improvements operating expense structure contributed decline operating expenses percentage net revenue compared prior year technology services operating margin fiscal 2008 continued benefit improved delivery efficiencies cost controls impact partially offset ongoing portfolio mix shift highermargin proprietary support lowermargin areas solution services outsourcing services operating margin increased fiscal 2008 due primarily increased volume cost controls favorable currency impacts effect partially offset installed base contract erosion pricing pressures consulting integration operating margin increased fiscal 2008 due mainly favorable currency impacts business growth hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hps net revenue increased 64 fiscal 2007 fiscal 2006 26 adjusted currency fiscal 2007 favorable currency impact due primarily movement dollar euro net revenue technology services increased 4 fiscal 2007 prior year due primarily favorable currency impacts growth solution support services extended warranty revenue impact partially offset competitive pricing pressures revenue erosion installed base contracts net revenue outsourcing services increased 10 fiscal 2007 prior year increase driven mainly favorable currency impacts existing account growth new business partially offset installed base revenue erosion pricing pressures net revenue consulting integration increased 9 fiscal 2007 prior year due mainly acquisitions made fiscal 2007 favorable currency impacts hps earnings operations percentage net revenue fiscal 2007 increased 12 percentage points operating margin increase result increase gross margin decrease operating expenses percentage net revenue gross margin increase fiscal 2007 due primarily continued focus cost structure improvements generated delivery efficiencies cost controls impact partially offset impact continued competitive pricing environment fiscal 2007 continued efficiency improvements operating expense structure contributed decline operating expenses percentage net revenue compared prior year technology services operating margin fiscal 2007 continued benefit improved delivery efficiencies cost controls impact offset part impact ongoing portfolio mix shift higher margin proprietary support lower margin areas solution services outsourcing services operating margin increased fiscal 2007 due primarily improved delivery efficiencies reduced operating expenses partially offset contractual pricing pressure consulting integration operating margin decreased fiscal 2007 due mainly increased customer project losses acquisition related costs impact partially offset efficient utilization consultants operating expense improvement hp software hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 1effective fiscal 2008 openview business unit renamed business technology optimization bto opencall business unit renamed software renamed software business unit includes primarily opencall business information optimization products hp software net revenue increased 197 144 adjusted currency fiscal 2008 fiscal 2007 net revenue bto increased 25 fiscal 2008 compared fiscal 2007 bto net revenue growth fiscal 2008 driven increases support higher license revenue due part opsware acquisition increases services contracts net revenue software increased 1 fiscal 2008 compared fiscal 2007 growth software net revenue fiscal 2008 attributable primarily growth information management business due part acquisition tower software may 2008 growth partially offset decline opencall net revenue resulting competitive environment following industry consolidation transfer hardware revenues ess due platform shift hp software earnings operations percentage net revenue increased 65 percentage points fiscal 2008 compared fiscal 2007 operating margin increase fiscal 2008 result combination increase gross margin decrease operating expenses percentage net revenue increase gross margin fiscal 2008 due primarily cost savings bto business cost structure improvements result increased scale information management business lesser extent favorable change revenue mix driven higher revenues bto business typically higher gross margins remainder segment decrease operating expenses percentage net revenue fiscal 2008 due primarily continued cost controls effect partially offset increased field selling costs driven sales force investments hp software net revenue increased 761 728 adjusted currency fiscal 2007 compared fiscal 2006 favorable currency impact due primarily movement dollar euro excluding results mercury hp softwares revenue grew 96 fiscal 2007 net revenue associated acquisition mercury included results bto increased 125 fiscal 2007 18 respective period without mercury bto net revenue growth also result increases revenue license support contracts net revenue software decreased 4 fiscal 2007 decrease software net revenue due primarily platform shift resulted transfer hardware revenue ess operating margin improvement 99 percentage points fiscal 2007 compared fiscal 2006 result primarily increase gross margin lesser degree decrease operating expense percentage net revenue fiscal 2007 improvement gross margin result favorable change revenue mix driven inclusion revenue mercury licenses hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued support typically higher gross margin offerings segment lesser degree effective management support costs bto software operating expense percentage net revenue fiscal 2007 decreased due primarily cost controls synergy savings mercury acquisition personal systems group components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 psg net revenue increased 162 108 adjusted currency fiscal 2008 fiscal 2007 unit volumes increased 22 fiscal 2008 compared fiscal 2007 unit volume increase result strong growth notebooks continued strength emerging markets fiscal 2008 net revenue notebook pcs increased 28 net revenue desktop pcs increased 5 prioryear period fiscal 2008 net revenue consumer clients increased 19 net revenue commercial clients increased 15 prioryear period net revenue increase psg fiscal 2008 related primarily increased sales thirdparty branded options extended warranties revenue increase partially offset decline handhelds revenue driven product transition within converged devices fiscal 2008 positive revenue impact psg unit volume increase compared fiscal 2007 also moderated 7 decline commercial client asps 4 decline consumer client asps declined prior year result price erosion related component cost reductions competitive pricing environment effect partially offset increased notebook mix improved attach rates monitors options psg earnings operations percentage net revenue increased 03 percentage points fiscal 2008 fiscal 2007 result decrease operating expenses percentage net revenue combined flat gross margin gross margin performance result declining asps offset increase attach rate highermargin options operating expense decline percentage net revenue fiscal 2008 result primarily increased net revenue continued efforts improve cost structure efficiency measures hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued psg net revenue increased 248 206 adjusted currency fiscal 2007 fiscal 2006 unit volumes increased 28 fiscal 2007 driving doubledigit net revenue growth across regions unit volume increase result strong growth notebooks significant improvements emerging markets fiscal 2007 net revenue notebook pcs increased 47 net revenue desktop pcs increased 9 prioryear period fiscal 2007 net revenue consumer clients increased 39 net revenue commercial clients increased 16 prioryear period net revenue increase psg fiscal 2007 related primarily improvements extended warranty sales revenue increase partially offset decreases handhelds revenue due declines pda product market partially offset new converged device travel companion products fiscal 2007 positive revenue impact psg unit volume increase compared fiscal 2006 also moderated 5 decline commercial client asps 1 decline consumer client asps decline asps prior year result price erosion related component cost reductions impact partially offset increased notebook mix monitor attach rates psg earnings operations percentage net revenue increased 14 percentage points fiscal 2007 fiscal 2006 result decreases operating expenses percentage net revenue coupled increase gross margin increased gross margin primarily result component cost declines improvements supply chain costs per unit impact partially offset asp declines operating expense decline percentage net revenue fiscal 2007 result primarily increased net revenue continued efforts improve cost structure efficiency measures imaging printing group components weightedaverage net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 ipg net revenue increased 32 decreased 11 adjusted currency fiscal 2008 fiscal 2007 growth printer supplies net revenue fiscal 2008 fiscal 2007 reflected higher unit volumes supplies result strong performance colorrelated products decrease commercial hardware net revenue fiscal 2008 fiscal 2007 due mainly competitive pricing pressures effect partially offset unit volume growth multifunction printers color laser printers large format printing products revenue recent acquisitions hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued decrease consumer hardware net revenue fiscal 2008 fiscal 2007 due primarily discontinued sales cameras competitive pricing pressures lower unit volumes consumer hardware result slower growth overall consumer printer market consumer commercial hardware impacted continued shift demand lowerpriced products slowing economy caused average revenue per unit category decline ipg earnings operations percentage net revenue increased 04 percentage points fiscal 2008 prior fiscal year operating margin improvement fiscal 2008 due lower operating expenses percentage net revenue fiscal 2008 gross margin remained flat driven improved margins supplies result product mix effect offset unfavorable hardware margins decrease operating expenses percentage net revenue fiscal 2008 due primarily higher revenue continued cost controls effect partially offset increased investments enterprise printing sales force ipg net revenue increased 63 43 adjusted currency fiscal 2007 fiscal 2006 favorable currency impact due primarily movement dollar euro fiscal 2007 growth printer supplies net revenue fiscal 2007 fiscal 2006 reflected higher unit volumes supplies result continued expansion printer hardware placements strong performance supplies colorrelated products growth commercial hardware net revenue fiscal 2007 attributable mainly unit volume growth multifunction printers revenue digital press large format printing products slight increase consumer hardware net revenue fiscal 2007 attributable increased unit volumes improved average revenue per unit performance mix shift single function products allinones impact partially offset continued shift demand lower priced products strategic pricing decisions ipg earnings operations percentage net revenue increased 03 percentage points fiscal 2007 fiscal 2006 driven decrease operating expenses percentage net revenue partially offset decrease gross margin gross margin decreased due primarily unfavorable hardware margins increased costs associated new product introductions change product mix operating expenses percentage net revenue decreased due primarily higher prioryear research development expenses associated product introduction costs coupled higher revenue effective spending controls hp financial services hpfs net revenue increased 155 fiscal 2008 fiscal 2007 net revenue increase due primarily shift towards operating leases financing leases overall portfolio asset mix higher average portfolio assets year higher endoflease activity favorable currency impact hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hpfs earnings operations percentage net revenue increased 05 percentage points fiscal 2008 fiscal 2007 due primarily decrease operating expenses percentage net revenue increased margin endof lease activity effect offset higher bad debt expenses lower portfolio margins due higher operating leases portfolio asset mix operating expense decrease percentage revenue driven higher rate increase revenues relative operating expenses due higher operating lease mix portfolio continued cost controls hpfs net revenue increased 124 fiscal 2007 fiscal 2006 net revenue increase due primarily operating lease growth higher endoflease activity financing lease growth increased used equipment sales lesser extent also contributed revenue growth hpfs earnings operations percentage net revenue decreased 05 percentage point fiscal 2007 fiscal 2006 due primarily decrease gross margin partially offset decrease operating expense percentage net revenue gross margin decrease driven primarily increased bad debt expenses lower bad debt recoveries well lower margins leases used equipment sales decline operating expenses percentage net revenue due continued cost controls financing originations new financing originations represent amounts financing provided customers equipment related software services include intercompany activity increased 97 fiscal 2008 fiscal 2007 112 fiscal 2007 fiscal 2006 increases reflect higher financing associated hp product sales resulting improved integration engagement hps sales efforts favorable currency impact portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated consolidated financial statements hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include gross financing receivables approximately 51 billion october 31 2008 54 billion october 31 2007 net equipment operating leases 18 billion october 31 2008 october 31 2007 disclosed note 10 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 700 million october 31 2008 500 million october 31 2007 intercompany leases approximately 800 million october 31 2008 700 million october 31 2007 eliminated consolidation 2hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs net portfolio assets october 31 2008 decreased 2 october 31 2007 decrease resulted unfavorable currency impact partially offset financing originations fiscal 2008 overall percentage portfolio assets reserved increased due primarily higher specific customer reserves hpfs funds operations mainly combination intercompany debt equity addition balances reflected hp assumed net portfolio assets 140 million acquisition eds rollforward reserves hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued corporate investments majority net revenue corporate investments relates network infrastructure products sold brand procurve networking fiscal 2008 revenue network infrastructure products increased 26 compared period fiscal 2007 result continued increased sales enterprise class gigabit 10 gigabit ethernet switch products fiscal 2008 network infrastructure revenue includes small amount revenue colubris networks inc company hp acquired october 1 2008 corporate investments reported earnings operations fiscal 2008 compared losses fiscal 2007 due primarily increased earnings operations generated network infrastructure products lower expenses related hp labs fiscal 2007 majority net revenue corporate investments related network infrastructure products grew 33 fiscal 2006 new product introductions continued drive increased sales enterprise class gigabit ethernet switch products corporate investments loss operations fiscal 2007 due primarily expenses associated corporate development global alliances hp labs carried segment yearoveryear decrease operating losses driven primarily higher earnings operations generated network infrastructure products liquidity capital resources cash balances held numerous locations throughout world including substantial amounts held outside united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws provided united states federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states repatriation could result additional united states federal income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside united states would meet united states liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed information discussed presented based historical results include results eds period following august 26 2008 closing date acquisition hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued financial condition sources uses cash total cash equivalents declined approximately 10 102 billion october 31 2008 113 billion october 31 2007 due primarily increased investment spending acquisitions increased borrowings partially offset positive operating cash flows cash position remains strong believe cash balances sufficient cover cash outlays expected fiscal 2009 associated additional stock repurchases acquisitions company bonus payments operating cash requirements key performance metrics days sales outstanding accounts receivable dso measures average number days receivables outstanding dso calculated dividing accounts receivable net allowance doubtful accounts 90day average net revenue days supply inventory dos measures average number days procurement sale product dos calculated dividing inventory 90day average cost goods sold days purchases outstanding accounts payable dpo measures average number days accounts payable balances outstanding dpo calculated dividing accounts payable 90day average cost goods sold working capital requirements depend upon effective management cash conversion cycle represents effectively number days elapse day pay purchase raw materials collection cash customers cash conversion cycle sum dso dos less dpo increase dso due primarily higher accounts receivable balance fourth quarter fiscal 2008 compared period fiscal 2007 effect eds acquisition decrease dos due primarily efficient inventory management higher cost goods sold fourth quarter 2008 result increased revenues effect eds acquisition slight decrease dpo due primarily purchasing linearity improved hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued accounts payable management changes contributed decrease current year cash conversion cycle compared prior year 2008 compared 2007 operating activities net cash provided operating activities increased approximately 50 billion fiscal 2008 fiscal 2007 increase due primarily higher net earnings fiscal 2008 decrease accounts financing receivables increased accounts payable investing activities net cash used investing activities increased approximately 46 billion fiscal 2008 fiscal 2007 due primarily higher cash payments made connection acquisitions financing activities net cash used financing activities decreased approximately 36 billion fiscal 2008 fiscal 2007 decrease due primarily higher net issuance commercial paper debt common stock repurchases repurchase shares common stock ongoing program manage dilution created shares issued employee benefit plans well repurchase shares opportunistically program authorizes repurchases open market private transactions fiscal 2008 completed share repurchases approximately 230 million shares repurchases approximately 216 million shares settled 96 billion included approximately 1 million shares repurchased transactions executed fiscal 2007 settled fiscal 2008 end fiscal 2008 approximately 14 million shares would settled next fiscal year fiscal 2007 completed share repurchases approximately 209 million shares repurchases approximately 210 million shares settled 91 billion fiscal 2007 including approximately 1 million shares repurchased transactions executed fiscal 2006 settled fiscal 2007 intend continue repurchase shares means manage dilution issuance shares employee benefit plans purchase shares opportunistically september 19 2008 board directors authorized additional 80 billion future share repurchases october 31 2008 remaining authorization approximately 91 billion future share repurchases information share repurchases see item 5 note 14 consolidated financial statements item 8 incorporated herein reference 2007 compared 2006 operating activities net cash provided operating activities decreased 17 billion fiscal 2007 fiscal 2006 decrease due primarily increase accounts receivable decrease accounts payable higher payments bonuses earned fiscal 2006 paid first quarter fiscal 2007 decease cash flow operations partially offset higher earnings fiscal 2007 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued investing activities net cash used investing activities increased 63 billion fiscal 2007 fiscal 2006 due primarily higher cash payments made connection acquisitions financing activities net cash used financing activities decreased 05 billion fiscal 2007 fiscal 2006 decrease due primarily higher net issuance commercial paper debt impact partially offset increased repurchases common stock common stock repurchases fiscal 2007 completed share repurchases approximately 209 million shares repurchases approximately 210 million shares settled 91 billion included approximately 1 million shares repurchased transactions executed fiscal 2006 settled fiscal 2007 fiscal 2006 completed share repurchases approximately 188 million shares repurchases approximately 190 million shares settled 61 billion fiscal 2006 including 2 million shares repurchased transactions executed fiscal 2005 settled fiscal 2006 addition transactions entered accelerated share repurchase program asr program thirdparty investment bank second quarter fiscal 2007 pursuant terms asr program purchased 40 million shares common stock thirdparty bank 18 billion purchase price march 30 2007 purchase date decreased shares outstanding reduced outstanding shares used calculate weightedaverage common shares outstanding basic diluted eps purchase date shares delivered us included shares investment bank borrowed third parties investment bank purchased equivalent number shares open market cover position respect borrowed shares contractually specified averaging period began purchase date ended june 6 2007 end averaging period investment banks total purchase cost based volume weightedaverage purchase price shares averaging period approximately 90 million less purchase price accordingly option receive either additional shares common stock cash payment amount difference investment bank june 2007 received approximately 2 million additional shares purchased investment bank open market value approximately equal amount reduced shares outstanding upon receipt shares also entered prepaid variable share purchase program pvspp thirdparty investment bank first quarter 2006 prepaid 17 billion exchange right receive variable number shares common stock weekly oneyear period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 completed repurchases pvspp march 9 2007 date cumulatively received total 53 million shares retired shares repurchased longer deem shares outstanding march 15 2007 board directors authorized additional 80 billion future share repurchases october 31 2007 remaining authorization approximately 27 billion future share repurchases november 19 2007 board directors authorized additional 80 billion future share repurchases hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued liquidity previously discussed use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support business operations capital expenditures payment stockholder dividends addition level discretionary investments share repurchases able supplement nearterm liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities overall cost capital outstanding debt increased 179 billion october 31 2008 compared 82 billion october 31 2007 bearing weightedaverage interest rates 39 52 respectively shortterm borrowings increased 102 billion october 31 2008 32 billion october 31 2007 increase shortterm borrowings due primarily net issuance approximately 50 billion commercial paper including 99 billion commercial paper issued fund acquisition eds reclassification longterm shortterm debt including 10 billion global notes mature june 2009 750 million global notes mature september 2009 700 million senior notes mature october 2009 fiscal 2008 issued 400 billion repaid 349 billion commercial paper longterm debt increased 77 billion october 31 2008 50 billion october 31 2007 increase longterm debt due primarily issuance aggregate 30 billion global notes march 2008 assumption 26 billion debt connection eds acquisition effect offset repayment 500 million global notes maturity march 2008 repayment 50 million series mediumterm notes maturity december 2007 redemption approximately 377 million zerocoupon subordinated convertible notes march 2008 reclassifications longterm shortterm debt october 31 2008 61 million total borrowings collateralized certain financing receivable assets october 31 2008 significant portion outstanding debt related hpfs issue debt order finance hpfs needed purposes including acquisitions hpfs business model assetintensive nature therefore fund hpfs debt fund business segments october 31 2008 hpfs approximately 81 billion net portfolio assets included short longterm financing receivables operating lease assets see note 12 consolidated financial statements incorporated herein reference additional information borrowings hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued october 31 2008 following resources available obtain shortterm longterm financings need additional liquidity 1we unable issue additional securities 2002 shelf registration statement december 1 2008 2approximately 863 million amount recorded debt october 31 2008 remaining amount used satisfy business operational requirements addition financing resources listed additional borrowing resources described may 2006 filed shelf registration statement 2006 shelf registration statement sec enable us offer sell time one offerings unlimited amount debt securities common stock preferred stock depositary shares warrants 29 billion us credit facility expiring may 2012 february july 2008 entered additional 364day credit facilities 30 billion 80 billion respectively credit facilities senior unsecured committed borrowing arrangements put place primarily support us commercial paper program terms july 2008 credit facility amount credit available declines amount equal proceeds future issuance longterm debt us december 5 2008 issued 20 billion global notes 2006 shelf registration statement resulted reduction amount credit available july 2008 credit facility 60 billion ability us commercial paper outstanding balance exceeds 119 billion supported credit facilities subject number factors including liquidity conditions business performance october 2008 registered commercial paper funding facility cpff provided federal reserve bank new york facility enables us issue threemonth unsecured commercial paper special purpose vehicle federal reserve rate established cpff program currently equal spread threemonth overnight index swap rate maximum amount commercial paper may issue time program 104 billion less total principal amount outstanding commercial paper issued unable issue commercial paper program april 30 2009 october 31 2008 issued commercial paper cpff program hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued revolving trade receivablesbased facilities permitting us sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 584 million october 31 2008 sold approximately 27 billion trade receivables fiscal 2008 october 31 2008 approximately 142 million available programs credit risk evaluated three independent rating agencies based upon publicly available information well information obtained ongoing discussions standard poors ratings services moodys investors service fitch ratings currently rate senior unsecured longterm debt a2 shortterm debt a1 prime1 respectively rating downgrade triggers would accelerate maturity material amount debt however downgrade credit rating would increase cost borrowings credit facilities also downgrade credit rating could limit ability issue commercial paper current programs occurs would seek alternative sources funding including drawdowns credit facility issuance notes existing shelf registration statements contractual obligations impact expect contractual obligations october 31 2008 liquidity cash flow future periods follows 1amounts represent expected cash payments longterm debt include fair value adjustments discounts included longterm debt approximately 372 million capital lease obligations secured certain equipment 2purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty purchase obligations related principally inventory items addition october 31 2008 approximately 17 billion recorded fin 48 liabilities related interest penalties liability amount approximately 340 million expected paid within one year remaining amount unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters 17 billion fin 48 liabilities related interest penalties partially offset 330 million deferred tax assets interest receivable hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued funding commitments fiscal 2008 made approximately 170 million contributions nonus pension plans paid 6 million cover benefit payments us nonqualified plan participants paid 50 million cover benefit claims postretirement benefit plans addition used 25 million cash fund distribution subsequent transfer accrued pension benefits us excess benefit plan us executive deferred compensation plan terminated vested plan participants fiscal 2009 expect contribute approximately 360 million pension plans approximately 35 million cover benefit payments us nonqualified plan participants also expect pay approximately 70 million cover benefit claims postretirement benefit plans fiscal 2009 funding policy contribute cash pension plans meet least minimum contribution requirements established local government funding taxing authorities expect use contributions made postretirement benefit plans primarily payment retiree health claims incurred fiscal year make significant cash payment associated fiscal 2008 bonus programs implemented bonus programs designed reward employees upon achievement annual performance objectives calculate bonuses based formula performance relative targets year improvements market conditions set beginning fiscal year board directors approves final bonus payments accrued expensed bonus earned throughout fiscal 2008 connection acquisition eds implemented restructuring program streamline services business better align structure efficiency business operating model successfully implemented recent years restructuring program implemented next four years include changes workforce well cost savings corporate overhead functions real estate procurement part restructuring program expect eliminate approximately 24700 positions nearly half eliminations occurring united states result approved restructuring plans expect future cash expenditures approximately 21 billion expect make cash payments approximately 13 billion fiscal 2009 majority remaining amount 2012 subsequent acquisitions subsequent acquisitions see note 6 consolidated financial statements item 8 incorporated herein reference offbalance sheet arrangements part ongoing business participate transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes october 31 2008 involved material unconsolidated spes guarantees indemnifications ordinary course business may provide certain clients principally governmental entities subsidiary performance guarantees andor financial performance guarantees may backed standby letters credit surety bonds general would liable amounts hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued guarantees event subsidiaries nonperformance permits termination related contract client likelihood believe remote believe compliance performance obligations service contracts performance guarantee result acquisition eds acquired certain service contracts supported client financing securitization arrangements specific circumstances involving non performance resulting service contract termination failure comply terms financing arrangement would required acquire certain assets consider possibility failure comply remote asset amounts involved material ordinary course business enter contractual arrangements may agree indemnify thirdparty arrangement losses incurred relating services perform behalf us losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses large enterprises including customers government health education sectors offerings span •multivendor customer services including infrastructure technology business process outsourcing technology support maintenance application development support services consulting integration services •enterprise information technology infrastructure including enterprise storage server technology networking products resources software optimizes business technology investments •personal computing access devices •imaging printingrelated products services seven business segments financial reporting purposes services enterprise storage servers ess hp software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments services ess hp software reported collectively broader hp enterprise business formerly referred technology solutions group hp enterprise business operating segment sometimes provide financial data aggregating segments within order provide supplementary view business strategy operations currently focused following initiatives competitive positioning businesses take advantage important trends markets products services example aligning printing business capitalize key market trends shift analog digital printing growth printable content developing innovative products consumers first webconnected home printer working enable web mobile printing expanding presence highusage annuity businesses including graphics retail photo printing growing managed print services business also positioning enterprise business capitalize trend towards converged infrastructure products integrate storage networking servers management software addition developed management software offerings seek satisfy increasing demand virtualization management increased automation driving operational efficiency implemented ongoing program optimize efficiency reduce cost across company part efforts continuing execute multiyear program consolidate real estate locations worldwide fewer core sites order reduce spending hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued real estate costs addition continuing implement restructuring plan announced fourth quarter fiscal 2008 optimize cost structure services business restructuring plan announced may 2009 structurally change improve effectiveness several product businesses see note 8 consolidated financial statements item 8 discussion restructuring plans associated restructuring charges also took actions fiscal 2009 improve cost structure shift employee compensation structure fixed variable part actions reduced base pay many employees reduced matching contributions hp 401k plan us employees began funding matching contributions quarterly discretionary basis based financial performance modified employee stock purchase plan eliminate discount applicable purchases made plan continuing evaluate businesses market conditions may consider additional restructuring actions future periods investing growth investing savings derived efficiency initiatives growth example increasing sales coverage expand size market cover including expanding emerging markets china india brazil creating innovative new products developing new channels connect customers particularly pc business addition expanding portfolio products services offer customers acquisitions organic growth critical component strategy acquisition electronic data systems corporation eds august 2008 increased size breadth services business enabled us provide comprehensive product services solutions customers november 2009 entered definitive agreement acquire 3com corporation global enterprise provider networking switching routing security solutions price 790 per share cash enterprise value approximately 27 billion acquisition subject customary closing conditions including receipt domestic foreign regulatory approvals approval 3coms stockholders transaction expected close second fiscal quarter 2010 leveraging portfolio scale offer one industrys broadest portfolios products services working leverage portfolio strategic advantage example enterprise business able provide servers storage networking packaged services delivered customers manner choosing inhouse outsourced service via internet portfolio management software completes package allowing customers manage operations efficient costeffective manner addition working optimize supply chain eliminating complexity reducing fixed costs leveraging scale ensure availability components favorable prices even shortages also expanding use industry standard components enterprise products leverage scale hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued following provides overview key fiscal 2009 financial metrics demonstrates execution initiatives translated financial performance cash equivalents october 31 2009 totaled 133 billion increase 31 billion october 31 2008 balance 102 billion increase fiscal 2009 due primarily 134 billion cash provided operations 18 billion proceeds issuance common stock employee stock plans partially offset 51 billion cash used repurchase common stock 32 billion net investment property plant equipment 28 billion net payment debt intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles gaap require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued reasonable however actual results may differ estimates different assumptions conditions accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements delivered elements standalone value uncertainties regarding customer acceptance resolved customernegotiated refund return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially control delivered element constitutes separate unit accounting changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract recognize revenue work progresses certain fixedprice contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue income result revisions cost estimates period facts give rise revision become known recognize revenue certain design build design development andor construction software andor systems projects using percentageofcompletion method use costtocost method measurement towards completion determined percentage cost incurred date total estimated costs project circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience number customers actually redeem incentive october 2009 financial accounting standards board fasb issued accounting standards update asu 200913 multipledeliverable revenue arrangements hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued asu 200913 new standard changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price selling price deliverable based vendorspecific objective evidence vsoe available thirdparty evidence tpe vsoe available estimated selling price esp neither vsoe tpe available concurrently issuing asu 200913 fasb also issued asu 200914 certain revenue arrangements include software elements asu 200914 asu 200914 excludes software contained tangible product scope software revenue guidance software essential tangible products functionality hp early adopted provisions asu 200913 asu 200914 beginning fiscal 2009 new materially modified deals originating november 1 2008 therefore previously reported quarterly results restated reflect impact adoption establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product lifecycle consideration also given market conditions competitor pricing strategies industry technology lifecycles determining best estimate selling price apply management judgment establishing margin objectives pricing strategies evaluating market conditions product lifecycles may modify develop new gotomarket practices future gotomarket strategies evolve may modify pricing practices future may result changes selling prices impacting vsoe esp aforementioned factors may result different allocation revenue deliverables multiple element arrangements current fiscal year may change pattern timing revenue recognition elements change total revenue recognized arrangement adoption asu 200913 asu 200914 material financial results increasing net revenues net earnings 255 million 55 million respectively fiscal 2009 primary driver impact number new materially modified deals particularly impacting second half fiscal year driven economic customerspecific factors additional driver impact extent hardware shorterterm service projects sold longerterm complex service arrangements particular quarter may vary significantly dealbydeal basis able reasonably estimate effect adopting standards future financial periods impact vary based nature volume new materially modified deals given period business combinations allocate purchase price acquired companies tangible assets acquired liabilities assumed intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill engage independent thirdparty appraisal firms assist us determining fair values assets acquired liabilities assumed valuations require management make significant estimates assumptions especially respect intangible assets significant hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued purchased intangible assets recorded us include customer contracts lists developed core technology compaq trade name fair values assigned identified intangible assets discussed detail note 7 consolidated financial statements item 8 critical estimates valuing certain intangible assets include limited future expected cash flows customer contracts customer lists distribution agreements acquired developed technologies patents expected costs develop iprd commercially viable products estimating cash flows projects completed compaq brand awareness market position well assumptions period time brand continue used product portfolio discount rates managements estimates fair value based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates associated accounting acquisitions may change additional information becomes available regarding assets acquired liabilities assumed fully discussed note 6 consolidated financial statements item 8 restructuring engaged may continue engage restructuring actions require management utilize significant estimates related expenses severance employee separation costs realizable values assets made redundant obsolete lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 8 consolidated financial statements item 8 incorporated herein reference stockbased compensation expense recognize stockbased compensation expense sharebased payment awards net estimated forfeiture rate recognize compensation cost shares expected vest straightline basis requisite service period award determining appropriate fair value model calculating fair value sharebased payment awards requires subjective assumptions including expected life sharebased payment awards stock price volatility utilize blackscholes option pricing model value stock options granted principal option plans implement model examined historical pattern option exercises determine discernable activity patterns based certain employee populations analysis identified three employee populations apply blackscholes model determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility therefore expected volatility used blackscholes option pricing model fiscal years 2009 2008 2007 based marketbased implied volatility issue performancebased restricted units prus representing hypothetical shares hp common stock pru award reflects target number shares may issued award recipient determine actual number shares recipient receives end threeyear performance period based results achieved versus goals based annual cash flow operations percentage revenue average total shareholder return tsr relative sp 500 performance period use historic volatility pru awards implied volatility hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued cannot used simulating multivariate prices companies sp 500 estimate fair value prus using monte carlo simulation model tsr modifier contains market condition update estimated expense net forfeitures cashflow performance goal year end reporting period assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application management judgment result factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period see note 2 consolidated financial statements item 8 discussion stockbased compensation taxes earnings calculate current deferred tax provisions based estimates assumptions could differ actual results reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third fourth quarters subsequent year us federal state provisions respectively recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would increase valuation allowance make corresponding charge earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2022 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued subject income taxes united states sixty foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges determining income tax expense potential assessments recording related assets liabilities requires management judgments estimates evaluate uncertain tax positions accordance guidance accounting uncertainty income taxes believe reserve uncertain tax positions including related interest adequate amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience also record specific provisions individual accounts become aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position circumstances related customers change would adjust estimates recoverability receivables either upward downward annual general provision doubtful accounts averaged approximately 006 net revenue last three fiscal years using thirdparty credit risk model october 31 2009 50basispoint deterioration weightedaverage default probabilities significant customers would resulted approximately 36 million increase trade allowance end fiscal year 2009 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued valuation goodwill purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable provisions accounting standards codification topic 350 intangiblesgoodwill require perform twostep impairment test goodwill first step compare fair value reporting unit carrying value reporting units consistent reportable segments identified note 19 consolidated financial statements item 8 determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference also compare fair value purchased intangible assets indefinite lives carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2009 result impairment charge excess fair value carrying value hps reporting units august 1 2009 annual testing date ranged approximately 750 million approximately 35 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 550 million approximately 31 billion hps reporting units fair value financial instruments measure certain financial assets liabilities fair value based valuation techniques using best information available may include quoted market prices market comparables discounted cash flow projections financial instruments primarily comprised time deposits money market funds commercial paper corporate debt securities equity securities investments common stock common stock equivalents derivative instruments hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued measure fair value using framework established fasb accounting guidance fair value measurements disclosures framework requires fair value determined based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants valuation techniques based upon observable unobservable inputs observable market inputs reflect market data obtained independent sources unobservable inputs require management make certain assumptions judgments based best information available observable inputs preferred source values two types inputs create following fair value hierarchy level 1quoted prices unadjusted identical instruments active markets level 2quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market corroborated observable market data substantially full term assets liabilities level 3prices valuations require management inputs significant fair value measurement unobservable description valuation methodologies use measure financial assets liabilities fair value provided cash equivalents investments hold time deposits money market funds commercial paper debt securities primarily consisting corporate foreign government notes bonds common stock equivalents general applicable use quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value use quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available use internally developed valuation models whose inputs include bid prices third party valuations utilizing underlying asset assumptions derivative instruments discussed note 10 consolidated financial statements item 8 mainly hold nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures active market quotes available use industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases use management judgment develop assumptions used determine fair value warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued call rates average cost per call current period product shipments actual product failure rates repair rates post sales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty provision averaged approximately 35 annual net product revenue actual annual warranty costs averaged approximately 33 annual net product revenue retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates salary growth longterm return plan assets medical cost trend rates base discount rate assumption current investment yields high quality fixed income investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment well target asset allocations beginning fiscal 2008 implemented liabilitydriven investment strategy hp us defined benefit pension plan frozen effective december 31 2007 part strategy transitioned investment allocation plan predominantly fixed income assets fiscal 2008 acquired eds us defined benefit plan assets invested predominantly public equity alternative investments end fiscal 2009 assets hp eds plans merged resulting portfolio blend fixed income equities alternatives expected return plan assets used calculating net benefit cost 799 fiscal 2010 reflects target asset allocation merged portfolio medical cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends actual results differ assumptions accumulated amortized generally estimated future working life plan participants major assumptions vary plan weightedaverage rates used set forth note 16 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved direction last several years fiscal 2009 changes weightedaverage rates hp benefit plans would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 43 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 71 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 15 million loss contingencies involved various lawsuits claims investigations proceedings arise ordinary course business record provision liability believe probable liability incurred amount reasonably estimated significant hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued judgment required determine probability estimated amount review provisions least quarterly adjust provisions reflect impact negotiations settlements rulings advice legal counsel updated information litigation inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows accounting pronouncements september 2006 fasb issued new accounting standard related fair value measurements new standard defines fair value establishes framework measuring fair value expands disclosures fair value measurements february 2008 fasb issued new provision delayed effective date fair value measurements disclosures nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually august 2009 fasb issued asu 200905 measuring liabilities fair value relation fair value measurement liabilities adopted applicable portions provisions new standards first fourth quarters fiscal 2009 adopt provision related nonfinancial assets nonfinancial liabilities first quarter fiscal 2010 although continue evaluate application provision nonfinancial assets nonfinancial liabilities expect adoption material impact consolidated financial statements see note 9 consolidated financial statements item 8 additional information pertaining fair value measurements december 2007 fasb issued new accounting standard related business combinations new standard expands definition business combination requires recognition assets acquired liabilities assumed contingent consideration fair value acquisition date subsequent changes recognized earnings requires acquisitionrelated expenses restructuring costs recognized separately business combination expensed incurred requires inprocess research development capitalized fair value indefinitelived intangible asset requires changes accounting deferred tax asset valuation allowances acquired income tax uncertainties measurement period recognized component provision taxes new standard also establishes disclosure requirements enable evaluation nature financial effects business combination april 2009 fasb issued new standard clarified accounting preacquisition contingencies adopt new business combination standards first quarter fiscal 2010 impact adoption largely dependent size nature business combinations completed adoption statement december 2007 fasb issued new accounting standard related noncontrolling interests new standard establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parents ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated new standard also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners adopt new accounting standard first quarter fiscal 2010 expect adoption standard material effect consolidated financial statements hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued may 2008 fasb issued new accounting standard related convertible debt instruments new standard requires issuer certain convertible debt instruments may settled cash assets conversion separately account liability debt equity conversion option components instrument manner reflects issuers nonconvertible debt borrowing rate adopt new accounting standard retrospective basis first quarter fiscal 2010 expect adoption standard material effect consolidated financial statements june 2008 fasb issued new accounting standard clarifies whether instruments granted sharebased payment transactions included computing earnings per share new standard required include restricted stock contains nonforfeitable rights dividends calculation basic earnings per share eps need calculate basic eps using twoclass method twoclass method computing eps earnings allocation formula determines eps class common stock participating securities according dividends declared accumulated participation rights undistributed earnings adopt new accounting standard retrospective basis first quarter fiscal 2010 expect adoption standard material effect calculation basic eps november 2008 fasb issued new accounting standard related defensive intangible assets defensive intangible assets acquired intangible assets acquirer intend actively use intends hold prevent competitors obtaining access new standard defensive intangible assets must initially recognized fair value amortized benefit period adopt new accounting standard first quarter fiscal 2010 impact adoption largely dependent size nature business combinations completed date adoption december 2008 fasb issued new accounting standard requires additional disclosures assets held employers defined benefit pension postretirement plan adopt new accounting standard first quarter fiscal 2010 present required disclosures prescribed format prospective basis upon adoption new standard affect notes consolidated financial statements june 2009 fasb issued new accounting standard related transfers financial assets amends previous guidance remove concept qualifying specialpurpose entity exemption consolidation transferors financial statements new standard also establishes conditions reporting transfer portion financial asset sale modifies financialasset derecognition criteria revises interests retained transferor sale financial assets initially measured removes guaranteed mortgage securitization recharacterization provisions requires additional disclosures adopt new accounting standard first quarter fiscal 2011 expect adoption standard material effect consolidated financial statements june 2009 fasb issued new accounting standard related consolidation variable interest entities eliminates quantitative approach previously required determining primary beneficiary variable interest entity requires ongoing qualitative reassessments whether enterprise primary beneficiary variable interest entity new standard also requires additional disclosures enterprises involvement variable interest entities adopt new accounting standard first quarter fiscal 2011 currently evaluating impact adoption standard consolidated financial statements hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued fourth quarter fiscal 2009 adopted fasb accounting standards codification hierarchy generally accepted accounting principles affected specific references gaap literature notes consolidated financial statements october 2009 fasb issued asu 200913 new standard changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price concurrently issuing asu 200913 fasb also issued asu 200914 asu 200914 excludes software contained tangible product scope software revenue guidance software essential tangible products functionality discussion financial impact asu 200913 asu 200914 appears critical accounting policies estimates results operations following discussion compares historical results operations gaap basis fiscal years ended october 31 2009 2008 2007 included results business operations acquired eds consolidated results operations beginning august 26 2008 closing date eds acquisition results operations dollars percentage net revenue follows following fiscal years ended october 31 1cost products cost services financing interest 2certain pursuitrelated costs previously reported cost sales realigned retroactively selling general administrative expenses due organizational realignments hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued net revenue components weighted net revenue change prioryear period follows following fiscal years ended october 31 fiscal 2009 fiscal 2009 global slowdown consumer spending impacted segments net revenue decreased 32 fiscal 2009 fiscal 2008 increased 13 constant currency basis unfavorable currency impact fiscal 2009 due primarily movement dollar euro fiscal 2009 services segment contributed favorably total hp net revenue change primarily result eds acquisition us net revenue increased 12 413 billion fiscal 2009 compared fiscal 2008 net revenue outside united states decreased 10 732 billion increase us net revenue fiscal 2009 fiscal 2008 primarily result acquisition eds psg net revenue decline fiscal 2009 fiscal 2008 primarily result overall slowdown global economy psg average selling prices asps declined consumer clients commercial clients asp decline fiscal 2009 offset slightly increase option monitor attach rates psg unit volumes however increased slightly fiscal 2009 compared fiscal 2008 ipg experienced net revenue declines fiscal 2009 fiscal 2008 commercial consumer hardware business units supplies business unit volume declines across business units result softness business consumer demand environments ess net revenue decreased fiscal 2009 fiscal 2008 driven declines industry standard servers iss business critical systems storage business units revenue declines due primarily economic slowdown overall weak demand environment iss unit volumes average unit prices declined fiscal 2009 compared prior year hp software experienced net revenue declines fiscal 2009 fiscal 2008 business technology optimization bto business unit software business unit due primarily revenue declines licenses services effect partially offset increased support revenue result renewal rate increases hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued net revenue corporate investments declined fiscal 2009 fiscal 2008 resulting lower sales network infrastructure products primarily result slowdown networking market hpfs net revenue decreased fiscal 2009 fiscal 2008 due unfavorable currency movements net revenue increase services fiscal 2009 fiscal 2008 due primarily net revenue increases infrastructure technology outsourcing application services business process outsourcing primarily result eds acquisition fourth quarter fiscal 2008 effect partially offset unfavorable currency impacts decline spending existing customers net revenue technology services declined fiscal 2009 due primarily unfavorable currency impacts weak economic conditions effect partially offset growth extended warranty fiscal 2008 fiscal 2008 hp net revenue increased approximately 135 prioryear period 84 constant currency basis favorable currency impact fiscal 2008 due primarily movement dollar euro us net revenue 369 billion fiscal 2008 increase 6 prior year international net revenue increased 17 814 billion psg net revenue increased fiscal 2008 fiscal 2007 result unit volume increase 22 unit volume increase result strong growth notebooks continued strength emerging markets positive revenue impact unit volume increase moderated declines asps commercial consumer clients 7 4 respectively ipg net revenue increased fiscal 2008 fiscal 2007 due growth supplies net revenue result higher unit volumes strong performance colorrelated products fiscal 2008 commercial hardware net revenues increased slightly consumer hardware net revenues declined due primarily competitive pricing pressures slowing economy ess net revenue increased fiscal 2008 prioryear period due primarily strong performance storage due part growth within eva msa product lines revenue growth industry standard servers increased unit volumes blade revenues fiscal 2008 revenues business critical systems flat compared prioryear period hp software net revenue growth fiscal 2008 fiscal 2007 attributable strong growth bto business unit resulting revenue increases support growth license revenue partially result acquisition opsware inc opsware september 2007 lesser extent increased services contract sales hpfs net revenue increased fiscal 2008 prior year due primarily increase mix operating leases portion asset portfolio growth average portfolio assets services net revenue increased fiscal 2008 prior year due primarily net revenue increases technology services infrastructure technology outsourcing application services business process outsourcing primarily result eds acquisition august 26 2008 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued gross margin gross margin table identifies segments weighted contribution change total company gross margin corresponding prior year segment contribution components gross margin decline compared prioryear periods follows fiscal 2009 total company gross margin decreased 06 percentage points fiscal 2009 compared fiscal 2008 segment perspective weighted basis ess largest impact total company gross margin decline due mix rate declines ess gross margin decreased fiscal 2009 prior year due primarily competitive pricing across segment business units product mix shifts gross margin services segment increased fiscal 2009 fiscal 2008 due primarily continued focus cost structure improvements including delivery efficiencies cost controls technology services business edsrelated acquisition synergies partially offset mix effect acquisition eds business lower gross margins increase hp software gross margin fiscal 2009 prior year resulted primarily favorable support services revenue mix improved services margins effect partially offset unfavorable license revenue mix hpfs gross margin decline fiscal 2009 fiscal 2008 driven unfavorable currency impacts lower margins relating endoflease activities higher bad debt expenses lower margins remarketing buyout activities effect partially offset higher portfolio margins gross margin corporate investments declined fiscal 2009 fiscal 2008 result unit volume decline sale network infrastructure products competitive pricing pressures improvement ipg gross margin fiscal 2009 prior year resulted primarily increase supplies mix supplies pricing effect partially offset hardware margin declines hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued psg favorable impact change total company gross margin due mix effect gross margin representing smaller component total gross margin levels experienced prioryear period psg gross margin declined fiscal 2009 fiscal 2008 resulting asps declining faster pace component costs combined mix shift towards lowerend products effects partially offset lower warranty supply chain costs improvements option attach rate fiscal 2008 total company gross margin decreased slightly fiscal 2008 fiscal 2007 segment basis increase hp software gross margin small increase ess gross margin offset small gross margin declines services hpfs flat gross margin growth across remaining segments slight improvement ess gross margin fiscal 2008 prior year primarily result improved cost management attach rates industry standard servers services gross margin declined fiscal 2008 prior year due primarily impact continued competitive pricing environment partially offset continued focus cost structure improvements generated delivery efficiencies cost controls fiscal 2008 compared fiscal 2007 improvement hp software gross margin primarily result cost savings bto business unit hpfs gross margin declined slightly fiscal 2008 due primarily higher bad debt expenses effect partially offset increased margins endoflease activity ipg gross margin remained flat fiscal 2008 compared fiscal 2007 improved supplies margins resulting mix shifts offset unfavorable hardware margins fiscal 2008 psg gross margin remained flat due primarily declining asps offset increase attach rate highermargin options operating expenses research development total research development rd expense decreased fiscal 2009 compared fiscal 2008 due primarily favorable currency impacts related movement dollar euro well effective cost controls effect partially offset additional expenses related primarily services fiscal 2009 rd expense percentage net revenue decreased ess psg ipg increased hp software services corporate investments total rd decreased fiscal 2008 compared fiscal 2007 due primarily effective cost controls impact partially offset unfavorable currency impacts related movement dollar euro major segments experienced yearoveryear decrease rd expense percentage net revenue fiscal 2008 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued selling general administrative selling general administrative sga expense decreased fiscal 2009 fiscal 2008 due primarily favorable currency impacts related movement dollar euro lower compensation expense well effective cost management impact partially offset additional expenses related eds acquisition fiscal 2009 sga expense percentage net revenue decreased segments except corporate investments total sga expense increased fiscal 2008 due primarily higher field selling costs result investments sales resources unfavorable currency impacts related movement dollar euro additional expenses related eds acquisition major segments experienced yearoveryear decrease sga expense percentage net revenue fiscal 2008 amortization purchased intangible assets increase amortization expense fiscal 2009 fiscal 2008 due primarily amortization expenses related intangible assets purchased part eds acquisition increase amortization expense fiscal 2008 compared fiscal 2007 due primarily amortization expenses related intangible assets purchased part eds acquisition well acquisitions made fiscal 2008 information amortization purchased intangibles assets see note 7 consolidated financial statements item 8 incorporated herein reference inprocess research development charges record iprd charges connection acquisitions accounted business combinations fully described note 6 consolidated financial statements item 8 fiscal 2009 fiscal 2008 fiscal 2007 recorded iprd charges 7 million 45 million 190 million respectively related acquisitions decrease iprd fiscal 2009 fiscal 2008 due primarily higher iprd expenses prior year result eds acquisition fourth quarter fiscal 2008 restructuring charges fiscal 2009 640 million charges included 346 million severance facility costs related fiscal 2008 restructuring plan 297 million severance costs associated fiscal 2009 restructuring plan reduction 3 million related adjustments restructuring plans restructuring charges fiscal 2008 270 million included 246 million charges due primarily severance facility costs related eds acquisition net charge 24 million relating adjustments existing restructuring programs restructuring charges fiscal 2007 387 million included 354 million expenses related severance benefit costs associated employees elected participate early retirement program implemented fiscal 2007 net charge 33 million relating adjustments previous restructuring programs hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued information restructuring charges see note 8 consolidated financial statements item 8 incorporated herein reference workforce rebalancing part ongoing business operations incurred workforce rebalancing charges severance related costs within certain business segments fiscal 2009 workforce rebalancing activities considered part normal operations continue optimize cost structure workforce rebalancing costs included business segment results expect incur additional workforce rebalancing costs future acquisitionrelated charges recorded acquisitionrelated charges 242 million 41 million fiscal 2009 fiscal 2008 respectively related primarily consulting integration costs well retention bonuses associated eds acquisition increase acquisitionrelated charges fiscal 2009 due primarily acquisition eds august 2008 pension curtailments pension settlements net fiscal 2007 recognized net gain pension curtailments settlements 517 million relating primarily 542 million curtailment gain associated modification us defined benefit pension plan postretirement benefit plan curtailment gain offset partially net settlement losses related pension plan design changes information retirement postretirement benefit plans see note 16 consolidated financial statements item 8 incorporated herein reference interest net interest net decreased 721 million fiscal 2009 compared fiscal 2008 decrease driven primarily higher interest expenses due higher average debt balances principally related eds acquisition lower interest income result lower interest rates higher currency losses balance sheet remeasurement items additionally higher gains sale real estate fiscal 2008 compared fiscal 2009 interest net decreased 458 million fiscal 2008 compared fiscal 2007 decrease resulted primarily currency losses balance sheet remeasurement items lower interest income result lower interest rates effect partially offset lower interest expense additionally prioryear period benefited higher gains sale real estate provision taxes effective tax rates 186 205 208 fiscal 2009 fiscal 2008 fiscal 2007 respectively hps effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated earnings hps operations lowertax jurisdictions throughout world hp provided us taxes earnings hp plans reinvest earnings indefinitely outside united states hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued decrease overall tax rate fiscal 2009 fiscal 2008 due primarily net income tax benefits recorded fiscal 2009 related foreign net operating losses adjustments estimated fiscal 2008 tax accruals upon filing 2008 income tax returns valuation allowance reversals state foreign net operating losses miscellaneous items decrease overall tax rate fiscal 2008 fiscal 2007 related part lower tax rates jurisdictions full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 14 consolidated financial statements item 8 incorporated herein reference segment information description products services well financial data segment found note 19 consolidated financial statements item 8 incorporated herein reference realigned segment financial data fiscal years ended october 31 2008 2007 reflect changes hps organizational structure occurred beginning first quarter fiscal 2009 describe changes fully note 19 presented business segments annual report form 10k based distinct nature various businesses customer base homogeneity products technology discussions include results segments hp enterprise business services ess hp software reported collectively broader hp enterprise business describe results business segments hp enterprise business detail services result acquisition eds renamed services segment reorganized business units within segment better align enhanced services portfolio business reorganization resulted three new business units application services infrastructure technology outsourcing business process outsourcing part reorganization businesses included former hp consulting integration business unit divided among application services technology services business units hp software segment addition businesses included former outsourcing services business unit divided among infrastructure technology outsourcing business process outsourcing business units managed print services offering technology services moved ipg hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued historical results 1reflects certain reclassifications made historical results conform current year presentation noted note 1 consolidated financial statements item 8 components weighted net revenue growth compared prioryear periods business unit follows following fiscal years ended october 31 services net revenue increased 654 716 adjusted currency fiscal 2009 compared fiscal 2008 increase revenues due primarily acquisition eds august 26 2008 services net revenue fiscal 2009 includes revenue infrastructure technology outsourcing technology services application services business process outsourcing accounted approximately 46 28 17 9 revenues respectively net revenue infrastructure technology outsourcing application services business process outsourcing increased due eds acquisition net revenue increase infrastructure technology outsourcing application services business process outsourcing partially offset unfavorable currency impacts decline spending existing customers offset new growth due slowing demand current economic environment application services business process outsourcing impacted greater degree infrastructure technology outsourcing net revenue technology services declined due primarily unfavorable currency impacts weak economic conditions effect partially offset growth extended warranty services earnings operations percentage net revenue increased 25 percentage points fiscal 2009 compared fiscal 2008 operating margin increased due primarily decrease operating expenses percentage revenue also increase gross margin fiscal 2009 operating expense declined result continued focus cost structure improvements overall cost controls gross margin services segment increased fiscal 2009 fiscal 2008 due primarily continued focus cost structure improvements including delivery efficiencies cost controls technology services business edsrelated acquisition synergies partially offset mix effect acquisition eds business lower gross margins hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services net revenue including eds results august 26 2008 increased 368 300 adjusted currency fiscal 2008 compared fiscal 2007 net revenue increased prior year primarily due acquisition eds services net revenue excluding eds results august 26 2008 increased 117 48 adjusted currency fiscal 2008 compared fiscal 2007 services net revenue including eds results august 26 2008 fiscal 2008 includes revenue technology services infrastructure technology outsourcing application services business process outsourcing accounted approximately 49 36 12 3 revenues respectively net revenue technology services increased fiscal 2008 prior year due primarily growth solution support services extended warranty revenue favorable currency impacts impact partially offset competitive pricing pressures net revenue infrastructure technology outsourcing application services business process outsourcing increased driven mainly eds acquisition increase volume favorable currency impacts new business services earnings operations percentage net revenue including eds results august 26 2008 increased 04 percentage points fiscal 2008 compared fiscal 2007 operating margin increase result decrease operating expenses percentage net revenue partially offset slight decrease gross margin gross margin decrease fiscal 2008 due primarily impact continued competitive pricing environment partially offset continued focus cost structure improvements generated delivery efficiencies cost controls fiscal 2008 continued efficiency improvements operating expense structure contributed decline operating expenses percentage net revenue compared prior year combined segment results combined segment results refer results services business fiscal 2008 include results eds acquisition date combined eds results nine months ended june 30 2008 period august 1 2008 acquisition date combined segment results presented informational purposes indicative results operations would achieved businesses operated together period 1refers results services year ended october 31 2008 combined eds results nine months ended june 30 2008 period august 1 2008 acquisition date order conform presentation segment earnings operations excluded certain eds expenses allocate segments hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services net revenue decreased 115 38 adjusted currency fiscal 2009 compared fiscal 2008 combined segment results presented table services net revenue prior period combined segment results includes revenue infrastructure technology outsourcing technology services application services business process outsourcing accounted approximately 46 26 19 9 revenues respectively net revenue declines due primarily unfavorable currency impact deferred revenue writedown resulting purchase accounting lower addon business due slowing economic environment services net revenue fiscal 2009 compared combined segment results fiscal 2008 reflects weighted net revenue decline infrastructure technology outsourcing business process outsourcing technology services application services units 50 39 13 respectively services earnings operations percentage net segment revenue increased 63 percentage points fiscal 2009 compared fiscal 2008 combined segment results operating margin increased result increase gross margin decrease operating expenses percentage net revenue gross margin increased due primarily continued focus cost structure improvements including delivery efficiencies cost controls acquisition synergies continued improvements operating expense structure contributed decline operating expenses percentage net revenue compared fiscal 2008 enterprise storage servers components weighted net revenue change compared prioryear periods business unit follows following fiscal years ended october 31 ess net revenue decreased 208 160 adjusted currency fiscal 2009 fiscal 2008 revenue decline due primarily economic slowdown overall weak demand environment iss net revenue declined 20 fiscal 2009 compared fiscal 2008 due declines unit volume iss average unit prices declined fiscal 2009 improving second half fiscal 2009 result new product ramp total ess blades revenue declined 8 fiscal 2009 compared fiscal 2008 business critical systems net revenue decreased 27 fiscal 2009 compared fiscal 2008 driven decline integrity server revenue due weaker market conditions planned phaseout parisc alpha server product lines storage net revenue declined 17 fiscal 2009 compared fiscal 2008 due decline disk tape products result hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued weaker demand environment effects partially offset revenue resulting acquisition lefthand networks completed first quarter fiscal 2009 fiscal 2009 ess earnings operations percentage net revenue decreased 34 percentage points compared fiscal 2008 due primarily decline gross margin gross margin fiscal 2009 decreased due primarily competitive pricing across segment business units product mix shifts operating expense percentage net revenue fiscal 2009 generally consistent fiscal 2008 ess net revenue increased 41 decreased 05 adjusted currency fiscal 2008 fiscal 2007 storage net revenue increased 13 fiscal 2008 compared fiscal 2007 strong performance midrange eva entry msa tape media storage software industry standard servers net revenue grew 2 fiscal 2008 compared fiscal 2007 result growth blade revenue unit volumes revenue growth industry standard servers business partially offset decline average unit prices driven market movement lowend product lines component cost declines business critical systems net revenue growth flat fiscal 2008 compared fiscal 2007 integrity servers net revenue grew 22 fiscal 2008 represents 79 business critical systems revenue mix 64 fiscal 2007 increase offset revenue declines parisc product line planned phaseout alpha server product line integrity servers revenue fiscal 2008 also included revenue montvalebased integrity servers fiscal 2008 ess earnings operations percentage net revenue increased 18 percentage points compared fiscal 2007 due primarily decrease operating expenses percentage net revenue gross margin increased slightly fiscal 2008 compared fiscal 2007 due primarily cost management improved attach rates industry standard servers effect mostly offset competitive pricing storage industry standard servers mix shift entry level integrity servers decrease operating expense percentage net revenue fiscal 2008 due primarily continued cost structure improvements hp software components weighted net revenue change compared prioryear periods business unit follows following fiscal years ended october 31 hp software net revenue decreased 154 108 adjusted currency fiscal 2009 fiscal 2008 due softening enterprise spending declines large deals fiscal 2009 revenue hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued licenses services declined effect partially offset increased support revenue result renewal rate increases net revenue bto decreased 15 fiscal 2009 compared fiscal 2008 net revenue software decreased 17 fiscal 2009 compared fiscal 2008 due declines revenues communication media solutions business intelligence solutions information management hp software earnings operations percentage net revenue increased 73 percentage points fiscal 2009 compared fiscal 2008 operating margin improvement fiscal 2009 due primarily increased gross margin coupled decreased operating expenses percentage net revenue increase gross margin fiscal 2009 resulted primarily favorable support services revenue mix improved services margins effect partially offset unfavorable license revenue mix decrease operating expenses percentage net revenue fiscal 2009 due primarily continued cost controls hp software net revenue increased 163 104 adjusted currency fiscal 2008 fiscal 2007 net revenue bto increased 23 fiscal 2008 compared fiscal 2007 bto net revenue growth fiscal 2008 driven increases support higher license revenue due part opsware acquisition increases services contracts net revenue software increased 6 fiscal 2008 compared fiscal 2007 growth software net revenue fiscal 2008 attributable primarily growth information management business due part acquisition tower software may 2008 increases services business intelligence solutions effect partially offset net revenue decline communication media solutions resulting competitive environment following network equipment provider industry consolidation transfer hardware revenues ess due platform shift hp software earnings operations percentage net revenue increased 50 percentage points fiscal 2008 compared fiscal 2007 operating margin increase fiscal 2008 result combination increase gross margin decrease operating expenses percentage net revenue increase gross margin fiscal 2008 due primarily cost savings bto business cost structure improvements result increased scale information management business lesser extent favorable change revenue mix driven higher revenues bto business typically higher gross margins remainder segment decrease operating expenses percentage net revenue fiscal 2008 due primarily continued cost controls effect partially offset increased field selling costs driven sales force investments personal systems group hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued components weighted net revenue change compared prioryear periods business unit follows following fiscal years ended october 31 psg net revenue decreased 165 116 adjusted currency fiscal 2009 fiscal 2008 revenue decline primarily result overall slowdown global economy despite overall regional declines revenue china increased fiscal 2009 compared fiscal 2008 psg net revenue decreased across businesses fiscal 2009 unit volume increased slightly fiscal 2009 compared fiscal 2008 increase notebook pc volume offset decline desktop pcs workstations handheld devices unit volume increase notebook pcs due part growth hp compaq mini notebooks fiscal 2009 net revenue notebook pcs decreased 11 net revenue desktop pcs decreased 23 fiscal 2008 workstations handheld revenues declined 33 52 respectively fiscal 2009 fiscal 2008 fiscal 2009 net revenue consumer clients decreased 14 net revenue commercial clients decreased 19 fiscal 2008 net revenue increase psg related primarily increased sales extended warranties support services thirdparty branded options fiscal 2009 psg net revenue also impacted asp declines asps consumer clients declined 21 asps commercial clients declined 16 asps declined fiscal 2008 due primarily competitive pricing environment component cost reductions impact currency combined mix shift toward lowerend models asp decline fiscal 2009 offset slightly increase option monitor attach rates psg earnings operations percentage net revenue decreased 09 percentage points fiscal 2009 fiscal 2008 decrease due primarily gross margin decline resulting asps declining faster pace component costs combined mix shift toward lowerend products effects partially offset lower warranty supply chain costs improvements option attach rate decrease operating expenses percentage net revenue fiscal 2009 result effective cost controls psg net revenue increased 162 108 adjusted currency fiscal 2008 fiscal 2007 unit volumes increased 22 fiscal 2008 compared fiscal 2007 unit volume increase result strong growth notebooks continued strength emerging markets fiscal 2008 net revenue notebook pcs increased 28 net revenue desktop pcs increased 5 fiscal 2007 fiscal 2008 net revenue consumer clients increased 19 net revenue commercial clients increased 15 fiscal 2007 net revenue increase psg fiscal 2008 related primarily increased sales thirdparty branded options extended warranties revenue increase partially offset decline handhelds revenue driven product transition within converged devices fiscal 2008 positive revenue impact psg unit volume increase compared fiscal 2007 also moderated 7 decline commercial client asps hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued 4 decline consumer client asps declined fiscal 2007 result price erosion related component cost reductions competitive pricing environment effect partially offset increased notebook mix improved attach rates monitors options psg earnings operations percentage net revenue increased 03 percentage points fiscal 2008 fiscal 2007 result decrease operating expenses percentage net revenue combined flat gross margin gross margin performance result declining asps offset increase attach rate highermargin options operating expense decline percentage net revenue fiscal 2008 result primarily increased net revenue continued efforts improve cost structure efficiency measures imaging printing group components weighted net revenue change compared prioryear periods business unit follows following fiscal years ended october 31 ipg net revenue decreased 189 165 adjusted currency fiscal 2009 fiscal 2008 reflecting impact global economic slowdown net revenue commercial hardware declined 36 fiscal 2009 compared fiscal 2008 net revenue decline commercial hardware driven unit volume decline 38 fiscal 2009 fiscal 2008 due primarily worldwide market weaknesses impacting laser graphics businesses supplies net revenue declined 11 fiscal 2009 compared fiscal 2008 supplies net revenue decline fiscal 2009 across platforms result reductions channel inventory unfavorable currency impacts effect partially moderated supplies pricing net revenue consumer hardware declined 27 fiscal 2009 compared fiscal 2008 net revenue decline consumer hardware driven unit volume decline 24 fiscal 2009 fiscal 2008 reflecting weak demand environment channel inventory reductions ipg earnings operations percentage net revenue increased 26 percentage points fiscal 2009 compared fiscal 2008 operating margin improvement fiscal 2009 combination increase gross margin decrease operating expenses percentage net revenue improvement gross margin fiscal 2009 resulted primarily increase supplies mix supplies pricing effect partially offset hardware margin declines due hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unfavorable currency impacts declines average revenue per unit decrease operating expenses percentage net revenue fiscal 2009 due primarily effective cost controls ipg net revenue increased 35 decreased 08 adjusted currency fiscal 2008 fiscal 2007 growth printer supplies net revenue fiscal 2008 fiscal 2007 reflected higher unit volumes supplies result strong performance colorrelated products slight increase commercial hardware net revenue fiscal 2008 fiscal 2007 due mainly unit volume growth multifunction printers color laser printers large format printing products revenue recent acquisitions partially offset continued competitive pricing pressures decrease consumer hardware net revenue fiscal 2008 fiscal 2007 due primarily discontinued sales cameras competitive pricing pressures lower unit volumes consumer hardware result slower growth overall consumer printer market consumer commercial hardware impacted continued shift demand lowerpriced products slowing economy caused average revenue per unit category decline ipg earnings operations percentage net revenue increased 04 percentage points fiscal 2008 prior fiscal year operating margin improvement fiscal 2008 due lower operating expenses percentage net revenue fiscal 2008 gross margin remained flat driven improved margins supplies result product mix effect offset unfavorable hardware margins decrease operating expenses percentage net revenue fiscal 2008 due primarily higher revenue continued cost controls effect partially offset increased investments enterprise printing sales force hp financial services hpfs net revenue decreased 09 fiscal 2009 fiscal 2008 net revenue decrease due unfavorable currency movements constant currency basis fiscal 2009 net revenue increased due primarily portfolio growth increased operating lease mix higher buyout activities effect partially offset lower levels remarketing endoflease activity hpfs earnings operations percentage net revenue increased 06 percentage points fiscal 2009 fiscal 2008 due primarily decrease operating expenses effect partially offset decline gross margin operating expense decrease due continued cost controls decline gross margin driven unfavorable currency impact lower margins relating end lease activity higher bad debt expenses lower remarketing buyout margins effect partially offset higher portfolio margins hpfs net revenue increased 155 fiscal 2008 fiscal 2007 net revenue increase due primarily shift towards operating leases financing leases overall portfolio asset mix higher average portfolio assets year higher endoflease activity favorable currency impact hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hpfs earnings operations percentage net revenue increased 05 percentage points fiscal 2008 fiscal 2007 due primarily decrease operating expenses percentage net revenue increased margin endof lease activity effect offset higher bad debt expenses lower portfolio margins due higher operating leases portfolio asset mix operating expense decrease percentage revenue driven higher rate increase revenues relative operating expenses due higher operating lease mix portfolio continued cost controls financing originations new financing originations represent amounts financing provided customers equipment related software services include intercompany activity increased 69 fiscal 2009 fiscal 2008 97 fiscal 2008 fiscal 2007 increases reflect higher financing associated hp product sales services offerings resulting improved integration engagement hps sales efforts offset unfavorable currency impact portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include gross financing receivables approximately 61 billion 51 billion october 31 2009 october 31 2008 net equipment operating leases 22 billion 18 billion october 31 2009 october 31 2008 disclosed note 11 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 700 million october 31 2009 october 31 2008 intercompany leases approximately 10 billion 800 million october 31 2009 october 31 2008 eliminated consolidation 2allowance doubtful accounts includes shortterm longterm portions allowance financing receivables 3hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs net portfolio assets october 31 2009 increased 208 october 31 2008 increase resulted higher levels financing originations fiscal 2009 favorable currency impact overall percentage portfolio assets reserves remained flat due continued strong portfolio performance hpfs funds operations mainly combination intercompany debt equity addition balances reflected hp assumed net portfolio assets 51 million acquisition eds rollforward reserves corporate investments net revenue corporate investments relates primarily network infrastructure products sold brand procurve networking fiscal 2009 revenue network infrastructure products decreased 196 compared fiscal 2008 resulting slowdown networking market resulting decrease sales enterprise ethernet switch products partially offsetting revenue decline revenue resulting acquisition colubris networks inc colubris hp acquired october 2008 corporate investments reported loss operations fiscal 2009 compared positive earnings operations reported fiscal 2008 due primarily lower earnings operations generated network infrastructure products gross margin corporate investments declined fiscal 2009 result unit volume decline sale network infrastructure products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued competitive pricing pressure loss operations corporate investments also impacted expenses carried segment associated corporate development global alliances hp labs declined fiscal 2008 fiscal 2008 majority net revenue corporate investments related network infrastructure products sold brand procurve networking grew 262 fiscal 2007 result continued increased sales enterprise class gigabit 10 gigabit ethernet switch products fiscal 2008 network infrastructure revenue included small amount revenue colubris corporate investments reported earnings operations fiscal 2008 compared losses fiscal 2007 due primarily increased earnings operations generated network infrastructure products operating expenses related hp labs flat compared fiscal 2007 liquidity capital resources cash balances held numerous locations throughout world including substantial amounts held outside united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws provided united states federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states repatriation could result additional united states federal income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside united states would meet united states liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed information discussed presented based historical results include results eds period following august 26 2008 closing date acquisition liquidity use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support business operations capital expenditures payment stockholder dividends addition level discretionary investments share repurchases able supplement nearterm liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued institutions liquidity subject various risks including market risks identified section entitled qualitative quantitative disclosures market risk item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda organized follows •overview discussion business overall analysis financial highlights affecting company provide context remainder mda •critical accounting policies estimates discussion accounting estimates believe important understanding assumptions judgments incorporated reported financial results •results operations analysis financial results comparing fiscal 2013 fiscal 2012 comparing fiscal 2012 fiscal 2011 discussion results operations consolidated level followed detailed discussion results operations segment •liquidity capital resources analysis changes balance sheets cash flows discussion financial condition liquidity •contractual obligations offbalance sheet arrangements overview contractual obligations postretirement benefit plan funding commitments payments restructuring uncertain tax positions offbalance sheet arrangements intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers government health education sectors offerings span following personal computing access devices imaging printingrelated products services enterprise infrastructure including enterprise server storage technology networking products solutions technology support maintenance multivendor customer services including infrastructure technology business process outsourcing application development support services consulting integration services management software information management solutions security intelligencerisk management solutions seven reportable business segments financial reporting purposes personal systems printing enterprise group eg enterprise services es software hp financial services hpfs corporate investments hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued following provides overview key financial metrics segment fiscal 2013 1hp consolidated net revenue excludes intersegment net revenue includes revenue corporate investments segment hp consolidated earnings operations includes amortization intangible assets unallocated costs related certain stockbased compensation expenses restructuring charges corporate unallocated costs eliminations loss corporate investments segment acquisitionrelated charges net revenue declined 67 decreased 55 constant currency basis fiscal 2013 compared fiscal 2012 due primarily revenue declines approximately 10 8 5 3 personal systems es eg printing segments respectively revenue declines reflect series revenue growth challenges impacted segments varying degrees primary challenges included significant contraction overall pc market impacted personal systems weak public sector spending enterprise demand particularly europe impacted es eg segments competitive pricing pressures enterprise pc markets impacted eg personal systems segments unfavorable currency impacts volume declines supplies impacted printing segment gross margin decreased 01 percentage points fiscal 2013 compared fiscal 2012 gross margin decline due primarily competitive pricing environments markets eg personal systems products decreased revenue contractual price declines es partially offsetting negative impacts gross margin increase printing due primarily improvements toner higher average selling prices highervalue consumer printers operating margin increased 156 percentage points fiscal 2013 compared fiscal 2012 due primarily absence goodwill intangible asset impairment charges lower restructuring charges fiscal 2013 additionally total research development rd selling general administrative sga expenses decreased 29 due primarily rd activity streamlining eg particularly business critical systems bcs cost savings associated ongoing restructuring efforts impacted expense categories hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued business continues produce significant cash flow operations generating 116 billion fiscal 2013 year repaid 57 billion debt returned 11 billion stockholders dividends repurchased 15 billion worth common stock addition purchased 32 billion capital assets ended fiscal 2013 investment portfolio 125 billion consisting cash equivalents shortterm longterm investments increase approximately 800 million end fiscal 2012 entered fiscal 2013 experienced multiquarter decline revenue operating margins decline financial performance reflected series challenges facing business challenges related structural execution issues aligning costs revenue trajectory addressing need rationalize rd investments reinvest systems rebuilding channel partner relationships challenges related dynamic market trends growth mobility increasing demand hyperscale computing infrastructure shift softwareasaservice saas transition towards cloud computing aggressive pricing conditions also confronted series significant macroeconomic challenges fiscal 2013 shift consumer spending weak demand smb enterprise sectors europe declining growth emerging markets fiscal 2013 continued address challenges driving innovation across company improving operations aligning cost structure rebuilding balance sheet result efforts revenue declines begun moderate reap early benefits investments product innovation decreasing costs driven restructuring efforts begun align revenue trajectory enterprise services business begun become predictable business performance begun improve printing business due focus key initiatives ink office managed print services ink advantage addition made investments targeted channel partner relationships improvements sales force channel partner deal pricing tools reporting infrastructure strong cash flows operations fiscal 2013 also allowed us reduce debt enter fiscal 2014 continue experience challenges represent trends uncertainties may affect business results operations one set challenges relates continuing dynamic accelerating market trends decline pc market growth multiarchitecture devices running competing operating systems market shift towards tablets within mobility market shift cloudrelated infrastructure software services growth saas business models another set challenges relates changes competitive landscape major competitors expanding product service offerings integrated products solutions businessspecific competitors exerting increased competitive pressure targeted areas going new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model gotomarket execution addition continuing experience macroeconomic weakness across many geographic regions particularly europe middle east africa emea china highgrowth markets discussion challenges segment level set forth •in personal systems continue negatively impacted market shift towards tablet products within mobility reduced demand consumer notebook products benefits new product investments area materialize continue negatively impacted trend personal systems also impacted consumer demand weakness particularly emea competitive pricing environment hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued •in printing experiencing impact growth mobility weak consumer demand weak demand emea competitive pricing environment successful addressing challenges need execute key initiatives focusing products targeted high usage categories developing emerging market opportunities introducing new revenue delivery models consumer customers •in eg experiencing revenue declines due multiple market trends highly competitive pricing environment including increasing demand hyperscale computing infrastructure products transition cloud computing addition market bcs products continues weaken overall market unix products contracts successful overcoming challenges must address business model gotomarket execution challenges including improved channel execution continue pursue new product innovation hp moonshot servers 3par storage hp cloudsystem areas softwaredefined networking blade servers wireless networking •in es facing market macroeconomic pressures competitive pricing environment internal execution challenges weak public sector spending successful addressing challenges must execute multiyear turnaround plan includes cost reduction initiative align costs revenue trajectory initiatives targeted improved execution areas sales performance accountability contracting practices pricing •in software facing multiple challenges including market shift saas gotomarket execution challenges successful addressing challenges must improve gotomarket execution integrated customer solutions aligned customer demand achieve broader integration across overall product portfolio work capitalize important market opportunities areas cloud big data security mobility address challenges need continue pursue new product innovation view towards developing new products services aligned market demand industry trends needs customers partners addition need continue improve operations particular focus enhancing endtoend processes also need continue optimize sales coverage models align sales incentives strategic goals improve channel execution strengthen capabilities areas strategic focus develop capitalize market opportunities discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles gaap require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows summary significant accounting policies included note 1 consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue applying basic revenue recognition criteria ie persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured along revenue recognition principles including industry specific revenue recognition guidance enter contracts sell products services many sales agreements contain standard terms conditions agreements enter contain nonstandard terms conditions many arrangements include multiple elements result significant contract interpretation required determine appropriate accounting including identification deliverables considered separate units accounting allocation transaction price among elements arrangement timing revenue recognition elements recognize revenue delivered elements separate units accounting delivered elements standalone value uncertainties regarding customer acceptance resolved customernegotiated refund return rights contingencies present delivered elements standalone value recognize revenue consistent pattern associated deliverables arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially within control delivered element constitutes separate unit accounting changes allocation transaction price elements may impact timing revenue recognition contract change total revenue recognized contract establish selling prices used deliverable based vendorspecific objective evidence vsoe selling price available thirdparty evidence tpe vsoe selling price available estimated selling price esp neither vsoe selling price tpe available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers esp established based managements judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued also given market conditions competitor pricing strategies industry technology life cycles may modify develop new gotomarket practices future may result changes selling prices impacting vsoe selling price esp arrangements multiple elements allocation transaction price determined inception arrangement based unit accountings relative selling price however aforementioned factors may result different allocation transaction price deliverables multiple element arrangements entered future periods may change pattern timing revenue recognition identical arrangements executed future periods change total revenue recognized given arrangement hardware products recognize revenue generated direct sales end customers indirect sales channel partners including resellers distributors valueadded solution providers assuming revenue recognition criteria met indirect sales channel partners recognize revenue time delivery channel partners economic substance apart hp completed obligations related sale record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate number customers actually redeem incentive based historical experience specific terms conditions incentive outsourcing services revenue generally recognized service provided amount earned contingent upon future event service provided evenly contract term service billings uneven generally recognize revenue straightline basis contract term losses outsourcing arrangements recognized period contractual losses become probable estimable recognize revenue work progresses certain fixedprice contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date apply proportional performance method reasonably dependable estimates labor costs applicable various stages contract made fixedprice contracts certain design build projects design develop construct software infrastructure systems recognize revenue work progresses using percentageofcompletion method use costtocost method measurement towards completion determined percentage cost incurred date compared total estimated costs project total contract profit subject revisions throughout life fixedprice contract result revisions cost estimates overall contract losses applicable record changes period facts give rise revision become known circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method various software products sell eg operating system software network enabling software information technology management software enterprise security software assess whether associated software products sold stand alone hardware products software sold hardware product morethanincidental essential functionality hardware apply software accounting guidance recognize revenue sale hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued perpetual software licenses inception license term assuming revenue recognition criteria met termbased software license revenue generally recognized ratably term license software products within scope software accounting guidance use residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied revenue generated maintenance unspecified upgrades updates ifandwhenavailable basis recognized ratably period items delivered software hosting saas arrangements recognize revenue service delivered generally straightline basis contractual period performance software hosting arrangements software licenses sold associated software revenue generally recognized according whether perpetual licenses term licenses sold subject guidance software hosting arrangements consider rights provided customer eg ownership license contract termination provisions feasibility customer operate software determining account license fees saas arrangements software licenses sold entire arrangement recognized ratably term subscription arrangement warranty provision accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty provision actual warranty costs averaged approximately 29 31 annual net product revenue respectively business combinations allocate fair value purchase consideration assets acquired liabilities assumed noncontrolling interests acquiree generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquiree recorded goodwill determining fair values assets acquired liabilities assumed noncontrolling interests acquiree management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued goodwill review goodwill impairment annually whenever events changes circumstances indicate carrying amount goodwill may recoverable permitted conduct qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2013 performed quantitative test reporting units goodwill tested impairment reporting unit level except eg es reporting units consistent reportable segments identified note 18 consolidated financial statements item 8 incorporated herein reference eg includes two reporting units enterprise servers storage networking essn technology services ts es also consists two reporting units mphasis limited remainder es fiscal 2013 made two changes reporting units identified mphasis limited reporting unit apart remainder es connection integration activities combined autonomy reporting unit legacy hp software business reporting unit first step impairment test compare fair value reporting unit carrying amount estimate fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach estimate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting units ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weight fair value derived market approach 50 concluded reporting unit fair value depending level comparability publiclytraded companies reporting unit market comparables meaningful available estimate fair value reporting unit using income approach mphasis limited reporting unit used quoted market price active market estimate fair value order assess reasonableness estimated fair values reporting units compare aggregate reporting unit fair values hps market capitalization calculate implied control premium excess sum reporting units fair values hps market capitalization evaluate control premium comparing observable control premiums recent comparable transactions implied control premium believed reasonable light recent transactions reevaluate reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could reduce estimated fair value certain reporting units determining fair value reporting unit judgmental nature involves use significant estimates assumptions estimates assumptions may include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates future economic market conditions determination appropriate comparable publiclytraded companies addition make certain judgments assumptions allocating shared assets liabilities individual reporting units determine carrying amount reporting unit hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount must perform second step impairment test measure amount impairment loss second step reporting units assets including unrecognized intangible assets liabilities noncontrolling interests measured fair value hypothetical analysis calculate implied fair value goodwill reporting unit manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying amount difference recorded impairment loss annual goodwill impairment analysis performed first day fourth quarter fiscal 2013 result impairment charges excess fair value carrying amount reporting units ranged approximately 14 approximately 1200 carrying amounts software essn reporting units lowest excess fair value carrying amount 31 14 respectively estimating fair value reporting units taken consideration challenging industry market trends existed august 1 2013 date annual goodwill impairment test respective reporting unit order evaluate sensitivity estimated fair values reporting units goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease resulted excess fair value carrying amount ranging approximately 2 approximately 1000 carrying amounts hypothetical 10 decrease resulted software essn reporting units lowest excess fair value carrying amount 18 2 respectively continue monitor goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances significant adverse changes business climate operating results changes managements business strategy significant declines stock price indicate may potential indicator impairment intangible assets review intangible assets finite lives impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability intangible assets assessed based estimated undiscounted future cash flows expected result use asset undiscounted future cash flows less carrying amount finitelived intangible assets considered impaired amount impairment loss measured difference carrying amount asset fair value estimate fair value finitelived intangible assets using income approach available appropriate using market approach restructuring engaged restructuring actions require management utilize significant estimates related timing amount severance employee separation costs workforce reduction enhanced early retirement programs realizable values assets made redundant obsolete lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements full description restructuring hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued actions refer discussions restructuring results operations note 7 consolidated financial statements item 8 incorporated herein reference stockbased compensation stockbased compensation program primarily consists awards restricted stock well stock options lesser extent award types fair value restricted stock award equal hps stock price date grant stock options determining appropriate fair value model calculating fair value requires use assumptions including expected term option expected stock price volatility expected term option utilize blackscholesmerton option pricing formula value servicebased stock options determine expected term using historical exercise postvesting termination patterns determine expected stock price volatility using implied volatility options traded hps stock believe implied volatility calculated based actively traded options hps stock better indicator expected volatility future stock price trends historical volatility amount compensation recognized awards restricted stock options adjusted assumed level forfeiture due presence service performance vesting conditions recognized straightline basis requisite service period award compensation costs determined aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions extent actual forfeitures different estimates record adjustment difference period awards vest adjustments could materially affect operating results discussion stockbased compensation refer note 2 consolidated financial statements item 8 incorporated herein reference taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns filed subsequent fiscal year adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year us federal state purposes respectively recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued effective tax rate includes impact certain undistributed foreign earnings provided us federal taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2024 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states approximately 80 countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained accordingly income tax expense includes amounts intended satisfy income tax assessments may result challenges determining income tax expense potential assessments recording related effects requires management judgments estimates amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest discussion taxes earnings refer note 13 consolidated financial statements item 8 incorporated herein reference allowance doubtful accounts receivable determine allowance doubtful accounts using combination factors ensure state account receivables balance net realizable value record specific provisions individual accounts become aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position customers circumstances change would adjust estimate net realizable value receivables addition maintain allowance doubtful accounts customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable annual provision doubtful accounts averaged approximately 004 net revenue last three fiscal years using thirdparty credit risk model october 31 2013 50basispoint deterioration weightedaverage default probabilities significant customers would increased allowance doubtful accounts 48 million hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues fair value derivative instruments use derivative instruments manage variety risks including risks related interest rates foreign exchange hp mainly holds nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures october 31 2013 gross notional derivative portfolio 519 billion assets liabilities related derivative instruments measured fair value every reporting period october 31 2013 derivative assets liabilities 452 million 656 million respectively fair value price would receive sell asset pay transfer liability orderly transaction market participants measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date determination fair value often involves significant judgments assumptions determining appropriate discount rate factors risk liquidity premiums identifying similarities differences market transactions weighting differences accordingly making appropriate adjustments market transactions reflect risks specific asset liability valued hp generally uses industry standard valuation models measure fair value derivative positions prices active markets available identical asset liability hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using market based observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices discussion fair value measurements derivative instruments refer note 8 note 9 respectively consolidated financial statements item 8 incorporated herein reference retirement postretirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates future compensation growth rates expected longterm return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period future compensation growth rate assumption reflects longterm actual experience future outlook expected longterm return plan assets determined based asset allocations historical portfolio results historical asset correlations managements expected returns asset class fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm asset performance relative expected longterm asset performance hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year major assumptions vary plan weightedaverage rates used set forth note 15 consolidated financial statements item 8 incorporated herein reference fiscal 2013 changes weightedaverage assumptions would following impact net periodic benefit cost •a decrease 25 basis points expected longterm rate return would increased net periodic benefit cost approximately 65 million •a decrease 25 basis points discount rate would increased net periodic benefit cost approximately 75 million •an increase 25 basis points future compensation growth rate would increased net periodic benefit cost approximately 18 million loss contingencies involved various lawsuits claims investigations proceedings arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information discussion litigation contingencies refer note 17 consolidated financial statements item 8 incorporated herein reference accounting pronouncements summary recent accounting pronouncements application consolidated financial statements see note 1 consolidated financial statements item 8 incorporated herein reference results operations following discussion compares historical results operations fiscal years ended october 31 2013 2012 2011 unless otherwise noted comparative performance data included reflect yearoveryear comparisons revenue international operations historically represented expect continue represent majority overall net revenue result revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing business segments performed excluding impact foreign currency fluctuations present yearoveryear percentage change revenue constant currency basis assumes change exchange rate prioryear period information provided revenue viewed without impact fluctuations foreign currency rates consistent management evaluates hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued operational results trends constant currency disclosure provided addition substitute yearoveryear percentage change revenue gaap basis companies may calculate define similarly labled items differently may limit usefulness measure comparative purposes results operations dollars percentage net revenue follows following fiscal years ended october 31 1cost products cost services financing interest 2for fiscal 2012 includes 88 billion goodwill intangible asset impairment charge associated autonomy reporting unit within software segment 80 billion goodwill impairment within es segment 12 billion intangible asset impairment associated compaq trade name within personal systems segment fiscal 2011 represents impairment charges goodwill intangible assets associated acquisition palm inc recorded result decision announced august 18 2011 wind webos device business 3for fiscal 2011 includes 276 million charges connection acquisition autonomy primarily comprised 265 million net cost british pound options bought limit foreign exchange rate risk net revenue fiscal 2013 fiscal 2013 total net revenue decreased 67 decreased 55 constant currency basis us net revenue decreased 44 403 billion net revenue outside united states decreased 79 720 billion hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued components weighted net revenue change follows following fiscal years ended october 31 fiscal 2013 compared fiscal 2012 segments experienced net revenue decline leading factors contributing declines segment follows •personal systems net revenue declined due contraction overall pc market result customer shift particularly consumers tablet products •es net revenue declined due primarily net service revenue runoff contractual price declines ongoing contracts due part weak public sector spending enterprise demand •eg net revenue declined due multiple factors including competitive pricing challenges industry standard servers iss market decline unix products impacting bcs declines ts due part lower support bcs products product transitions storage overall weak enterprise demand •printing net revenue declined due unfavorable currency impacts particularly euro declines supplies commercial printers •hpfs net revenue decreased due primarily lower rental revenue decrease operating lease assets •software net revenue declined due lower license professional services revenues itcloud management information management products fiscal 2012 fiscal 2012 total net revenue decreased 54 decreased 44 constant currency basis us net revenue decreased 45 421 billion net revenue outside united states decreased 59 782 billion revenue decreased due primarily weak customer demand environment resulting volume declines hardware businesses printing supplies coupled contractual rate declines ongoing contracts es software contributed favorably total net revenue change result acquisition autonomy october 2011 detailed discussion segment revenue included segment information hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued gross margin total gross margin decreased 01 percentage points 02 percentage points fiscal 2013 2012 respectively fiscal 2013 compared fiscal 2012 segment perspective total decrease gross margin due primarily gross margin decreases eg personal systems es software printing lesser extent hpfs experienced gross margin increases primary factors impacting gross margin performance segments summarized •eg experienced gross margin decline due primarily competitive pricing pressures iss lesser extent mix impacts lower bcs storage revenue •personal systems experienced gross margin decline due primarily unfavorable currency impacts competitive pricing pressures •es gross margin decreased due net service revenue runoff contractual price declines •software gross margin decreased slightly due higher development costs itcloud management products •hpfs gross margin increased slightly due primarily higher portfolio margins lower mix operating leases higher margins early buyouts •printing gross margin increased due primarily improvement toner gross margins result lower discounting higher average revenue per unit aru consumer printers fiscal 2012 compared fiscal 2011 segment perspective total decrease gross margin due primarily gross margin decreases es eg lesser extent personal systems printing software hpfs experienced gross margin increase primary factors impacting gross margin performance segments summarized •es gross margin decreased due primarily lower expected revenue contractual rate declines ongoing contracts lower resource utilization rate additional costs associated certain contract deliverable delays •eg experienced gross margin decline due competitive pricing pressures particularly iss lesser extent networking •personal systems gross margin decreased due primarily higher component costs combined unfavorable currency impact •printing experienced gross margin decrease due unfavorable currency impact driven strength japanese yen lower ink supplies volumes result demand declines regions •software gross margin decreased due primarily lower mix license revenue •hpfs gross margin increased due primarily lower bad debt expense hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued detailed discussion segment operating margins included segment information operating expenses research development rd expense decreased fiscal 2013 due primarily rationalization rd eg bcs cost savings restructuring higher value added rd tax subsidy credits decrease partially offset increased rd expense storage iss business units software innovationfocused spending areas converged infrastructure converged cloud fiscal 2013 rd expense percentage revenue increased software personal systems es decreased eg flat printing rd expense increased fiscal 2012 due primarily additional expense acquisition autonomy innovationfocused spending storage networking converged cloud increase partially offset elimination rd expense associated former webos device business fiscal 2012 rd expense percentage revenue increased eg software printing personal systems flat es selling general administrative sga expense decreased fiscal 2013 due primarily cost savings associated ongoing restructuring efforts impacted segments partially offsetting decline higher marketing expenses support new product introductions increased administrative expenses due part higher consulting project spending fiscal 2013 sga expense percentage revenue increased eg es hpfs personal systems segments due part revenue declines taking place segments decreased software printing segments sga expense decreased fiscal 2012 due primarily lower marketing costs 103 million net gains sale real estate fiscal 2012 fiscal 2012 sga expense percentage revenue increased es personal systems decreased eg software flat printing hpfs amortization intangible assets amortization expense decreased fiscal 2013 due primarily intangible asset impairment recorded fourth quarter fiscal 2012 related autonomy certain intangible assets associated prior acquisitions reaching end amortization periods amortization expense increased fiscal 2012 due primarily intangible assets purchased part autonomy acquisition fourth quarter fiscal 2011 increase partially offset decreased amortization expenses related certain intangible assets associated prior acquisitions reaching end amortization periods information amortization intangible assets see note 6 consolidated financial statements item 8 incorporated herein reference impairment goodwill intangible assets fiscal 2012 recorded goodwill impairment charges 80 billion 57 billion associated es acquisition autonomy respectively addition recorded intangible asset hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued impairment charges 31 billion 12 billion associated acquisition autonomy compaq trade name respectively information impairment charges see note 6 consolidated financial statements item 8 incorporated herein reference restructuring charges restructuring charges decreased fiscal 2013 due primarily 21 billion charge recorded fiscal 2012 restructuring plan announced may 2012 plan restructuring charges fiscal 2013 approximately 10 billion included 12 billion charges related 2012 plan partially offset reversal 190 million severance charges related fiscal 2010 es restructuring plan restructuring charges increased fiscal 2012 due primarily 21 billion charge 2012 plan effect partially offset lower charges fiscal 2008 fiscal 2010 es restructuring plans restructuring charges fiscal 2012 23 billion included 21 billion costs related 2012 plan 106 million costs related fiscal 2008 restructuring plan 75 million costs related fiscal 2010 es restructuring plan information restructuring charges see note 7 consolidated financial statements item 8 incorporated herein reference part ongoing business operations incur workforce rebalancing charges severance related costs workforce rebalancing activities considered part normal operations continue optimize cost structure workforce rebalancing costs included business segment results expect incur additional workforce rebalancing costs future acquisitionrelated charges fiscal 2013 2012 2011 recorded acquisitionrelated charges 22 million 45 million 182 million respectively decrease fiscal 2013 2012 due primarily lower consulting integration costs associated autonomy acquisition reduced level acquisition activity interest net interest net decreased 255 million fiscal 2013 decrease driven primarily lower currency transaction losses coupled lower interest expense due lower average debt balances gain sale investments lower investment losses interest net increased 181 million fiscal 2012 increase driven primarily higher interest expense due higher average debt balances higher currency transaction losses provision taxes effective tax rates 215 60 212 fiscal 2013 2012 2011 respectively effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lowertax jurisdictions throughout world jurisdictions favorable tax rates significant effective tax rate impact periods presented include china ireland netherlands puerto rico singapore plan reinvest earnings jurisdictions indefinitely outside united states therefore provided us taxes indefinitely reinvested earnings hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued addition factors overall tax rates fiscal 2012 2011 impacted nondeductible goodwill impairments increases valuation allowances certain deferred tax assets full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 13 consolidated financial statements item 8 incorporated herein reference segment information description products services segment found note 18 consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes business segments disclosed implemented certain organizational realignments result realignments reevaluated segment financial reporting structure effective first quarter fiscal 2013 •we created new eg segment consisting ts business unit previously part former essn segment •we created new es segment consisting infrastructure technology outsourcing ito business unit application business services abs business unit previously part former services segment •we transferred personal systems commercial products support business ts business unit business unit within personal systems segment •we transferred enduser workplace support business ts business unit ito business unit within new es segment •we transferred portion business intelligence services business part corporate investments segment abs business unit within new es segment noted result changes created two new reportable segments eg segment es segment also noted eliminated two existing reportable segments essn segment services segment taking account changes effective beginning first quarter fiscal 2013 seven reportable segments personal systems printing enterprise group enterprise services software hp financial services corporate investments printing personal systems group printing personal systems segments realigned beneath newly formed printing personal systems group fiscal 2012 describe results business segments within printing personal systems group detail personal systems hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued components weighted net revenue change personal systems business units follows following fiscal years ended october 31 personal systems net revenue decreased 102 decreased 90 constant currency basis fiscal 2013 personal systems business continues experience significant challenges due overall pc market contraction result customer shift particularly consumers tablet products business also experiencing broadbased regional demand weakness particularly emea region decline personal systems revenue driven 8 decline unit volume along 3 decline average selling prices asps unit volume decrease led declines consumer notebook products result market shift tablet products decline asps due primarily competitive pricing environment net revenue consumer clients decreased 19 net revenue commercial clients decreased 4 notebook pcs net revenue decreased 15 desktop pcs net revenue decreased 8 workstations net revenue growth flat net revenue increased 22 net revenue increase related increased sales extended warranties thirdparty branded options sales newly introduced consumer tablets personal systems earnings operations percentage net revenue decreased 17 percentage points fiscal 2013 decrease driven decline gross margin combined increase operating expenses percentage net revenue decline gross margin due unfavorable currency impacts competitive pricing pressures unfavorable impacts gross margin partially offset lower component warranty costs favorable mix highermargin commercial products operating expenses percentage net revenue increased due primarily size revenue decline well slightly higher rd costs however operating expenses declined across expense categories result ongoing restructuring efforts personal systems net revenue decreased 99 decreased 88 constant currency basis fiscal 2012 revenue decline due primarily decline unit volumes effect partially offset nominal increase asps increased due primarily mix shift toward higherend models effect partially offset unfavorable currency impacts unit volume 11 due primarily continued demand weakness consumer commercial markets fiscal 2012 net revenue notebook pcs decreased 12 net revenue desktop pcs decreased 9 result overall market decline workstations revenue decreased 3 due weak demand commercial pc market fiscal 2012 net revenue consumer clients decreased 15 commercial client revenue decreased 6 personal systems earnings operations percentage net revenue decreased 12 percentage points fiscal 2012 decrease due primarily gross margin decline resulting higher component costs combined unfavorable currency impact negative impacts gross margin partially offset lower warranty logistics costs benefits insurance proceeds related flooding thailand july 2011 increased level component vendor hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued rebates addition operating expenses percentage net revenue increased due primarily decline revenue coupled increased investments research development effects partially offset decrease administrative expenses printing components weighted net revenue change printing business units follows following fiscal years ended october 31 printing net revenue decreased 26 decreased 10 constant currency basis fiscal 2013 decrease driven unfavorable currency impacts particularly weakness euro declines supplies commercial printers net revenue supplies decreased 3 due unfavorable currency impacts lower volumes toner ink supplies effects partially offset growth large format printing supplies printer unit volumes declined 3 aru increased 1 printer unit volumes decreased largely due declines lowend consumer printers continued focus highervalue ink office ink advantage products increase aru driven mix shift highvalue consumer printers effect partially offset higher discounting commercial printers net revenue commercial hardware decreased 3 driven 6 decline aru partially offset volume increase 2 decline commercial hardware net revenue partially offset net revenue growth graphics services managed print services businesses net revenue consumer hardware remained flat due 7 increase aru effect offset 5 reduction volume unit volume aru increased within highvalue consumer printers result continued focus profitable printers printing earnings operations percentage net revenue increased 17 percentage points fiscal 2013 due increase gross margin combined lower operating expenses percentage net revenue gross margin increase due improvement toner gross margins resulting lower discounting higher aru consumer printers lower cost sales toner commercial printers due favorable currency impact japanese yen positive effects partially offset unfavorable mix lowermargin consumer printers operating expenses percentage net revenue decreased due lower administrative rd field selling costs result ongoing restructuring efforts effects partially offset higher marketing expenses support new product introductions hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued printing net revenue decreased 65 decreased 63 constant currency basis fiscal 2012 driven broadbased consumer demand weakness regions printer unit volume declined 15 aru increased 8 net revenue supplies decreased 6 fiscal 2012 driven demand declines regions effects partially offset growth large format printing supplies net revenue consumer hardware decreased 14 fiscal 2012 due primarily decline consumer demand inkjet unit volume reductions 18 partially offset higher mix high value inkjet units reflecting increase aru 6 net revenue commercial hardware decreased 5 fiscal 2012 net revenue decline driven volume declines 8 due primarily weak worldwide demand environment impacting laserjet printer business negative impacts offset higher aru 2 net revenue growth large format printers managed print services business printing earnings operations percentage net revenue decreased 04 percentage points fiscal 2012 gross margin declined fiscal 2012 due unfavorable currency impact driven strength japanese yen lower ink supplies volumes result demand declines regions effects partially offset focus higherend inkjet printers combined higher mix supplies operating expenses percentage net revenue increased due decline revenue investments research development effects partially offset declines marketing administrative expenses enterprise group components weighted net revenue change business units follows following fiscal years ended october 31 eg net revenue decreased 54 decreased 44 constant currency basis fiscal 2013 due primarily macroeconomic demand challenges business faced fiscal year additionally new product technology transitions storage iss competitive pricing environment contributed revenue decline eg also experienced execution challenges impacted revenue growth fiscal 2013 although challenges moderated fourth quarter due improved sales execution business units within eg experienced yearoveryear revenue declines fiscal 2013 except networking iss net revenue decreased 4 due competitive pricing soft demand within iss experienced revenue decline core mainstream products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued partially offset revenue growth hyperscale server products ts net revenue decreased 4 due revenue declines support consulting businesses lesser extent unfavorable currency impacts support revenue declined due reduction support bcs products consulting revenue decline result unfavorable currency impacts divestiture service product line shift profitable services data center storage consulting bcs net revenue decreased 26 result ongoing pressures decline overall unix market along lower demand itaniumbased servers storage net revenue decreased 9 due declines traditional storage products include tape storage networking legacy external disk products effects partially offset growth converged storage solutions include 3par storeonce storevirtual storeall products networking revenue increased 2 due higher demand switching routing wireless products effect partially offset impact divestiture video surveillance business first quarter fiscal 2012 eg earnings operations percentage net revenue decreased 21 percentage points fiscal 2013 driven decrease gross margin lesser extent increase operating expenses percentage net revenue gross margin decrease due primarily competitive pricing pressures iss lesser extent pricing pressures storage mix impacts lower bcs revenue operating expenses percentage net revenue increased due decline eg net revenue increased field selling costs administrative expenses rd expenses percentage net revenue decreased due primarily rationalization rd specifically bcs valueadded tax subsidy credit bcs eg also benefitted cost savings resulting ongoing restructuring efforts eg net revenue decreased 53 decreased 46 constant currency basis fiscal 2012 due primarily revenue decreases iss bcs storage ts fiscal 2012 iss net revenue decreased 7 driven declines unit volume average unit prices declines due primarily competitive pricing pressures macroeconomic challenges emea effects partially offset increased demand public private cloud offerings bcs net revenue decreased 23 fiscal 2012 mainly result lower demand itaniumbased servers impact slightly offset growth nonstop servers storage net revenue decreased 6 fiscal 2012 due primarily revenue declines storage tape storage networking products effect partially offset strong growth 3par products storeonce data deduplication solutions ts net revenue decreased 1 fiscal 2012 due primarily revenue declines support business driven unfavorable currency impact support contract renewals remained steady declines thirdparty hardware support offset growth project services networking net revenue increased 4 fiscal 2012 due higher market demand core data center products effect partially offset competitive pricing pressures divestiture video surveillance business eg earnings operations percentage net revenue decreased 25 percentage points fiscal 2012 driven decrease gross margin coupled increase operating expenses percentage net revenue decrease gross margin due primarily competitive pricing pressures particularly iss lesser extent networking increase operating expenses percentage net revenue driven increase research development costs field selling costs effect partially offset lower administrative expenses hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued enterprise services components weighted net revenue change es business units follows following fiscal years ended october 31 es net revenue decreased 82 decreased 71 constant currency basis fiscal 2013 revenue performance es continues challenged several factors impact demand environment including weak public sector spending united states austerity measures countries particularly united kingdom weak services spend due mixed global recovery particularly emea region net revenue decrease es driven primarily net service revenue runoff contractual price declines ongoing contracts unfavorable currency impacts ito net revenue decreased 7 fiscal 2013 due net service revenue runoff contractual price declines ongoing contracts unfavorable currency impacts effects partially offset net revenue growth security cloud offerings abs net revenue declined 10 fiscal 2013 net revenue decline due primarily net service revenue runoff unfavorable currency impacts effects partially offset revenue growth cloud information analytics offerings revenue abs also negatively impacted weakness publicsector spending es earnings operations percentage net revenue decreased 12 percentage points fiscal 2013 decrease due decline gross margin combined increase operating expenses percentage net revenue gross margin declined due primarily net service revenue runoff contractual price declines unfavorable impacts gross margin partially offset continued focus improving resource management profit improvements underperforming contracts operating expenses percentage net revenue increased due higher administrative marketing rd costs effects partially offset reduced field selling costs due lower headcountrelated costs year savings ongoing restructuring efforts es net revenue decreased 25 decreased 04 constant currency basis fiscal 2012 due revenue decreases business units ito net revenue decreased 3 fiscal 2012 contractual rate declines ongoing contracts increased deal selectivity designed meet threshold margins strategic fit unfavorable currency impact contributed decrease revenues effects partially offset increase productrelated revenue increased revenue cloud security offerings abs net revenue decreased 2 fiscal 2012 decrease driven hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued declines shortterm project work combined unfavorable currency impact effect partially offset increases sales cloud information management analytics offerings es earnings operations percentage net revenue decreased 34 percentage points fiscal 2012 decrease due primarily gross margin decline driven lower expected revenue contractual rate declines ongoing contracts lower resource utilization rate additional costs associated certain contract deliverable delays effects partially offset continued focus operating improvements cost initiatives favorably impacted cost structure business units software net revenue decreased 36 decreased 26 constant currency basis fiscal 2013 net revenue licenses professional services decreased 17 14 respectively net revenue saas support increased 10 8 respectively decline software revenue driven primarily lower license revenue itcloud management information management products due primarily large deal entered prior year market shift saas offerings revenue decline also due lower professional services revenue itcloud management information management products manage professional services portfolio focus highermargin solutions declines partially offset higher growth support revenue information management security products higher revenue growth saas offerings itcloud management information management products shift market providing saas offerings software earnings operations percentage net revenue increased 17 percentage points fiscal 2013 due decrease operating expense percentage net revenue effect partially offset decrease gross margin decrease gross margin due primarily higher development costs itcloud management products comparative impact highly profitable software deal entered prior year decreases partially offset lower mix lowermargin professional services revenue decrease operating expense percentage revenue driven primarily lower field selling costs due cost savings associated ongoing restructuring efforts software net revenue increased 206 increased 213 constant currency basis fiscal 2012 due revenue acquired companies primarily autonomy acquired october 2011 fiscal 2012 net revenue services support licenses increased 71 16 8 respectively software earnings operations percentage net revenue decreased 10 percentage points fiscal 2012 due primarily decrease gross margin slight increase operating expenses percentage net revenue gross margin decline due primarily lower mix license revenue effect partially offset highly profitable software deal entered fourth quarter fiscal 2012 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hp financial services hpfs net revenue decreased 50 decreased 42 constant currency basis fiscal 2013 due primarily lower rental revenue decrease average operating lease assets lower asset recovery services revenue unfavorable currency impacts effects partially offset higher revenue remarketing sales higher finance income increase finance lease assets hpfs earnings operations percentage net revenue increased 08 percentage points fiscal 2013 increase due primarily increase gross margin effect partially offset increase operating expenses percentage net revenue result higher investments increase gross margin result higher portfolio margin lower mix operating leases higher margin early buyouts lower bad debt expense hpfs net revenue increased 62 increased 90 constant currency basis fiscal 2012 net revenue increase due primarily portfolio growth along higher buyout activity higher endoflease revenue residual expirations effects changes partially offset unfavorable currency movements hpfs earnings operations percentage net revenue increased 05 percentage points fiscal 2012 increase due primarily increase gross margin increase gross margin due primarily lower bad debt expense effect partially offset lower margins endofterm activities including buyouts lease extensions operating expenses percentage net revenue flat due continued focus cost efficiencies financing originations new financing originations represent amount financing provided customers equipment related software services including intercompany activity decreased 150 26 fiscal 2013 fiscal 2012 respectively decrease new financing originations periods primarily driven lower financing associated hp product sales services offerings lesser extent unfavorable currency impacts portfolio assets ratios hpfs business model asset intensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however intercompany hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued loans certain accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include gross financing receivables approximately 72 billion 77 billion october 31 2013 october 31 2012 respectively net equipment operating leases 24 billion october 31 2013 october 31 2012 disclosed note 10 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 07 billion 09 billion october 31 2013 october 31 2012 respectively intercompany leases approximately 21 billion october 31 2013 october 31 2012 respectively eliminated consolidation 2allowance doubtful accounts includes shortterm longterm portions allowance financing receivables 3hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt 09 billion borrowing funding related activity associated hpfs subsidiaries october 31 2013 october 31 2012 debt allocated hpfs totaled 108 billion 113 billion respectively hpfs equity october 31 2013 october 31 2012 15 billion 16 billion respectively believe allocated intercompany debt equity ratio comparable similar financing companies october 31 2013 2012 hpfs cash balances 697 million 700 million respectively net portfolio assets october 31 2013 decreased 46 october 31 2012 decrease resulted lower levels new financing originations early customer buyouts unfavorable currency impacts hpfs recorded net bad debt expenses 57 million 54 million 60 million fiscal 2013 2012 2011 respectively hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued corporate investments fiscal 2013 corporate investments net revenue primarily related licensing revenue hp labs net revenue decreased fiscal 2012 due primarily lower residual activity webos device business lower revenue business intelligence products costs expenses corporate investments due activities segment residual activity related webos device business hp labs certain incubation projects corporate strategy global alliances fiscal 2012 revenue decrease corporate investments result lower sales due wind webos device business announced august 2011 corporate investments reported smaller loss operations fiscal 2012 due primarily recognition charges fiscal 2011 related wind webos device business loss operations corporate investments also due expenses associated corporate strategy global alliances hp labs liquidity capital resources use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support operating businesses capital expenditures restructuring activities maturing debt income tax payments payment stockholder dividends addition discretionary investments share repurchases able supplement shortterm liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions access capital markets may constrained cost borrowing may increase certain business market economic conditions however use variety funding sources meet liquidity needs designed facilitate continued access borrowing resources conditions liquidity subject various risks including risks identified section entitled risk factors item 1a market risks identified section entitled quantitative qualitative disclosures market risk item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda organized follows • overview discussion business overall analysis financial highlights affecting company provide context remainder mda overview analysis compares fiscal 2014 fiscal 2013 • critical accounting policies estimates discussion accounting policies estimates believe important understanding assumptions judgments incorporated reported financial results • results operations analysis financial results comparing fiscal 2014 fiscal 2013 prior years discussion results operations consolidated level followed detailed discussion results operations segment • liquidity capital resources analysis changes cash flows discussion financial condition liquidity • contractual obligations overview contractual obligations retirement postretirement benefit plan funding restructuring plans uncertain tax positions offbalance sheet arrangements intend discussion financial condition results operations follows provide information assist reader understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document october 2014 announcement hp separation transaction october 6 2014 announced plans separate two independent publiclytraded companies one comprising enterprise technology infrastructure software services financing businesses conduct business hewlettpackard enterprise one comprise printing personal systems businesses conduct business hp inc separation subject certain conditions including among others obtaining final approval hps board directors receipt favorable opinion andor rulings respect taxfree nature transaction federal income tax purposes effectiveness form 10 filing sec separation expected completed end fiscal 2015 separation plan hp shareholders shares hewlettpackard enterprise hp inc following chart provides overview planned separation segment revenues respective businesses based hps fiscal 2014 results excluding corporate investments intercompany eliminations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued following overview results operations liquidity discussions analysis compare fiscal 2014 fiscal 2013 fiscal 2013 fiscal 2012 unless otherwise noted capital resources contractual obligations discussions present information october 31 2014 unless otherwise noted overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers government health education sectors offerings span following personal computing access devices imaging printingrelated products services enterprise information technology infrastructure including enterprise server storage technology networking products solutions technology support maintenance multivendor customer services including technology consulting outsourcing support services across infrastructure applications business process domains management software application testing delivery software information management solutions big data analytics security intelligencerisk management solutions seven segments financial reporting purposes personal systems printing enterprise group eg enterprise services es software hp financial services hpfs corporate investments hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued following provides overview key financial metrics segment fiscal 2014 1hp consolidated net revenue excludes intersegment net revenue segment earnings operations exclude corporate unallocated costs stockbased compensation expense amortization intangible assets restructuring charges acquisitionrelated charges 2nm represents meaningful hp net revenue declined 08 decreased 04 constant currency basis fiscal 2014 compared fiscal 2013 leading contributors hp net revenue decline key account runoff es lower printing supplies volume partially offsetting net revenue decline growth personal systems commercial personal computers pcs experienced growth across product categories along growth consumer notebooks hps gross margin increased 08 percentage points fiscal 2014 due primarily service delivery efficiencies improvements underperforming contracts es favorable currency impacts japanese yen continued cost structure improvements printing continue experience gross margin pressures resulting competitive pricing environment across hardware portfolio hps operating margin flat fiscal 2014 compared fiscal 2013 due gross margin increase improved business performance primarily printing es personal systems lower intangible asset amortization offset higher restructuring charges investments research development rd higher selling general administrative sga expenses increase sga expenses partially offset gains sales real estate business continues produce significant cash flow operations generating 123 billion fiscal 2014 additionally invested 30 billion property plant equipment net proceeds sales repurchased 27 billion common stock paid dividends 12 billion stockholders october 31 2014 cash equivalents short longterm investments 155 billion representing increase approximately 30 billion october 31 2013 continue experience challenges representative trends uncertainties may affect business results operations one set challenges relates continuing dynamic accelerating market trends another set challenges relates changes competitive landscape major competitors expanding product service offerings integrated products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued solutions businessspecific competitors exerting increased competitive pressure targeted areas entering new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model changes gotomarket execution macroeconomic weakness experienced moderated geographic regions remains overall challenge discussion challenges segment level set forth • personal systems negatively impacted market shift towards tablet products within mobility products reduced demand pcs particularly consumer notebooks benefits new product investments area materialize continue negatively impacted trend however pace market decline slowing signs stabilization hp gaining market share personal systems maintaining strategic focus profitable growth improved market segmentation respect multios multiarchitecture geography customer segments key attributes fiscal 2014 personal systems experienced revenue growth commercial pcs growth across product categories particularly notebooks along growth consumer notebooks increase demand due part customers migrating windows xp operating system benefits delayed installed base refresh cycle new product introductions • printing experiencing impact growth mobility demand challenges consumer commercial markets well overall competitive pricing environment successful addressing challenges need continue execute key initiatives focusing products targeted high usage categories developing emerging market opportunities introducing new revenue delivery models consumer customers fiscal 2014 printing experienced revenue decline increase operating profit continued print strategies focus driving high value printer unit placements consumer market ink office products driving unit volume due demand officejet pro product lines particularly officejet pro x printers leverage pagewide array technology ink office initiative targets shifting ink smbs profitably commercial market focus placing higher value printer units also offer positive annuity toner accomplishing two growth areas multifunction printers recently introduced products increasing demand managed print services presents strong aftermarket supplies opportunity plan continue focus replenishing installed base valueadded units expanding innovative ink laser programs • eg experiencing revenue challenges due multiple market trends including increasing demand hyperscale computing infrastructure products transition cloud computing highly competitive pricing environment addition demand business critical systems bcs products continues weaken along overall market unix products effect lower bcs revenue impacting technology services ts successful overcoming challenges must address business model shifts gotomarket execution challenges continue pursue new product innovation areas cloud data center computing softwaredefined networking storage blade servers wireless networking fiscal 2014 eg experienced decline revenue operating profit due previously mentioned challenging market environment particular weak market demand bcs market shifts impacting storage elsewhere eg experienced areas hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued growth industry standard servers iss networking ts due part product innovation new product introductions cloud data center computing products build existing capabilities cloud security big data converged infrastructure include cloudsystem 8 hp helion hp apollo support solutions proactive data center flexible capacity services • es facing execution challenges including managing revenue runoff several large contracts pressured public sector spending competitive pricing environment market pressures mixed economic recovery europe middle east africa emea successful addressing challenges must execute es multiyear turnaround plan includes cost reduction initiative align costs revenue trajectory focus new logo wins strategic enterprise services ses initiatives improve execution sales performance accountability contracting practices pricing fiscal 2014 factors continued impact es revenue operating profit • software facing challenges including market shift softwareasaservice saas gotomarket execution challenges successful addressing challenges must improve gotomarket execution multiple product delivery models better address customer needs achieve broader integration across overall product portfolio work capitalize important market opportunities cloud big data security fiscal 2014 factors continued impact software revenue operating profit address challenges continue pursue innovation view towards developing new products services aligned market demand industry trends needs customers partners addition need continue improve operations particular focus enhancing endtoend processes efficiencies also need continue optimize sales coverage models align sales incentives strategic goals improve channel execution strengthen capabilities areas strategic focus develop capitalize market opportunities discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance united states us generally accepted accounting principles gaap require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities readily apparent sources management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting amounts reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued summary significant accounting policies included note 1 consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured well revenue recognition principles including industry specific revenue recognition guidance enter contracts sell products services many sales agreements contain standard terms conditions agreements enter contain nonstandard terms conditions many arrangements include multiple elements result significant contract interpretation may required determine appropriate accounting including identification deliverables considered separate units accounting allocation transaction price among elements arrangement timing revenue recognition elements recognize revenue delivered elements separate units accounting delivered elements standalone value customer elements standalone value recognize revenue consistent pattern associated deliverables arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price elements may impact timing revenue recognition contract change total revenue recognized contract establish selling prices used deliverable based vendorspecific objective evidence vsoe selling price available thirdparty evidence tpe vsoe selling price available estimated selling price esp neither vsoe selling price tpe available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers esp established based managements judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles may modify develop new gotomarket practices future may result changes selling prices impacting vsoe selling price esp arrangements multiple elements transaction price allocated individual units accounting inception arrangement based relative selling price however aforementioned factors may result different allocation transaction price deliverables multiple element arrangements entered future periods may change pattern timing revenue recognition identical hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued arrangements executed future periods change total revenue recognized given arrangement reduce revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs estimate number customers expected redeem incentive based historical experience specific terms conditions incentive hardware products recognize revenue generated direct sales end customers indirect sales channel partners including resellers distributors valueadded solution providers revenue recognition criteria satisfied indirect sales channel partners recognize revenue time delivery channel partner economic substance apart hp completed obligations related sale various software products sell eg operating system software network enabling software management software enterprise security software assess whether software products sold standalone hardware products software sold hardware product essential functionality hardware morethanincidental treat software deliverable recognize revenue sale perpetual software licenses inception license term assuming revenue recognition criteria satisfied termbased software license revenue generally recognized ratably term license use residual method allocate revenue software licenses inception arrangement vsoe fair value undelivered elements postcontract support exists revenue recognition criteria satisfied revenue maintenance unspecified upgrades updates provided ifandwhenavailable basis recognized ratably period items delivered hosting saas arrangements recognize revenue service delivered generally straightline basis contractual period performance hosting arrangements software licenses sold license revenue generally recognized according whether perpetual term licenses sold revenue recognition criteria satisfied hosting arrangements include software licenses consider rights provided customer eg ownership license contract termination provisions feasibility customer operate software determining recognize revenue licenses recognize revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period certain fixedprice contracts consulting arrangements recognize revenue work progresses using proportional performance method estimate total expected labor costs order determine amount revenue earned date apply proportional performance method reasonably dependable estimates labor costs applicable various stages contract made fixedprice contracts design build projects design develop construct software infrastructure systems recognize revenue work progresses using percentageofcompletion method use costtocost method measure progress toward completion determined percentage cost incurred date compared total estimated costs project total project costs subject revision throughout life fixedprice contract provisions estimated losses fixedprice contracts recognized period hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued losses become known recorded component cost sales circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method outsourcing services revenue generally recognized period service provided amount earned contingent occurrence future event recognize revenue using objective measure output per unitpriced contracts revenue fixedprice outsourcing contracts periodic billings recognized straightline basis service provided evenly contract term provisions estimated losses outsourcing arrangements recognized period losses become probable estimable recorded component cost sales warranty accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty expense actual warranty costs averaged approximately 27 29 annual net product revenue respectively restructuring engaged restructuring actions require management estimate timing amount severance employee separation costs workforce reduction enhanced early retirement programs fair value assets made redundant obsolete fair value lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements full description restructuring actions refer discussions restructuring results operations note 3 consolidated financial statements item 8 incorporated herein reference retirement postretirement benefits pension postretirement benefit costs obligations depend various assumptions major assumptions relate primarily discount rates mortality rates expected increases compensation levels expected longterm return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period mortality rates help predict expected life plan participants based historical demographic study plan result historical study us plans fiscal 2014 hp adopted new mortality rate table incorporated newly released mortality rates published society actuaries resulted increase projected benefit obligation approximately 870 million us defined benefit plans hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued expected increase compensation levels assumption reflects longterm actual experience future expectations expected longterm return plan assets determined based asset allocations historical portfolio results historical asset correlations managements expected returns asset class fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm performance relative expected longterm performance lesser extent differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year major assumptions vary plan weightedaverage rates used set forth note 4 consolidated financial statements item 8 incorporated herein reference following table provides impact changes weightedaverage assumptions discount rates expected increase compensation levels expected longterm return plan assets would net periodic benefit cost fiscal 2014 taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize determining need valuation allowance consider future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income jurisdictions deferred tax assets located hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued effective tax rate includes impact certain undistributed foreign earnings provided us federal taxes plan reinvest earnings indefinitely outside us plan distributions foreign earnings based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount expect indefinitely invest outside us amounts expect distribute us provide us federal taxes due amounts expected distributed us result certain employment actions capital investments undertaken income manufacturing activities certain jurisdictions subject reduced tax rates cases wholly exempt taxes fiscal years 2024 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact future earnings repatriated us related future effective tax rate subject income taxes us approximately 105 countries subject routine corporate income tax audits many jurisdictions believe positions taken tax returns fully supported tax authorities may challenge positions may fully sustained examination relevant tax authorities accordingly income tax provision includes amounts intended satisfy assessments may result challenges determining income tax provision potential assessments recording related effects requires management judgments estimates amounts ultimately paid resolution audit could materially different amounts previously included income tax provision therefore could material impact income tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions intercompany transactions related interest discussion taxes earnings refer note 6 consolidated financial statements item 8 incorporated herein reference inventory state inventory lower cost market firstin firstout basis make adjustments reduce cost inventory net realizable value product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues goodwill review goodwill impairment annually whenever events changes circumstances indicate carrying amount goodwill may recoverable permitted conduct qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2014 performed quantitative test reporting units goodwill tested impairment reporting unit level beginning first quarter fiscal 2014 changed reporting units connection continued operational synergies interdependencies enterprise servers storage networking reporting unit ts reporting unit within eg segment combined reporting units create eg reporting unit october 31 2014 reporting units consistent reportable segments identified hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued note 2 except es includes two reporting units mphasis limited remainder es first step goodwill impairment test compare fair value reporting unit carrying amount estimate fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach estimate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting units ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies operating investment characteristics similar reporting unit weight fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available estimate fair value reporting unit using income approach mphasis limited reporting unit utilized quoted market price active market estimate fair value order assess reasonableness estimated fair value reporting units compare aggregate reporting unit fair value hps market capitalization calculate implied control premium excess sum reporting units fair value hps market capitalization evaluate control premium comparing observable control premiums recent comparable transactions implied control premium believed reasonable light recent transactions reevaluate reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units estimating fair value reporting unit judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates future economic market conditions determination appropriate comparable publiclytraded companies addition make certain judgments assumptions allocating shared assets liabilities individual reporting units determine carrying amount reporting unit fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount perform second step goodwill impairment test measure amount impairment loss second step reporting units assets including unrecognized intangible assets liabilities noncontrolling interests measured fair value hypothetical analysis calculate implied fair value goodwill reporting unit manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying amount difference recorded impairment loss annual goodwill impairment analysis performed first day fourth quarter fiscal 2014 result impairment charges excess fair value carrying amount reporting units ranged 18 approximately 12000 carrying amounts software reporting unit lowest excess fair value carrying amount 18 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued order evaluate sensitivity estimated fair value reporting units goodwill impairment test applied hypothetical 10 decrease fair value reporting unit hypothetical 10 decrease resulted excess fair value carrying amount reporting units ranging 6 approximately 10000 carrying amounts software reporting unit lowest excess fair value carrying amount 6 fair value software reporting unit estimated using weighting income market approaches software business facing multiple challenges including market shift saas gotomarket execution challenges successful addressing challenges projected revenue growth rates could decline resulting decrease fair value software reporting unit fair value software reporting unit could also negatively impacted declines market multiples revenue comparable publiclytraded companies changes managements business strategy significant declines stock price could result indicator impairment intangible assets review intangible assets finite lives impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability finitelived intangible assets assessed based estimated undiscounted future cash flows expected result use eventual disposition asset undiscounted future cash flows less carrying amount finitelived intangible assets considered impaired amount impairment loss measured difference carrying amount asset fair value estimate fair value finitelived intangible assets using income approach available appropriate using market approach fair value derivative instruments use derivative instruments manage variety risks including risks related foreign currency exchange rates interest rates use forwards swaps options hedge certain foreign currency interest rate exposures use derivative financial instruments speculative purposes october 31 2014 gross notional derivative portfolio 547 billion assets liabilities related derivative instruments measured fair value 980 million 405 million respectively october 31 2014 fair value price would receive sell asset pay transfer liability orderly transaction market participants measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date determination fair value often involves significant judgments assumptions determining appropriate discount rate factors risk liquidity premiums identifying similarities differences market transactions weighting differences accordingly making appropriate adjustments market transactions reflect risks specific asset liability valued generally use industry standard valuation models measure fair value derivative positions prices active markets available identical asset liability use industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign currency exchange rates forward spot prices hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued discussion fair value measurements derivative instruments refer note 10 note 11 respectively consolidated financial statements item 8 incorporated herein reference loss contingencies involved various lawsuits claims investigations proceedings including consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information events pertaining particular case based experience believe damage amounts claimed specific litigation contingencies matters discussed note 15 consolidated financial statements item 8 incorporated herein reference meaningful indicator hps potential liability litigation inherently unpredictable however believe valid defenses respect legal matters pending us nevertheless cash flows results operations could materially affected particular period resolution one contingencies believe recorded adequate provisions matters october 31 2014 reasonably possible material loss incurred excess amounts recognized financial statements accounting pronouncements summary recent accounting pronouncements applicable consolidated financial statements see note 1 consolidated financial statements item 8 incorporated herein reference results operations revenue international operations historically represented expect continue represent majority overall net revenue result revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing performance excluding impact foreign currency fluctuations present yearoveryear percentage change revenue constant currency basis assumes change foreign currency exchange rates prioryear period information provided revenue viewed without effect fluctuations foreign currency exchange rates consistent management evaluates revenue results trends constant currency disclosure provided addition substitute yearoveryear percentage change revenue gaap basis companies may calculate define similarly labeled items differently may limit usefulness measure comparative purposes hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued results operations dollars percentage net revenue follows 1cost products cost services financing interest 2fiscal 2012 includes 88 billion goodwill intangible asset impairment charge associated autonomy reporting unit within software segment 80 billion goodwill impairment within es segment 12 billion intangible asset impairment associated compaq trade name within personal systems segment net revenue components weighted net revenue change follows hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued fiscal 2014 compared fiscal 2013 fiscal 2014 total hp net revenue declined 08 decreased 04 constant currency basis compared fiscal 2013 us net revenue decreased 37 388 billion net revenue outside us increased 09 726 billion leading contributors hp net revenue decline key account runoff es lower printing supplies volume partially offsetting net revenue decline growth personal systems commercial pcs experienced growth across product categories along growth consumer notebooks segment perspective primary factors contributing change hp net revenue fiscal 2014 compared fiscal 2013 summarized follows • es net revenue declined due primarily revenue runoff key accounts weak growth new existing accounts particularly emea contractual price declines • printing net revenue decreased due primarily decline supplies • eg net revenue decreased due net revenue declines ts bcs storage • software net revenue decreased due lower net revenue licenses support professional services • hpfs net revenue decreased due primarily lower portfolio revenue lower average portfolio assets lower asset management activity primarily customer buyouts • corporate investments net revenue increased due sale intellectual property ip • personal systems net revenue increased due growth commercial pcs particularly notebooks along growth consumer notebooks fiscal 2013 compared fiscal 2012 fiscal 2013 total hp net revenue declined 67 decreased 55 constant currency basis compared fiscal 2012 us net revenue decreased 44 403 billion net revenue outside us decreased 79 720 billion net revenue decline due primarily declines approximately 10 7 5 3 personal systems es eg printing segments respectively segment perspective primary factors contributing change hp net revenue fiscal 2013 compared fiscal 2012 summarized follows • personal systems net revenue declined due decline overall pc market result customer shift particularly consumers tablet products • es net revenue declined due primarily net service revenue runoff contractual price declines ongoing contracts due part weak public sector spending enterprise demand • eg net revenue declined due multiple factors including competitive pricing challenges iss market decline unix products impacting bcs declines ts due part lower support bcs products product transitions storage overall weak enterprise demand • printing net revenue declined due unfavorable currency impacts particularly euro declines supplies commercial printers hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued • hpfs net revenue decreased due primarily lower rental revenue decrease operating lease assets • software net revenue declined due lower license professional services revenues itcloud management information management products detailed discussion segment revenue included segment information gross margin fiscal 2014 compared fiscal 2013 hps gross margin increased 08 percentage points fiscal year 2014 compared fiscal 2013 segment perspective primary factors impacting gross margin performance summarized follows • es gross margin increased due primarily continued focus service delivery efficiencies improving profit performance underperforming contracts labor savings result restructuring • printing gross margin increased due primarily favorable currency impacts japanese yen continued cost structure improvements favorable mix higher proportion graphics ink supplies • corporate investments gross margin increased due sale ip • software gross margin increased due shift profitable contracts improved workforce utilization professional services • hpfs gross margin increased due higher portfolio margin primarily lower bad debt expense lower cost funds improved margins remarketing sales • personal systems gross margin increased due primarily operational cost improvements favorable mix commercial products sale ip • eg gross margin decreased due primarily impact higher mix iss products lower mix bcs products competitive pricing pressure iss networking fiscal 2013 compared fiscal 2012 hps gross margin decreased 02 percentage points fiscal year 2013 compared fiscal 2012 segment perspective primary factors impacting gross margin performance summarized follows • eg experienced gross margin decline due primarily competitive pricing pressures iss lesser extent mix impacts lower bcs storage revenue • personal systems experienced gross margin decline due primarily unfavorable currency impacts competitive pricing pressures • es gross margin decreased due net service revenue runoff contractual price declines • software gross margin decreased slightly due higher development costs itcloud management products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued • hpfs gross margin increased slightly due primarily higher portfolio margins lower mix operating leases higher margins early buyouts • printing gross margin increased due primarily improvement toner gross margins result lower discounting higher average revenue per unit aru consumer printers detailed discussion segment gross margins operating margins included segment information operating expenses research development rd expense increased 10 fiscal 2014 compared fiscal 2013 increases across segments make investments strategic focus areas cloud security big data mobility rd expense decreased 8 fiscal 2013 compared fiscal 2012 due primarily rationalization rd eg bcs cost savings restructuring higher value added rd tax subsidy credits decrease partially offset increased rd expense storage iss business units software innovationfocused spending areas converged infrastructure cloud selling general administrative sga expense increased 1 fiscal 2014 compared fiscal 2013 due primarily higher compensation costs litigation expenses higher selling costs investments areas cloud networking storage partially offset gains sales real estate lower program spending marketing sga expense decreased 2 fiscal 2013 compared fiscal 2012 due primarily cost savings associated ongoing restructuring efforts impacted segments partially offsetting decline higher marketing expenses support new product introductions increased administrative expenses due part higher consulting project spending amortization intangible assets amortization expense decreased fiscal 2014 due primarily certain intangible assets associated prior acquisitions reaching end respective amortization periods amortization expense decreased fiscal 2013 due primarily intangible asset impairment recorded fourth quarter fiscal 2012 related autonomy certain intangible assets associated prior acquisitions reaching end amortization periods impairment goodwill intangible assets fiscal 2012 recorded goodwill impairment charges 80 billion 57 billion associated es acquisition autonomy respectively addition recorded intangible asset impairment charges 31 billion 12 billion associated acquisition autonomy compaq trade name respectively information impairment charges see note 9 consolidated financial statements item 8 incorporated herein reference hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued restructuring charges restructuring charges increased fiscal 2014 due primarily higher charges connection multiyear restructuring plan initially announced may 2012 plan increases 2012 plan announced fiscal 2014 fiscal 2014 hp increased total positions expected eliminated 2012 plan 34000 55000 positions changes hp expects recognize additional restructuring charges fiscal 2015 restructuring charges decreased fiscal 2013 due primarily 21 billion charge recorded fiscal 2012 plan restructuring charges fiscal 2013 approximately 10 billion included 12 billion charges related 2012 plan partially offset reversal 190 million severance charges related fiscal 2010 es restructuring plan interest net interest net expense increased 7 million fiscal 2014 increase due primarily higher currency transaction losses partially offset lower interest expense lower average debt balance interest net expense decreased 255 million fiscal 2013 decrease driven primarily lower currency transaction losses coupled lower interest expense due lower average debt balances lower investment losses provision taxes effective tax rates 235 215 60 fiscal 2014 2013 2012 respectively effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lowertax jurisdictions throughout world jurisdictions favorable tax rates significant effective tax rate impact periods presented puerto rico singapore netherlands china ireland plan reinvest certain earnings jurisdictions indefinitely outside us therefore provided us taxes indefinitely reinvested earnings addition factors effective tax rate fiscal 2012 impacted nondeductible goodwill impairments increases valuation allowances certain deferred tax assets reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 6 consolidated financial statements item 8 incorporated herein reference segment information description products services segment found note 2 consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes segments disclosed effective beginning first quarter fiscal 2014 implemented certain organizational changes align segment financial reporting closely current business structure organizational changes include • transferring hp exstream business commercial hardware business unit within printing segment software segment hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued • transferring personal systems trade warranty support business ts business unit within eg segment business unit within personal systems segment • transferring spare replacement parts supporting personal systems printing segments ts business unit within eg segment business unit within personal systems segment commercial hardware business unit within printing segment respectively • transferring certain cloudrelated incubation activities previously reported corporate unallocated costs eliminations eg segment corporate investments segment addition transferred certain intrasegment eliminations es segment eg segment corporate intersegment revenue eliminations hp reflected changes segment information retrospectively earliest period presented resulted transfer revenue among printing personal systems eg es software segments transfer operating profit among printing personal systems eg software corporate investments segments changes impact previously reported financial results hpfs segment addition none changes impacted hps previously reported consolidated net revenue earnings operations net earnings net eps consolidated assets printing personal systems group personal systems segment printing segment structured beneath broader printing personal systems group pps describe results business segments within pps personal systems components weighted net revenue change business unit follows hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued fiscal 2014 compared fiscal 2013 personal systems net revenue increased 66 increased 72 constant currency basis fiscal 2014 personal systems business continues challenged market shift towards mobility products pace pc market decline slowing signs stabilization driven growth commercial pcs effects partially offset weakness consumer pcs revenue increase personal systems due growth commercial pcs particularly notebooks along growth consumer notebooks personal systems experienced revenue growth across regions led double digit revenue growth emea experienced improved demand revenue increase driven 82 increase unit volume effects partially offset 15 decline average selling prices asps unit volume increase primarily led growth commercial notebooks well strength commercial desktops consumer notebooks thin client products decline asps due primarily competitive pricing environment unfavorable currency impacts effects partially offset favorable mix commercial pcs net revenue commercial clients increased 102 due primarily benefits delayed installed base refresh cycle effects customers migrating windows xp operating system growth product categories partly driven new product introductions including hp elite products net revenue consumer clients remained flat growth consumer notebooks partly driven new product lineup including chromebooks hybrid products offset decline consumer desktops fiscal 2014 net revenue notebook pcs increased 9 desktop pcs increased 3 workstations increased 3 net revenue increased 16 net revenue increase due sale ip growth mobility products primarily consumer tablets introduced second half fiscal 2013 personal systems earnings operations percentage net revenue increased 07 percentage points fiscal 2014 increase driven increase gross margin decline operating expenses percentage net revenue increase gross margin due primarily operational cost improvements favorable commercial mix sale ip effects partially offset unfavorable currency impacts operating expenses percentage net revenue decreased due primarily cost structure optimization efforts effects partially offset increased research development investments commercial mobility immersive computing products well higher administrative expenses driven lower bad debt recoveries compared fiscal 2013 fiscal 2013 compared fiscal 2012 personal systems net revenue decreased 102 decreased 90 constant currency basis fiscal 2013 personal systems business continued experience significant challenges due overall pc market decline result customer shift particularly consumers tablet products business also experienced broadbased regional demand weakness particularly emea region decline personal systems revenue driven 8 decline unit volume along 3 decline asps unit volume decrease led declines consumer notebook products result market shift tablet products decline asps due primarily competitive pricing environment net revenue consumer clients decreased 19 net revenue commercial clients decreased 4 notebook pcs net revenue decreased 15 desktop pcs net revenue decreased 8 workstations net revenue growth flat net revenue increased 19 net revenue increase related increased sales extended warranties thirdparty branded options sales consumer tablets hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued personal systems earnings operations percentage net revenue decreased 18 percentage points fiscal 2013 decrease driven decline gross margin combined increase operating expenses percentage net revenue decline gross margin due unfavorable currency impacts competitive pricing pressures unfavorable impacts gross margin partially offset lower component warranty costs favorable mix highermargin commercial products operating expenses percentage net revenue increased due primarily size revenue decline well slightly higher rd costs however operating expenses declined across expense categories result benefits ongoing restructuring efforts printing components weighted net revenue change business unit follows fiscal 2014 compared fiscal 2013 fiscal 2014 printing experienced decline revenue increase operating profit continued push print strategies includes driving high value printer unit placements expanding graphics products managed print services portfolio printing net revenue decreased 38 decreased 34 constant currency basis fiscal 2014 decline net revenue primarily driven decline supplies effects partially offset growth graphics products managed print services net revenue supplies decreased 5 driven demand weakness toner ink reduction channel inventory fourth quarter fiscal 2014 effects partially offset growth graphics supplies printer unit volume remained flat average revenue per unit aru decreased 1 printer unit volume flat due primarily continued efforts target high value areas market resulted decline home printer units lowvalue laserjet printer units effects offset increased units smb multifunction laser graphics printers decline aru due primarily increased discounting driven competitive pricing pressures net revenue commercial hardware flat 3 increase printer unit volume offset 3 decline printer aru unit volume commercial hardware increased due primarily growth multifunction laser printers graphics printers aru decline commercial hardware due primarily decline hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued laserjet graphics printers driven competitive pricing environment net revenue consumer hardware decreased 4 driven 1 decline printer unit volume 1 decline aru along decline peripheral printing solutions unit volume decline consumer hardware due lower sales home printers effects partially offset growth smb printers aru decline consumer hardware due primarily increased discounting smb printers due competitive pricing environment effects partially offset favorable mix high value home printers printing earnings operations percentage net revenue increased 17 percentage points fiscal 2014 increase gross margin offset increase operating expenses percentage net revenue gross margin increase due favorable currency impacts primarily driven japanese yen continued cost structure improvements favorable mix higher proportion graphics ink supplies effects partially offset competitive pricing environment operating expenses percentage net revenue increased due primarily higher rd expenses result investments enterprise products 3d printing effects partially offset reduced marketing expenses fiscal 2013 compared fiscal 2012 printing net revenue decreased 26 decreased 1 constant currency basis fiscal 2013 decrease driven unfavorable currency impacts particularly weakness euro declines supplies commercial printers net revenue supplies decreased 3 due unfavorable currency impacts lower volumes toner ink supplies effects partially offset growth large format printing supplies printer unit volumes declined 3 aru increased 1 printer unit volumes decreased largely due declines lowend consumer printers continued focus highervalue ink office ink advantage products increase aru driven mix shift highvalue consumer printers effect partially offset higher discounting commercial printers net revenue commercial hardware decreased 3 driven 6 decline aru partially offset volume increase 2 decline commercial hardware net revenue partially offset net revenue growth graphics services managed print services businesses net revenue consumer hardware remained flat due 7 increase aru effect offset 5 reduction volume unit volume aru increased within highvalue consumer printers result continued focus profitable printers printing earnings operations percentage net revenue increased 18 percentage points fiscal 2013 due increase gross margin combined lower operating expenses percentage net revenue gross margin increase due improvement toner gross margins resulting lower discounting higher aru consumer printers lower cost sales toner commercial printers due favorable currency impact japanese yen positive effects partially offset unfavorable mix lowermargin consumer printers operating expenses percentage net revenue decreased due lower administrative rd field selling costs result benefits ongoing restructuring efforts effects partially offset higher marketing expenses support new product introductions hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued enterprise group components weighted net revenue change business unit follows following fiscal years ended october 31 fiscal 2014 compared fiscal 2013 eg net revenue decreased 10 decreased 06 constant currency basis fiscal 2014 eg continue experience revenue challenges due market trends including transition cloud computing well product technology transitions along highly competitive pricing environment decline eg net revenue due net revenue declines ts bcs storage partially offset net revenue growth iss networking ts net revenue decreased 4 due primarily continued reduction support bcs traditional storage products lower support networking services partially offset growth support solutions converged storage solutions iss bcs net revenue decreased 22 result ongoing pressures overall unix market contraction storage net revenue decreased 5 continue experience multiple challenges including product transitions traditional storage products include tape storage networking legacy external disk products converged solutions include 3par storeserv storeonce storevirtual products challenges include market weakness highend converged solutions sales execution challenges effects partially offset revenue growth converged storage solutions networking net revenue increased 4 due higher switching product revenue result growth data center products partially offset lower revenue wireless local area network products iss net revenue increased 3 due primarily higher volume higher average unit prices rack blade server products driven higher option attach rates memory processors hard drives eg earnings operations percentage net revenue decreased 08 percentage points fiscal 2014 due decrease gross margin coupled increase operating expenses percentage net revenue gross margin decline due primarily higher mix iss products lower mix bcs products competitive pricing pressure iss networking partially offset hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued supply chain cost optimization improved cost management ts increase operating expenses percentage net revenue driven higher rd investments storage networking iss partially offset continued cost savings associated ongoing restructuring efforts fiscal 2013 compared fiscal 2012 eg net revenue decreased 53 decreased 42 constant currency basis fiscal 2013 due primarily macroeconomic demand challenges business faced fiscal year additionally new product technology transitions storage iss competitive pricing environment contributed revenue decline eg also experienced execution challenges impacted revenue growth fiscal 2013 although challenges moderated fourth quarter due improved sales execution business units within eg experienced yearoveryear revenue declines fiscal 2013 except networking iss net revenue decreased 4 due competitive pricing soft demand within iss experienced revenue decline core mainstream products partially offset revenue growth hyperscale server products ts net revenue decreased 4 due revenue declines support consulting businesses lesser extent unfavorable currency impacts support revenue declined due reduction support bcs products consulting revenue decline result unfavorable currency impacts divestiture service product line shift profitable services data center storage consulting bcs net revenue decreased 26 result ongoing pressures decline overall unix market along lower demand itaniumbased servers storage net revenue decreased 9 due declines traditional storage products include tape storage networking legacy external disk products effects partially offset growth converged storage solutions include 3par storeonce storevirtual storeall products networking revenue increased 2 due higher demand switching routing wireless products effect partially offset impact divestiture video surveillance business first quarter fiscal 2012 eg earnings operations percentage net revenue decreased 21 percentage points fiscal 2013 driven decrease gross margin lesser extent increase operating expenses percentage net revenue gross margin decrease due primarily competitive pricing pressures iss lesser extent pricing pressures storage mix impacts lower bcs revenue operating expenses percentage net revenue increased due decline eg net revenue increased field selling costs administrative expenses rd expenses percentage net revenue decreased due primarily rationalization rd specifically bcs valueadded tax subsidy credit bcs eg also benefited cost savings resulting ongoing restructuring efforts enterprise services hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued components weighted net revenue change business unit follows fiscal 2014 compared fiscal 2013 es net revenue decreased 69 decreased 68 constant currency basis fiscal 2014 performance es remains challenged impact several large contracts winding lower public sector spending emea particularly united kingdom several countries emea net revenue decrease es due primarily revenue runoff key accounts weak growth new existing accounts particularly emea contractual price declines effects partially offset net revenue growth ses portfolio includes information management analytics security cloud services net revenue infrastructure technology outsourcing ito decreased 8 fiscal 2014 due revenue runoff key accounts weak growth new existing accounts particularly emea contractual price declines ongoing contracts partially offset growth cloud security revenue favorable currency impacts net revenue application business services abs decreased 5 fiscal 2014 due revenue runoff key account weak growth new existing accounts particularly emea unfavorable currency impacts partially offset growth information management analytics cloud revenue es earnings operations percentage net revenue increased 08 percentage points fiscal 2014 increase operating margin due increase gross margin partially offset increase operating expenses percentage net revenue gross margin increased due primarily continued focus service delivery efficiencies improving profit performance underperforming contracts labor savings result restructuring partially offset unfavorable impacts revenue runoff key accounts weak growth new existing accounts increase operating expenses percentage net revenue primarily driven size revenue decline higher administrative expenses field selling costs increase current year administrative expenses due prioryear period containing higher bad debt recoveries insurance recoveries increase selling costs result expanding sales force coverage transition reactive sales model proactive approach fiscal 2013 compared fiscal 2012 es net revenue decreased 74 decreased 63 constant currency basis fiscal 2013 revenue performance es continues challenged several factors impact demand environment including weak public sector spending us austerity measures countries particularly united kingdom weak services spend due mixed global recovery particularly emea region net revenue decrease es driven primarily net service revenue runoff contractual price declines ongoing contracts unfavorable currency impacts ito net revenue decreased 6 fiscal 2013 due net service revenue runoff hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued contractual price declines ongoing contracts unfavorable currency impacts effects partially offset net revenue growth security cloud offerings abs net revenue declined 10 fiscal 2013 net revenue decline due primarily net service revenue runoff unfavorable currency impacts effects partially offset revenue growth cloud information analytics offerings revenue abs also negatively impacted weakness publicsector spending es earnings operations percentage net revenue decreased 12 percentage points fiscal 2013 decrease due decline gross margin combined increase operating expenses percentage net revenue gross margin declined due primarily net service revenue runoff contractual price declines unfavorable impacts gross margin partially offset continued focus improving resource management profit improvements underperforming contracts operating expenses percentage net revenue increased due higher administrative marketing rd costs effects partially offset reduced field selling costs due lower headcountrelated costs year savings ongoing restructuring efforts software fiscal 2014 compared fiscal 2013 software net revenue decreased 22 decreased 21 constant currency basis fiscal 2014 revenue growth software challenged overall market customer shift saas solutions impacting growth license support revenue fiscal 2014 net revenue licenses support professional services decreased 3 2 5 respectively saas net revenue increased 5 decline license net revenue due market customer shift saas solutions resulted lower revenue itcloud management information management products partially offset strength key focus areas big data analytics security decrease support net revenue due past declines license revenue professional services net revenue decreased continue focus highermargin engagements declines partially offset higher saas revenue due improving demand saas solutions itcloud management products security products fiscal 2014 software earnings operations percentage net revenue increased 06 percentage points due increase gross margin effect partially offset increase operating expenses percentage net revenue increase gross margin due shift profitable contracts improved workforce utilization professional services increase operating expenses percentage net revenue due primarily investments rd partially offset lower sga expenses due cost savings associated ongoing restructuring efforts improved operational expense management hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued fiscal 2013 compared fiscal 2012 software net revenue decreased 36 decreased 26 constant currency basis fiscal 2013 net revenue licenses professional services decreased 16 13 respectively net revenue saas support increased 10 7 respectively decline software revenue driven primarily lower license revenue itcloud management information management products due primarily large deal entered prior year market shift saas offerings revenue decline also due lower professional services revenue itcloud management information management products manage professional services portfolio focus highermargin solutions declines partially offset higher growth support revenue information management security products higher revenue growth saas offerings itcloud management information management products shift market providing saas offerings software earnings operations percentage net revenue increased 16 percentage points fiscal 2013 due decrease operating expense percentage net revenue effect partially offset decrease gross margin decrease gross margin due primarily higher development costs itcloud management products comparative impact highly profitable software deal entered prior year decreases partially offset lower mix lowermargin professional services revenue decrease operating expense percentage revenue driven primarily lower field selling costs due cost savings associated ongoing restructuring efforts hp financial services fiscal 2014 compared fiscal 2013 hpfs net revenue decreased 36 decreased 33 constant currency basis fiscal 2014 due primarily lower portfolio revenue lower average portfolio assets lower asset management activity primarily customer buyouts hpfs earnings operations percentage net revenue increased 01 percentage points fiscal 2014 increase due primarily increase gross margin partially offset increase operating expenses percentage net revenue increase gross margin result higher portfolio margin primarily lower bad debt expense lower cost funds improved margins remarketing sales increase operating expenses percentage net revenue due primarily higher gotomarket investments fiscal 2013 compared fiscal 2012 hpfs net revenue decreased 50 decreased 42 constant currency basis fiscal 2013 due primarily lower rental revenue decrease average operating lease assets lower asset recovery services revenue unfavorable currency impacts effects partially offset higher revenue remarketing sales higher finance income increase finance lease assets hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hpfs earnings operations percentage net revenue increased 08 percentage points fiscal 2013 increase due primarily increase gross margin effect partially offset increase operating expenses percentage net revenue result higher investments increase gross margin result higher portfolio margin lower mix operating leases higher margin early buyouts lower bad debt expense financing originations new financing originations represent amount financing provided customers equipment related software services including intercompany activity increased 147 fiscal 2014 decreased 150 fiscal 2013 respectively increase fiscal 2014 driven higher financing associated hp product sales related services offerings decrease fiscal 2013 primarily driven lower financing associated hp product sales services offerings lesser extent unfavorable currency impacts portfolio assets ratios hpfs business model asset intensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive hpfs amounts substantially used hp however intercompany loans certain accounts reflected segment balances eliminated consolidated financial statements hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued portfolio assets ratios derived segment balance sheet hpfs follows 1intercompany activity eliminated consolidation 2allowance doubtful accounts financing receivables includes short longterm portions 3debt attributable hpfs consists intercompany equity treated debt segment reporting purposes intercompany debt borrowing fundingrelated activity associated hpfs subsidiaries debt attributable hpfs totaled 107 billion 108 billion october 31 2014 october 31 2013 respectively hpfs equity october 31 2014 october 31 2013 15 billion believe hpfs debttoequity ratio comparable similar financing companies october 31 2014 october 31 2013 hpfs cash balances 829 million 697 million respectively net portfolio assets october 31 2014 decreased 13 october 31 2013 decrease generally resulted unfavorable currency impacts partially offset new financing volume excess portfolio runoff hpfs recorded net bad debt expenses operating lease equipment reserves 40 million 50 million 62 million fiscal 2014 2013 2012 respectively hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued corporate investments 1nm represents meaningful fiscal 2014 compared fiscal 2013 revenue increase fiscal 2014 due primarily sale ip related palm acquisition decrease loss operations fiscal 2014 due primarily sale ip benefits partially offset higher expenses associated cloudrelated incubation activities corporate strategy hp labs global alliances fiscal 2013 compared fiscal 2012 fiscal 2013 corporate investments net revenue primarily related licensing revenue hp labs net revenue decreased fiscal 2012 due primarily lower residual activity webos device business lower revenue business intelligence products costs expenses corporate investments due activities segment residual activity related webos device business hp labs certain incubation projects corporate strategy global alliances liquidity capital resources use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support operating businesses capital expenditures restructuring activities maturing debt income tax payments payment stockholder dividends addition investments share repurchases able supplement shortterm liquidity necessary broad access capital markets credit facilities made available various domestic foreign financial institutions access capital markets may constrained cost borrowing may increase certain business market economic conditions however access variety funding sources meet liquidity needs designed facilitate continued access capital resources conditions liquidity subject various risks including risks identified section entitled risk factors item 1a market risks identified section entitled quantitative qualitative disclosures market risk item 7a incorporated herein reference cash balances held numerous locations throughout world substantially amounts held outside us utilize variety planning financing strategies effort ensure worldwide cash available needed cash position remains strong expect cash balances anticipated cash flow generated operations access capital markets sufficient cover expected nearterm cash outlays hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued amounts held outside us generally utilized support nonus liquidity needs although portion amounts may time subject shortterm intercompany loans us amounts held outside us could repatriated us current law would subject us federal income taxes less applicable foreign tax credits repatriation foreign earnings restricted local law except foreign earnings considered indefinitely reinvested outside us provided us federal tax liability earnings financial statement purposes repatriation could result additional income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside us would meet liquidity needs ongoing cash flows external borrowings expect restrictions potential taxes incurred repatriation amounts held outside us material effect overall liquidity financial condition results operations liquidity cash equivalents total debt available borrowing resources follows 1in addition available borrowing resources able offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants shelf registration statement filed securities exchange commission may 2012 shelf registration statement key cash flow metrics follows operating activities net cash provided operating activities increased 07 billion fiscal 2014 compared fiscal 2013 due primarily improvements working capital management net cash provided operating activities increased 10 billion fiscal 2013 compared fiscal 2012 due primarily improvements working capital management reduction payments associated webos contract cancellations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued key working capital metrics follows days sales outstanding accounts receivable dso measures average number days receivables outstanding dso calculated dividing ending accounts receivable net allowance doubtful accounts 90day average net revenue fiscal 2014 decrease dso due primarily impact currency expansion factoring programs days supply inventory dos measures average number days procurement sale product dos calculated dividing ending inventory 90day average cost goods sold fiscal 2014 increase dos due higher inventory balance personal systems due part strategic advanced buys days purchases outstanding accounts payable dpo measures average number days accounts payable balances outstanding dpo calculated dividing ending accounts payable 90day average cost goods sold fiscal 2014 increase dpo primarily result extension payment terms product suppliers cash conversion cycle sum dso dos less dpo cash conversion cycle ended fiscal 2014 expect longterm sustainable rate items may cause cash conversion cycle particular period differ longterm sustainable rate include limited changes business mix changes payment terms extent receivables factoring seasonal trends timing revenue recognition inventory purchases within period investing activities net cash used investing activities flat fiscal 2014 compared fiscal 2013 due primarily higher cash utilization purchases property plant equipment offset cash generated sales availableforsale securities net cash used investing activities decreased 07 billion fiscal 2013 compared fiscal 2012 due primarily lower investments property plant equipment higher net sales maturities availableforsale securities financing activities net cash used financing activities decreased approximately 14 billion fiscal 2014 compared fiscal 2013 decrease due primarily proceeds issuance us dollar global notes january 2014 partially offset higher debt repayments repurchases common stock net cash used financing activities increased 41 billion fiscal 2013 compared fiscal 2012 increase due primarily higher maturities debt net repayments commercial paper information share repurchase programs see item 5 note 13 consolidated financial statements item 8 incorporated herein reference hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued capital resources debt levels maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities cost capital targeted capital structure shortterm debt longterm debt decreased 25 billion 06 billion respectively fiscal 2014 compared fiscal 2013 net decrease total debt due primarily maturities debt fiscal 2014 issued 20 billion us dollar global notes 2012 shelf registration statement mature 2019 repaid 49 billion us dollar global notes also issued 116 billion repaid 115 billion commercial paper fiscal 2014 shortterm debt longterm debt decreased 06 billion 52 billion respectively fiscal 2013 compared fiscal 2012 net decreases due primarily maturities debt net repayments commercial paper issuances repayments commercial paper 161 billion 162 billion fiscal 2013 122 billion 150 billion fiscal 2012 respectively fiscal 2015 25 billion us dollar global notes scheduled mature 650 million matured december 2014 information borrowings see note 12 consolidated financial statements item 8 incorporated herein reference debttoequity ratio calculated carrying amount debt divided total stockholders equity debttoequity ratio decreased 010x fiscal 2014 due decrease total debt balances 31 billion partially offset decrease stockholders equity 05 billion end fiscal 2014 debttoequity ratio decreased 043x fiscal 2013 due decrease total debt balances 58 billion coupled increase stockholders equity 48 billion end fiscal 2013 information borrowings see note 12 consolidated financial statements item 8 incorporated herein reference weightedaverage interest rate reflects effective interest rate borrowings prevailing period reflects effect interest rate swaps information interest rate swaps see note 11 consolidated financial statements item 8 incorporated herein reference hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued available borrowing resources following resources available obtain short longterm financing need additional liquidity information available borrowings resources see note 12 consolidated financial statements item 8 incorporated herein reference credit ratings credit risk evaluated major independent rating agencies based publicly available information well information obtained ongoing discussions credit ratings october 31 2014 follows announcement separation october 2014 credit ratings assigned negative outlook standard poors rating services fitch rating services additionally moodys investors service placed us review downgrade december 2013 moodys investors service affirmed negative outlook assigned november 2012 rating downgrade triggers would accelerate maturity material amount debt previous downgrades increased cost borrowing credit facilities reduced market capacity commercial paper required posting additional collateral derivative contracts addition downgrade credit ratings rating agencies may impact us similar manner depending extent downgrade could negative impact liquidity capital position rely alternative sources funding including drawdowns credit facilities issuance debt securities existing 2012 shelf registration statement necessary offset potential reductions market capacity commercial paper hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued contractual obligations contractual obligations october 31 2014 follows 1amounts represent principal cash payments relating longterm debt include fair value adjustments discounts premiums 2amounts represent expected interest payments relating longterm debt outstanding interest rate swap agreements accounted fair value hedges economic effect changing fixed interest rates associated us dollar global notes variable interest rates impact outstanding interest rate swaps october 31 2014 factored calculation future interest payments longterm debt 3purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations related principally inventory items purchase obligations exclude agreements cancelable without penalty purchase obligations also exclude open purchase orders routine arrangements entered ordinary course business difficult quantify meaningful way even though open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust terms based business needs prior delivery goods performance services 4in fiscal 2015 hp anticipates making contributions 686 million nonus pension plans expects pay benefits 35 million us nonqualified pension plan participants expects pay claims 47 million postretirement benefit plans policy fund pension plans meet least minimum contribution requirements established local government funding taxing authorities expected contributions payments pension postretirement benefit plans excluded contractual obligations table represent contractual cash outflows dependent numerous factors may result wide range outcomes information retirement postretirement benefit plans see note 4 consolidated financial statements item 8 incorporated herein reference 5we expect future cash payments 18 billion connection approved restructuring plans includes 10 billion expected paid fiscal 2015 remaining approximately 800 million cash payments made fiscal 2021 payments restructuring hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued excluded contractual obligations table represent contractual cash outflows uncertainty timing payments information restructuring activities see note 3 consolidated financial statements item 8 incorporated herein reference 6as october 31 2014 approximately 35 billion recorded liabilities related interest penalties pertaining uncertain tax positions liabilities related interest penalties include 27 million expected paid within one year remaining amount unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters payments obligations would result settlements taxing authorities information uncertain tax positions see note 6 consolidated financial statements item 8 incorporated herein reference offbalance sheet arrangements part ongoing business participated transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes thirdparty revolving shortterm financing arrangements intended facilitate working capital requirements certain customers total aggregate maximum capacity financing arrangements 30 billion october 31 2014 including aggregate maximum capacity 11 billion nonrecourse financing arrangements aggregate maximum capacity 19 billion partialrecourse facilities information thirdparty revolving shortterm financing arrangements see note 7 consolidated financial statements item 8 incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations hp inc subsidiaries managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations mda organized follows • hp separation transaction discussion separation hewlett packard enterprise hewlettpackard companys former enterprise technology infrastructure software services financing businesses • overview discussion business overall analysis financial highlights affecting company provide context remainder mda overview analysis compares fiscal 2015 fiscal 2014 • critical accounting policies estimates discussion accounting policies estimates believe important understanding assumptions judgments incorporated reported financial results • results operations analysis financial results comparing fiscal 2015 fiscal 2014 fiscal 2014 fiscal 2013 discussion results operations consolidated level followed detailed discussion results operations segment • liquidity capital resources analysis changes cash flows discussion financial condition liquidity • contractual obligations overview contractual obligations retirement postretirement benefit plan funding restructuring plans separation costs uncertain tax positions offbalance sheet arrangements intend discussion financial condition results operations follows provide information assist reader understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document hp separation transaction november 1 2015 distribution date completed separation hewlett packard enterprise hewlettpackard companys former enterprise technology infrastructure software services financing businesses separation connection separation hewlettpackard company changed name hp inc november 1 2015 stockholders record close business october 21 2015 record date received one share hewlett packard enterprise common stock every one share common stock held record date distributed total approximately 18 billion shares hewlett packard enterprise common stock stockholders hewlett packard enterprise independent public company trading new york stock exchange nyse symbol hpe separation beneficially shares hewlett packard enterprise common stock hp inc subsidiaries managements discussion analysis financial condition results operations continued process completing separation highly complex involved significant costs expenses accordingly incurred separation costs foreign tax expenses associated separating two companies fiscal 2015 recorded nonrecurring separation costs net foreign tax expenses 16 billion primarily related thirdparty consulting contractor fees incremental costs directly associated separation process expect total separation charges net foreign tax expenses approximately 180 million fiscal 2016 additionally separation two independent companies expected result total dissynergies approximately 400 million 450 million annually costs primarily associated corporate functions finance legal real estate human resources dissynergies expected divided approximately equally hp inc hewlett packard enterprise recorded deferred tax asset costs expenses incurred fiscal 2015 expect portion deferred tax assets associated separation costs expenses eliminated given nondeductible time separation executed furthermore concluded legal form separation may 2015 announced hewlett packard enterprise spinnee company united states us accordingly implemented certain internal reorganizations transactions among whollyowned subsidiaries operating activities preparation legal form separation result recognized gross incremental foreign tax expenses related separation foreign legal entities approximately 300 million foreign tax credits approximately 100 million fiscal 2015 additional tax credit amounts expected several years october 31 2015 also expect separationrelated capital expenditures approximately 30 million fiscal 2016 connection separation hewlett packard enterprise entered separation distribution agreement well various agreements provide framework relationships parties going forward including among others tax matters agreement employee matters agreement transition service agreement real estate matters agreement master commercial agreement information technology service agreement fourth quarter fiscal 2015 transferred substantially assets liabilities operations enterprise technology infrastructure software services financing businesses hewlett packard enterprise fourth fiscal quarter 2015 historical results operations financial position hewlett packard enterprise included consolidated financial statements hp inc fiscal years included report reported discontinued operations beginning first quarter fiscal 2016 beginning november 1 2015 longer consolidate hewlett packard enterprise within financial results reflect financial results hewlett packard enterprise within continuing results operations overview october 31 2015 leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers government health education sectors offerings span following • personal computing access devices • imaging printingrelated products services hp inc subsidiaries managements discussion analysis financial condition results operations continued • enterprise infrastructure including enterprise server storage technology networking products solutions technology support maintenance • multivendor customer services including technology consulting outsourcing support services across infrastructure applications business process domains • software products solutions including application testing delivery big data analytics enterprise security information governance operations management october 31 2015 seven segments financial reporting purposes personal systems printing enterprise group eg enterprise services es software hp financial services hpfs corporate investments effective november 1 2015 report three segments part continuing operations personal systems printing corporate investments following provides overview key financial metrics segment fiscal 2015 1hp consolidated net revenue excludes intersegment net revenue 2segment earnings operations exclude corporate unallocated costs stockbased compensation expense amortization intangible assets restructuring charges acquisition related charges separation costs defined benefit plan settlement charges impairment data center assets 3nm represents meaningful hp consolidated net revenue declined 73 decreased 21 constant currency basis fiscal 2015 compared fiscal 2014 leading contributors net revenue decline unfavorable currency impacts across major segments key account runoff soft demand infrastructure technology outsourcing ito es lower desktop sales personal systems lower sales printers supplies partially offsetting declines growth within eg segment sales iss servers gross margin 240 248 billion 239 266 billion fiscal 2015 2014 respectively 01 percentage point increase gross margin due primarily service delivery efficiencies improvements underperforming contracts es partially offsetting gross margin increase impact higher mix iss products eg competitive pricing pressures printing impact sale intellectual property ip prioryear period continue experience gross margin pressures resulting competitive pricing environment across hardware portfolio hps operating margin decreased 11 percentage points fiscal 2015 compared fiscal 2014 due primarily separation costs pension plan settlement charges data center impairments impact sale ip prioryear period partially offsetting hp inc subsidiaries managements discussion analysis financial condition results operations continued declines gross margin increase lower selling general administrative sga expenses lower restructuring charges october 31 2015 cash equivalents short longterm investments 177 billion representing increase approximately 22 billion october 31 2014 balance 155 billion increase cash equivalents short longterm investments fiscal 2015 primarily due following factors cash received operating cash flows 65 billion cash received net issuances repayments debt 50 billion partially offset investments property plant equipment business acquisitions net divestitures 32 billion 24 billion respectively cash utilization share repurchases common stock 29 billion dividend payments stockholders 12 billion continue experience challenges representative trends uncertainties may affect business results operations one set challenges relates dynamic accelerating market trends decline pc market certain legacy hardware businesses face challenges customers migrate cloudbased offerings reduce purchases hardware products second set challenges relates changes competitive landscape major competitors expanding product service offerings integrated products solutions businessspecific competitors exerting increased competitive pressure targeted areas entering new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model changes gotomarket execution macroeconomic weakness experienced moderated geographic regions remains overall challenge discussion challenges segment level set forth • personal systems witnessing soft demand personal computer pc market customers hold onto pcs longer thereby extending pc refresh cycles demand pcs impacted weaker macroeconomic conditions currency devaluations certain asian european markets additionally industry wide pc channels regions working excess channel inventory impacting sell see continued market headwinds next several quarters however optimistic see opportunity market long term given strength commercial launch windows 10 combined intels skylake processor family transition may represent catalyst demand introduction breakthrough form factors personal systems maintaining strategic focus profitable growth improved market segmentation respect enhanced innovation multioperating systems multiarchitecture geography customer segments key attributes additionally hp investing significantly premium mobility form factors convertible notebooks detachable notebooks commercial tablets order meet customer preference mobile thinner lighter devices • printing experiencing impact growth mobility demand challenges consumer commercial markets also experiencing overall competitive pricing environment due aggressive pricing japanese competitors given weakness japanese yen successful addressing challenges need continue execute key initiatives focusing products targeted high usage categories introducing new revenue delivery models consumer customers consumer market ink office products driving unit volume due officejet pro product lines ink office hp inc subsidiaries managements discussion analysis financial condition results operations continued initiative also targets shifting ink smbs officejet pro x printers leverage pagewide array technology commercial market focus placing higher value printer units also offers positive annuity toner ink accelerating growth graphics accomplishing several growth areas multifunction enterprise ink printers recently introduced products increasing demand managed print services presents strong aftermarket supplies opportunity graphics product innovation indigo product line plan continue focus shifting mix installed base valueadded units expanding innovative ink laser graphics programs • eg experiencing challenges due multiple market trends including increasing demand hyperscale computing infrastructure products transition cloud computing highly competitive pricing environment addition demand business critical systems bcs products continues weaken overall market unix products effect lower bcs traditional storage revenue along higher mix iss density optimized server products midrange converged storage solutions impacting support attach opportunities technology services ts successful overcoming challenges must address business model shifts gotomarket execution challenges continuing pursue new product innovation builds existing capabilities areas cloud data center computing softwaredefined networking storage blade servers wireless networking • es facing challenges including managing revenue runoff several large contracts pressured public sector spending competitive pricing environment market pressures mixed economic recovery europe middle east africa emea also experiencing commoditization infrastructure services market placing pressure traditional ito pricing cost structures also industrywide shift highly automated assetlight delivery infrastructure applications leading headcount consolidation successful addressing challenges must execute es multiyear turnaround plan includes cost reduction initiative align costs revenue trajectory focus new logo wins strategic enterprise services ses initiatives improve execution sales performance accountability contracting practices pricing • software facing challenges including market shift saas gotomarket execution challenges successful addressing challenges must improve gotomarket execution multiple product delivery models better address customer needs achieve broader integration across overall product portfolio work capitalize important market opportunities cloud big data security address challenges continue pursue innovation view towards developing new products services aligned market demand industry trends needs customers partners addition need continue improve operations particular focus enhancing endtoend processes efficiencies also need continue optimize sales coverage models align sales incentives strategic goals improve channel execution strengthen capabilities areas strategic focus develop capitalize market opportunities hp inc subsidiaries managements discussion analysis financial condition results operations continued discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles gaap require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities readily apparent sources management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting amounts reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows summary significant accounting policies included note 1 consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured well revenue recognition principles met including industryspecific revenue recognition guidance enter contracts sell products services many sales agreements contain standard terms conditions agreements enter contain nonstandard terms conditions many arrangements include multiple elements result significant contract interpretation may required determine appropriate accounting including identification deliverables considered separate units accounting allocation transaction price among elements arrangement timing revenue recognition elements recognize revenue delivered elements separate units accounting delivered elements standalone value customer elements standalone value recognize revenue consistent pattern undelivered elements arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within control delivered element constitutes separate unit accounting arrangements hp inc subsidiaries managements discussion analysis financial condition results operations continued combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract establish selling prices used deliverable based vendor specific objective evidence vsoe selling price available thirdparty evidence tpe vsoe selling price available estimated selling price esp neither vsoe selling price tpe available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers esp established based managements judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles may modify develop new gotomarket practices future may result changes selling prices impacting vsoe selling price esp arrangements multiple elements transaction price allocated individual units accounting inception arrangement based relative selling price however aforementioned factors may result different allocation transaction price deliverables multiple element arrangements entered future periods may change pattern timing revenue recognition identical arrangements executed future periods change total revenue recognized given arrangement reduce revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs estimate number customers expected redeem incentive based historical experience specific terms conditions incentive hardware products recognize revenue generated direct sales end customers indirect sales channel partners including resellers distributors valueadded solution providers revenue recognition criteria satisfied indirect sales channel partners recognize revenue time delivery channel partner economic substance apart hp completed obligations related sale various software products sell eg big data analytics applications application delivery management enterprise security operations management assess whether software products sold standalone basis hardware products software sold hardware product essential functionality hardware product morethanincidental treat software deliverable recognize revenue sale perpetual software licenses inception license term assuming revenue recognition criteria satisfied termbased software license revenue generally recognized ratably term license use residual method allocate revenue software licenses inception arrangement vsoe fair value undelivered elements postcontract customer support exists revenue recognition criteria satisfied revenue maintenance unspecified upgrades updates provided hp inc subsidiaries managements discussion analysis financial condition results operations continued whenandifavailable basis recognized ratably period items delivered hosting saas arrangements recognize revenue service delivered generally straightline basis contractual period performance hosting arrangements consider rights provided customer eg whether customer contractual right take possession software time hosting period without significant penalty feasibility customer operate contract another vendor operate software determining whether arrangement includes sale software license hosting arrangements software licenses sold license revenue generally recognized according whether perpetual term licenses sold revenue recognition criteria satisfied recognize revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period certain fixedprice contracts consulting arrangements recognize revenue work progresses using proportional performance method estimate total expected labor costs order determine amount revenue earned date apply proportional performance method reasonably dependable estimates labor costs applicable various stages contract made fixedprice contracts design build projects design develop construct software infrastructure systems recognize revenue work progresses using percentageofcompletion method use costtocost method measure progress toward completion determined percentage costs incurred date compared total estimated costs project total project costs subject revision throughout life fixedprice contract provisions estimated losses fixedprice contracts recognized period losses become known recorded component cost sales circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method outsourcing services revenue generally recognized period service provided amount earned contingent occurrence future event recognize revenue using objective measure output per unitpriced contracts revenue fixedprice outsourcing contracts periodic billings recognized straightline basis service provided evenly contract term provisions estimated losses outsourcing arrangements recognized period losses become probable estimable recorded component cost sales warranty accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty expense actual warranty costs averaged approximately 25 27 annual net product revenue respectively hp inc subsidiaries managements discussion analysis financial condition results operations continued restructuring engaged restructuring actions require management estimate timing amount severance employee separation costs workforce reduction enhanced early retirement programs fair value assets made redundant obsolete fair value lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements full description restructuring actions refer discussions restructuring results operations note 3 consolidated financial statements item 8 incorporated herein reference retirement postretirement benefits pension postretirement benefit costs obligations depend various assumptions major assumptions relate primarily discount rates mortality rates expected increases compensation levels expected longterm return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period mortality rates help predict expected life plan participants based historical demographic study plan expected increase compensation levels assumption reflects longterm actual experience future expectations expected longterm return plan assets determined based asset allocations historical portfolio results historical asset correlations managements expected returns asset class evaluate expected return assumptions annually including reviewing current capital market assumptions assess reasonableness expected longterm return plan assets update expected longterm return assets observe sufficient level evidence would suggest longterm expected return changed fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm performance relative expected longterm performance lesser extent differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year unless updated result interim remeasurement major assumptions vary plan weightedaverage rates used set forth note 4 consolidated financial statements item 8 incorporated herein reference following table provides impact changes weightedaverage assumptions discount rates hp inc subsidiaries managements discussion analysis financial condition results operations continued expected increase compensation levels expected longterm return plan assets would net periodic benefit cost fiscal 2015 taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize determining need valuation allowance consider future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us federal taxes plan reinvest earnings indefinitely outside us plan distributions foreign earnings based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount expect indefinitely invest outside us amounts expect distribute us provide us federal taxes due amounts expected distributed us result certain employment actions capital investments undertaken income manufacturing activities certain jurisdictions subject reduced tax rates cases wholly exempt taxes fiscal years 2026 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact future earnings repatriated us related future effective tax rate subject income taxes us approximately 105 countries subject routine corporate income tax audits many jurisdictions believe positions hp inc subsidiaries managements discussion analysis financial condition results operations continued taken tax returns fully supported tax authorities may challenge positions may fully sustained examination relevant tax authorities accordingly income tax provision includes amounts intended satisfy assessments may result challenges determining income tax provision potential assessments recording related effects requires management judgments estimates amounts ultimately paid resolution audit could materially different amounts previously included income tax provision therefore could material impact income tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions intercompany transactions related interest discussion taxes earnings refer note 6 consolidated financial statements item 8 incorporated herein reference inventory state inventory lower cost market firstin firstout basis make adjustments reduce cost inventory net realizable value product group level estimated excess obsolescence factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues business combinations allocate fair value purchase consideration assets acquired including inprocess research development iprd liabilities assumed noncontrolling interests acquiree generally based fair values acquisition date iprd initially capitalized fair value intangible asset indefinite life assessed impairment thereafter iprd project complete reclassified amortizable purchased intangible asset amortized estimated useful life iprd project abandoned record charge value related intangible asset consolidated statement earnings period abandoned excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquiree recorded goodwill determining fair values assets acquired liabilities assumed noncontrolling interests acquiree management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill review goodwill impairment annually whenever events changes circumstances indicate carrying amount goodwill may recoverable permitted conduct qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2015 performed quantitative test reporting units goodwill tested impairment hp inc subsidiaries managements discussion analysis financial condition results operations continued reporting unit level october 31 2015 reporting units consistent reportable segments identified note 2 except es includes two reporting units mphasis limited remainder es first step goodwill impairment test compare fair value reporting unit carrying amount estimate fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach estimate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting units ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies operating investment characteristics similar reporting unit weight fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available estimate fair value reporting unit using income approach mphasis limited reporting unit utilized quoted market price active market estimate fair value order assess reasonableness estimated fair value reporting units compare aggregate reporting unit fair value hps market capitalization calculate implied control premium excess sum reporting units fair value hps market capitalization evaluate control premium comparing observable control premiums recent comparable transactions implied control premium believed reasonable light recent transactions reevaluate reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units estimating fair value reporting unit judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates future economic market conditions determination appropriate comparable publiclytraded companies addition make certain judgments assumptions allocating shared assets liabilities individual reporting units determine carrying amount reporting unit fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount perform second step goodwill impairment test measure amount impairment loss second step reporting units assets including unrecognized intangible assets liabilities noncontrolling interests measured fair value hypothetical analysis calculate implied fair value goodwill reporting unit manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying amount difference recorded impairment loss annual goodwill impairment analysis performed first day fourth quarter fiscal 2015 result impairment charges excess fair value carrying amount reporting units ranged 19 approximately 2600 carrying amounts software reporting unit lowest excess fair value carrying amount 19 hp inc subsidiaries managements discussion analysis financial condition results operations continued order evaluate sensitivity estimated fair value reporting units goodwill impairment test applied hypothetical 10 decrease fair value reporting unit hypothetical 10 decrease resulted excess fair value carrying amount reporting units ranging 7 approximately 2400 carrying amounts software reporting unit lowest excess fair value carrying amount 7 fair value software reporting unit estimated using equal weighting income market approaches software business facing multiple challenges including market shift saas gotomarket execution challenges successful addressing challenges projected revenue growth rates could decline resulting decrease fair value software reporting unit fair value software reporting unit could also negatively impacted declines market multiples revenue comparable publiclytraded companies changes managements business strategy significant sustained declines stock price could result indicator impairment intangible assets review intangible assets finite lives impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability finitelived intangible assets assessed based estimated undiscounted future cash flows expected result use eventual disposition asset undiscounted future cash flows less carrying amount finitelived intangible assets considered impaired amount impairment loss measured difference carrying amount asset fair value estimate fair value finitelived intangible assets using income approach available appropriate using market approach fair value derivative instruments use derivative instruments manage variety risks including risks related foreign currency exchange rates interest rates use forwards swaps times options hedge certain foreign currency interest rate exposures use derivative instruments speculative purposes october 31 2015 gross notional derivative portfolio 526 billion assets liabilities related derivative instruments measured fair value 11 billion 05 billion respectively october 31 2015 fair value price would receive sell asset pay transfer liability orderly transaction market participants measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date determination fair value often involves significant judgments assumptions determining appropriate discount rate factors risk liquidity premiums identifying similarities differences market transactions weighting differences accordingly making appropriate adjustments market transactions reflect risks specific asset liability valued generally use industry standard valuation models measure fair value derivative positions prices active markets available identical asset liability use industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased hp inc subsidiaries managements discussion analysis financial condition results operations continued observable inputs including interest rate curves hp counterparty credit risk foreign currency exchange rates forward spot prices discussion fair value measurements derivative instruments refer note 11 note 12 respectively consolidated financial statements item 8 incorporated herein reference loss contingencies involved various lawsuits claims investigations proceedings including consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information events pertaining particular case based experience believe damage amounts claimed specific litigation contingencies matters discussed note 16 consolidated financial statements item 8 incorporated herein reference meaningful indicator hps potential liability litigation inherently unpredictable however believe valid defenses respect legal matters pending us nevertheless cash flows results operations could materially affected particular period resolution one contingencies believe recorded adequate provisions matters october 31 2015 reasonably possible material loss incurred excess amounts recognized financial statements accounting pronouncements summary recent accounting pronouncements applicable consolidated financial statements see note 1 consolidated financial statements item 8 incorporated herein reference results operations revenue international operations historically represented expect continue represent majority overall net revenue result net revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing performance excluding impact foreign currency fluctuations present yearoveryear percentage change net revenue constant currency basis assumes change foreign currency exchange rates prioryear period doesnt adjust repricing demand impacts changes foreign currency exchange rates information provided net revenue viewed without effect fluctuations foreign currency exchange rates consistent management evaluates net revenue results trends constant currency disclosure provided addition substitute yearoveryear percentage change revenue gaap basis companies may calculate define similarly labeled items differently may limit usefulness measure comparative purposes hp inc subsidiaries managements discussion analysis financial condition results operations continued results operations dollars percentage net revenue follows 1cost products cost services financing interest net revenue fiscal 2015 total hp net revenue declined 73 decreased 21 constant currency basis compared fiscal 2014 us net revenue decreased 29 377 billion net revenue outside us decreased 96 657 billion fiscal 2014 total hp net revenue declined 08 decreased 04 constant currency basis compared fiscal 2013 us net revenue decreased 37 388 billion net revenue outside us increased 09 726 billion hp inc subsidiaries managements discussion analysis financial condition results operations continued components weighted net revenue change segment follows fiscal 2015 compared fiscal 2014 fiscal 2015 total net revenue decreased 73 percentage points segment perspective primary factors contributing change net revenue summarized follows • personal systems net revenue decreased due primarily unfavorable currency impacts particularly emea weakening market demand • es net revenue decreased due primarily unfavorable currency impacts revenue runoff key accounts weak growth new existing accounts • printing net revenue decreased due primarily unfavorable currency impacts weak market demand competitive pricing pressures • hpfs net revenue decreased due primarily unfavorable currency impacts led weakness euro lower asset management activity primarily customer buyouts • corporate investments net revenue decreased due sale ip prioryear period • software net revenue decreased due primarily unfavorable currency impacts declines license revenue • eg net revenue increased due growth industry standard servers iss net revenue resulting acquisition aruba networks inc aruba may 2015 fiscal 2014 compared fiscal 2013 fiscal 2014 total net revenue decreased 08 percentage points segment perspective primary factors contributing change net revenue summarized follows • es net revenue declined due primarily revenue runoff key accounts weak growth new existing accounts particularly emea contractual price declines • printing net revenue decreased due primarily decline supplies • eg net revenue decreased due net revenue declines ts bcs storage hp inc subsidiaries managements discussion analysis financial condition results operations continued • software net revenue decreased due lower net revenue licenses support professional services • hpfs net revenue decreased due primarily lower portfolio revenue lower average portfolio assets lower asset management activity primarily customer buyouts • corporate investments net revenue increased due sale ip • personal systems net revenue increased due growth commercial pcs particularly notebooks along growth consumer notebooks detailed discussion segment revenue included segment information gross margin fiscal 2015 compared fiscal 2014 hps gross margin increased 01 percentage points fiscal year 2015 compared fiscal 2014 segment perspective primary factors impacting gross margin performance summarized follows • es gross margin increased due primarily service delivery efficiencies improving profit performance underperforming contracts • hpfs gross margin decreased due primarily unfavorable currency impacts lower margin customer buyouts lower portfolio margin due competitive pricing • eg gross margin decreased due primarily higher revenue mix iss products unfavorable currency impacts competitive pricing • printing gross margin decreased due primarily competitive pricing environment hardware unfavorable currency impacts • personal systems gross margin decreased due primarily unfavorable currency impacts lower mix commercial products partially offset favorable component costs operational cost improvements • software gross margin decreased due lower mix license revenue fiscal 2014 compared fiscal 2013 hps gross margin increased 08 percentage points fiscal year 2014 compared fiscal 2013 segment perspective primary factors impacting gross margin performance summarized follows • es gross margin increased due primarily continued focus service delivery efficiencies improving profit performance underperforming contracts labor savings result restructuring • printing gross margin increased due primarily favorable currency impacts japanese yen continued cost structure improvements favorable mix higher proportion graphics ink supplies • corporate investments gross margin increased due sale ip hp inc subsidiaries managements discussion analysis financial condition results operations continued • software gross margin increased due shift profitable contracts improved workforce utilization professional services • hpfs gross margin increased due higher portfolio margin primarily lower bad debt expense lower cost funds improved margins remarketing sales • personal systems gross margin increased due primarily operational cost improvements favorable mix commercial products sale ip • eg gross margin decreased due primarily impact higher mix iss products lower mix bcs products competitive pricing pressure iss networking detailed discussion segment gross margins operating margins included segment information operating expenses research development rd expense increased 2 fiscal 2015 compared fiscal 2014 due primarily expenses acquisition aruba increases technology services cloud hp labs partially offset favorable currency impacts rd expense increased 10 fiscal 2014 compared fiscal 2013 increases across segments made investments strategic focus areas cloud security big data mobility selling general administrative sga expense decreased 9 fiscal 2015 compared fiscal 2014 due primarily favorable currency impacts declines gotomarket costs result lower commissions productivity initiatives sga expense increased 1 fiscal 2014 compared fiscal 2013 due primarily higher compensation costs litigation expenses higher selling costs investments areas cloud networking storage partially offset gains sales real estate lower program spending marketing amortization intangible assets amortization expense decreased fiscal 2015 fiscal 2014 due primarily certain intangible assets associated prior acquisitions reaching end respective amortization periods partially offset amortization expense intangible assets resulting acquisition aruba fiscal 2015 restructuring charges restructuring charges decreased 37 fiscal 2015 due primarily lower charges multiyear restructuring plan initially announced may 2012 plan september 14 2015 board directors approved restructuring plan 2015 plan connection separation implemented fiscal 2018 result hp recognized 391 million charges related 2015 plan fourth quarter fiscal 2015 hp inc subsidiaries managements discussion analysis financial condition results operations continued restructuring charges increased fiscal 2014 due primarily higher charges connection 2012 plan increases 2012 plan announced fiscal 2014 fiscal 2014 hp increased total positions expected eliminated 2012 plan 34000 55000 positions fiscal 2015 hp recognized restructuring charges 640 million connection 2012 plan acquisition related charges acquisition related charges increased fiscal 2015 due primarily acquisition aruba resulting noncash inventory fair value adjustment charge professional services legal fees associated acquisition separation costs separation costs fiscal 2015 primarily comprised thirdparty consulting contractor fees related costs defined benefit plan settlement charges defined benefit plan settlement charges fiscal 2015 related us defined benefit plan settlement expense net periodic benefit cost resulting voluntary lump sum program announced january 2015 impairment data center assets impairment data center assets fiscal 2015 related exit several es data centers interest net interest net expense increased 111 million fiscal 2015 increase connection 167 million early debt settlement costs higher foreign currency transaction losses partially offset lower interest expense due lower weighted average interest rates decrease miscellaneous expenses interest net expense increased 7 million fiscal 2014 increase due primarily higher currency transaction losses partially offset lower interest expense lower average debt balance provision taxes effective tax rates 38 235 215 fiscal 2015 2014 2013 respectively effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lower tax jurisdictions throughout world jurisdictions favorable tax rates significant impact hps effective tax rate periods presented puerto rico singapore china malaysia ireland netherlands hp plans reinvest certain earnings jurisdictions indefinitely outside us therefore provided us taxes indefinitely reinvested earnings hp inc subsidiaries managements discussion analysis financial condition results operations continued reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 6 consolidated financial statements item 8 incorporated herein reference fiscal 2015 recorded 16 billion net income tax benefits related items unique year amounts included 18 billion tax benefit due release valuation allowances pertaining certain us deferred tax assets 486 million tax charge record valuation allowances certain foreign deferred tax assets related legal entities within es business 394 million tax charges adjustments uncertain tax positions settlement tax audit matters inclusive 449 million tax charges related pension transfers 3 million tax charges various provision return adjustments addition recorded 639 million net tax benefits restructuring separationrelated charges tax benefit 47 million arising retroactive research development credit resulting tax increase prevention act 2014 signed law december 2014 recorded gross deferred tax assets 125 billion 140 billion 136 billion october 31 2015 2014 2013 reduced valuation allowances 99 billion 119 billion 114 billion respectively total valuation allowances decreased 2 billion fiscal 2015 associated release valuation allowance deferred tax assets us increased 525 million fiscal 2014 associated primarily foreign net operating losses fiscal 2014 recorded 53 million net income tax charges related items unique year fiscal 2013 recorded 471 million net income tax charges related items unique year amounts included 214 million net increases valuation allowances 406 million tax charges adjustments uncertain tax positions settlement tax audit matters 47 million tax charges various prior period adjustments addition recorded 146 million tax benefits adjustments prior year foreign income tax accruals tax benefit 50 million arising retroactive research development credit resulting american taxpayer relief act 2012 signed law january 2013 segment information description products services segment found note 2 consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes segments disclosed effective beginning first quarter fiscal 2015 implemented organizational change align segment financial reporting closely current business structure organizational change resulted transfer thirdparty multivendor support arrangements ts business unit within eg segment ito business unit within es segment reflected change segment information retrospectively earliest period presented resulted removal intersegment revenue ts business unit within eg segment related corporate intersegment revenue eliminations transfer operating profit ts business unit within eg segment ito business unit within es segment connection separation effective beginning fourth quarter fiscal 2015 implemented organizational change resulted transfer marketing optimization solutions business software segment commercial hardware business unit within hp inc subsidiaries managements discussion analysis financial condition results operations continued printing segment reflected change segment information prior reporting periods asif basis resulted transfer net revenue software segment commercial hardware business unit within printing segment change also resulted transfer operating profit software segment commercial hardware business unit within printing segment addition change resulted reclassification 512 million goodwill software segment printing segment changes impact previously reported consolidated net revenue earnings operations net earnings net earnings per share printing personal systems group personal systems segment printing segment structured beneath broader printing personal systems group pps describe results business segments within pps personal systems components net revenue weighted net revenue change business unit follows hp inc subsidiaries managements discussion analysis financial condition results operations continued fiscal 2015 compared fiscal 2014 personal systems net revenue decreased 83 decreased 31 constant currency basis fiscal 2015 net revenue decline personal systems due primarily unfavorable currency impacts particularly emea weakening market demand personal systems net revenue decreased result 5 decline average selling prices asps 3 decline unit volume decline asps due primarily unfavorable currency impacts shift consumer pcs low end products lower mix commercial pcs within personal systems unit volume decline due primarily unit volume decline desktops partially offset unit volume growth notebooks consumer commercial net revenue commercial clients decreased 8 due primarily unfavorable currency impacts decline commercial desktops result weak market demand higher net revenue prioryear period resulting replacement windows xp operating system net revenue consumer clients decreased 8 due primarily unfavorable currency impacts decline consumer desktops net revenue declined 17 desktop pcs 2 notebook pcs 9 workstations 8 net revenue decline due primarily decline consumer tablets sale ip prioryear period unfavorable currency impacts effects partially offset increased sales extended warranties personal systems earnings operations percentage net revenue decreased 03 percentage points fiscal 2015 result decline gross margin combined increase operating expenses percentage net revenue decline gross margin due primarily unfavorable currency impacts lower mix commercial products partially offset favorable component costs operational cost improvements operating expenses percentage net revenue increased due primarily size net revenue decline higher administrative expenses result lower bad debt recoveries compared prioryear period higher rd investments commercial mobility immersive computing products effects partially offset decline field selling costs result favorable currency impacts operational cost improvements fiscal 2014 compared fiscal 2013 personal systems net revenue increased 66 increased 72 constant currency basis fiscal 2014 personal systems business continued challenged market shift towards mobility products pace pc market decline slowed signs stabilization driven growth commercial pcs effects partially offset weakness consumer pcs revenue increase personal systems due growth commercial pcs particularly notebooks along growth consumer notebooks personal systems experienced revenue growth across regions led double digit revenue growth emea experienced improved demand revenue increase driven 82 increase unit volume effects partially offset 15 decline asps unit volume increase primarily led growth commercial notebooks well strength commercial desktops consumer notebooks thin client products decline asps due primarily competitive pricing environment unfavorable currency impacts effects partially offset favorable mix commercial pcs net revenue commercial clients increased 10 due primarily benefits delayed installed base refresh cycle effects customers migrating windows xp operating system growth product categories partly driven new product introductions including hp elite hp inc subsidiaries managements discussion analysis financial condition results operations continued products net revenue consumer clients remained flat growth consumer notebooks partly driven new product lineup including chromebooks hybrid products offset decline consumer desktops fiscal 2014 net revenue notebook pcs increased 9 desktop pcs increased 3 workstations increased 3 net revenue increased 16 net revenue increase due sale ip growth mobility products primarily consumer tablets introduced second half fiscal 2013 personal systems earnings operations percentage net revenue increased 07 percentage points fiscal 2014 increase driven increase gross margin decline operating expenses percentage net revenue increase gross margin due primarily operational cost improvements favorable commercial mix sale ip effects partially offset unfavorable currency impacts operating expenses percentage net revenue decreased due primarily cost structure optimization efforts effects partially offset increased research development investments commercial mobility immersive computing products well higher administrative expenses driven lower bad debt recoveries compared fiscal 2013 printing components net revenue weighted net revenue change business unit follows hp inc subsidiaries managements discussion analysis financial condition results operations continued fiscal 2015 compared fiscal 2014 printing net revenue decreased 85 decreased 51 constant currency basis fiscal 2015 decline net revenue due primarily unfavorable currency impacts decline supplies weak market demand competitive pricing pressures effects partially offset growth graphics products regional perspective printing experienced net revenue decline across regions primarily emea particularly russia result challenges markets net revenue supplies decreased 6 due primarily unfavorable currency impacts demand weakness toner ink partially offset growth graphics supplies demand weakness toner particularly emea led net revenue decline russia printer unit volumes declined 7 average revenue per unit aru decreased 7 printer unit volume declined due primarily decline laserjet home printer units effects partially offset growth graphics printer units aru printers decreased due primarily highly competitive pricing environment unfavorable currency impacts inkjet laserjet printers net revenue commercial hardware decreased 10 driven 7 decline printer unit volume 4 decline aru partially offset net revenue increase peripheral solutions commercial hardware decline unit volume due primarily overall decline laserjet printer units partially offset growth graphics printer units aru decline commercial hardware due primarily competitive pricing environment unfavorable currency impacts net revenue consumer hardware decreased 20 driven 13 decline aru 7 decline unit volume aru decline consumer hardware due primarily competitive pricing environment unfavorable currency impacts unit volume decline consumer hardware due primarily lower sales home smb printer units printing earnings operations percentage net revenue remained flat fiscal 2015 due decline gross margin offset lower operating expenses percentage net revenue decline gross margin due primarily competitive pricing environment hardware unfavorable currency impacts effects partially offset favorable mix ink graphics supplies favorable currency impacts japanese yen operating expenses percentage net revenue decreased due primarily cost saving initiatives lower marketing expenses impact divestiture photo printing service snapfish favorable currency impacts hp inc subsidiaries managements discussion analysis financial condition results operations continued fiscal 2014 compared fiscal 2013 fiscal 2014 printing experienced decline revenue increase operating profit continued push print strategies includes driving high value printer unit placements expanding graphics products managed print services portfolio printing net revenue decreased 38 decreased 33 constant currency basis fiscal 2014 decline net revenue primarily driven decline supplies effects partially offset growth graphics products managed print services net revenue supplies decreased 5 driven demand weakness toner ink reduction channel inventory fourth quarter fiscal 2014 effects partially offset growth graphics supplies printer unit volume remained flat aru decreased 1 printer unit volume flat due primarily continued efforts target high value areas market resulted decline home printer units low value laserjet printer units effects offset increased units smb multifunction laser graphics printers decline aru due primarily increased discounting driven competitive pricing pressures net revenue commercial hardware flat 3 increase printer unit volume offset 3 decline printer aru unit volume commercial hardware increased due primarily growth multifunction laser printers graphics printers aru decline commercial hardware due primarily decline laserjet graphics printers driven competitive pricing environment net revenue consumer hardware decreased 4 driven 1 decline printer unit volume 1 decline aru along decline peripheral printing solutions unit volume decline consumer hardware due lower sales home printers effects partially offset growth smb printers aru decline consumer hardware due primarily increased discounting smb printers due competitive pricing environment effects partially offset favorable mix high value home printers printing earnings operations percentage net revenue increased 18 percentage points fiscal 2014 increase gross margin offset increase operating expenses percentage net revenue gross margin increase due favorable currency impacts primarily driven japanese yen continued cost structure improvements favorable mix higher proportion graphics ink supplies effects partially offset competitive pricing environment operating expenses percentage net revenue increased due primarily higher rd expenses result investments enterprise products 3d printing effects partially offset reduced marketing expenses enterprise group hp inc subsidiaries managements discussion analysis financial condition results operations continued components net revenue weighted net revenue change business unit follows fiscal 2015 compared fiscal 2014 eg net revenue increased 07 increased 63 constant currency basis fiscal 2015 increase eg net revenue due primarily growth iss acquisition aruba may 2015 partially offset primarily unfavorable currency impacts led euro net revenue decline ts however continued experience challenges due market trends including transition cloud computing well product technology transitions along highly competitive pricing environment iss net revenue increased 8 result higher average unit prices aups unit volume growth increase aups across server portfolio primarily driven higher option attach rates memory processors hard drives mix shift highend new generation hp proliant servers unit volume growth primarily due shipment increases rack density optimized server products networking net revenue increased 8 due primarily revenue aruba resulted higher revenue wireless local area network wlan products effect partially offset competitive pricing pressures particularly china market storage net revenue decreased 4 result decline traditional storage products effect partially offset growth converged storage solutions 3par storeserv products hp inc subsidiaries managements discussion analysis financial condition results operations continued particularly allflash arrays storeonce bcs net revenue decreased 13 largely result contraction overall unix market ts net revenue decreased 9 due primarily reduction support bcs traditional storage products along lower revenue consulting services effects partially offset growth hp data center care hp proactive care support solutions fiscal 2015 eg earnings operations percentage net revenue decreased 01 percentage point due decrease gross margin partially offset decrease operating expenses percentage net revenue decrease gross margin due primarily higher revenue mix iss products unfavorable currency impacts competitive pricing effects partially offset improved cost management improved pricing storage higher gross margin contribution networking aruba decrease operating expenses percentage net revenue due primarily favorable currency impacts partially offset expenses period aruba fiscal 2014 compared fiscal 2013 eg net revenue decreased 10 decreased 06 constant currency basis fiscal 2014 eg continued experience revenue challenges due market trends including transition cloud computing well product technology transitions along highly competitive pricing environment decline eg net revenue due net revenue declines ts bcs storage partially offset net revenue growth iss networking ts net revenue decreased 4 due primarily continued reduction support bcs traditional storage products lower support networking services partially offset growth support solutions converged storage solutions iss bcs net revenue decreased 22 result ongoing pressures overall unix market contraction storage net revenue decreased 5 continue experience multiple challenges including product transitions traditional storage products include tape storage networking legacy external disk products converged solutions include 3par storeserv storeonce storevirtual products challenges include market weakness highend converged solutions sales execution challenges effects partially offset revenue growth converged storage solutions networking net revenue increased 4 due higher switching product revenue result growth data center products partially offset lower revenue wlan products iss net revenue increased 3 due primarily higher volume higher average unit prices rack blade server products driven higher option attach rates memory processors hard drives eg earnings operations percentage net revenue decreased 08 percentage points fiscal 2014 due decrease gross margin coupled increase operating expenses percentage net revenue gross margin decline due primarily higher mix iss products lower mix bcs products competitive pricing pressure iss networking partially offset supply chain cost optimization improved cost management ts increase operating expenses percentage net revenue driven higher rd investments storage networking iss partially offset continued cost savings associated ongoing restructuring efforts hp inc subsidiaries managements discussion analysis financial condition results operations continued enterprise services components net revenue weighted net revenue change business unit follows fiscal 2015 compared fiscal 2014 es net revenue decreased 116 decreased 57 constant currency basis fiscal 2015 performance es remained challenged impact several large contracts winding net revenue decrease es due primarily unfavorable currency impacts revenue runoff key accounts weak growth new existing accounts partially offset growth ses portfolio includes analytics data management security cloud services net revenue ito decreased 14 fiscal 2015 due unfavorable currency impacts revenue runoff key accounts weak growth new existing accounts particularly emea first half fiscal 2015 partially offset growth ses revenue second half fiscal 2015 net revenue application business services abs declined 8 fiscal 2015 due unfavorable currency impacts weak growth new existing accounts particularly first half fiscal 2015 partially offset growth ses net revenue second half fiscal 2015 es earnings operations percentage net revenue increased 17 percentage points fiscal 2015 increase operating margin due increase gross margin decrease hp inc subsidiaries managements discussion analysis financial condition results operations continued operating expenses percentage net revenue gross margin increased due primarily service delivery efficiencies improving profit performance underperforming contracts decrease operating expenses percentage net revenue primarily driven lower field selling costs due favorable currency impacts sales transformation initiatives fiscal 2014 compared fiscal 2013 es net revenue decreased 69 decreased 68 constant currency basis fiscal 2014 performance es remained challenged impact several large contracts winding lower public sector spending emea particularly united kingdom several countries emea net revenue decrease es due primarily revenue runoff key accounts weak growth new existing accounts particularly emea contractual price declines effects partially offset net revenue growth ses portfolio includes information management analytics security cloud services net revenue infrastructure technology outsourcing ito decreased 8 fiscal 2014 due revenue runoff key accounts weak growth new existing accounts particularly emea contractual price declines ongoing contracts partially offset growth cloud security revenue favorable currency impacts net revenue abs decreased 5 fiscal 2014 due revenue runoff key account weak growth new existing accounts particularly emea unfavorable currency impacts partially offset growth information management analytics cloud revenue es earnings operations percentage net revenue increased 07 percentage points fiscal 2014 increase operating margin due increase gross margin partially offset increase operating expenses percentage net revenue gross margin increased due primarily continued focus service delivery efficiencies improving profit performance underperforming contracts labor savings result restructuring partially offset unfavorable impacts revenue runoff key accounts weak growth new existing accounts increase operating expenses percentage net revenue primarily driven size revenue decline higher administrative expenses field selling costs increase administrative expenses due prioryear period containing higher bad debt recoveries insurance recoveries increase selling costs result expanding sales force coverage transition reactive sales model proactive approach software fiscal 2015 compared fiscal 2014 software net revenue decreased 66 decreased 27 constant currency basis fiscal 2015 revenue growth software challenged overall market shift saas solutions related gotomarket sales execution challenges additionally challenges impacting growth hp inc subsidiaries managements discussion analysis financial condition results operations continued license support revenue fiscal 2015 net revenue growth negatively impacted foreign currency fluctuations across regions led primarily weakness euro fiscal 2015 net revenue licenses professional services saas support decreased 13 8 3 respectively decrease license revenue due primarily market shift saas solutions sales execution challenges result experienced lower revenue operations management professional services net revenue decreased due primarily unfavorable currency impacts continued focus highermargin engagements result experienced net revenue decrease big data solutions partially offset net revenue growth security products saas net revenue decreased due primarily sales execution challenges resulted lower revenue big data solutions partially offset net revenue growth operations management decrease support revenue due primarily unfavorable currency impacts past declines license revenue partially offset growth revenue security products fiscal 2015 software earnings operations percentage net revenue decreased 04 percentage points due decrease gross margin increase operating expenses percentage net revenue decrease gross margin due primarily lower mix license revenue increase operating expenses percentage net revenue due size revenue decline period operating expense declined due primarily favorable currency impacts lower sga expenses result lower field selling costs driven expense management fiscal 2014 compared fiscal 2013 software net revenue decreased 23 decreased 22 constant currency basis fiscal 2014 revenue growth software challenged overall market customer shift saas solutions impacting growth license support revenue fiscal 2014 net revenue licenses support professional services decreased 3 2 6 respectively saas net revenue increased 5 decline license net revenue due market customer shift saas solutions resulted lower revenue itcloud management information management products partially offset strength key focus areas big data analytics security decrease support net revenue due past declines license revenue professional services net revenue decreased continued focus highermargin engagements declines partially offset higher saas revenue due improving demand saas solutions itcloud management products security products fiscal 2014 software earnings operations percentage net revenue remained flat percentage points increase gross margin effect offset increase operating expenses percentage net revenue increase gross margin due shift profitable contracts improved workforce utilization professional services increase operating expenses percentage net revenue due primarily investments rd partially offset lower sga expenses due cost savings associated ongoing restructuring efforts improved operational expense management hp inc subsidiaries managements discussion analysis financial condition results operations continued hp financial services fiscal 2015 compared fiscal 2014 hpfs net revenue decreased 81 decreased 15 constant currency basis fiscal 2015 due primarily unfavorable currency impacts led weakness euro lower asset management activity customer buyouts hpfs earnings operations percentage net revenue decreased 02 percentage points fiscal 2015 due primarily decrease gross margin operating expense percentage net revenue flat fiscal 2015 compared fiscal 2014 decrease gross margin due unfavorable currency impacts lower margins customer buyouts lower portfolio margin due competitive pricing effects partially offset higher margins asset recovery services operating expenses percentage net revenue flat result lower sga expenses due primarily lower field selling costs effects offset size revenue decline fiscal 2014 compared fiscal 2013 hpfs net revenue decreased 36 decreased 33 constant currency basis fiscal 2014 due primarily lower portfolio revenue lower average portfolio assets lower asset management activity primarily customer buyouts hpfs earnings operations percentage net revenue increased 01 percentage points fiscal 2014 increase due primarily increase gross margin partially offset increase operating expenses percentage net revenue increase gross margin result higher portfolio margin primarily lower bad debt expense lower cost funds improved margins remarketing sales increase operating expenses percentage net revenue due primarily higher gotomarket investments financing volume new financing volume represent amount financing provided customers equipment related software services including intercompany activity increased 12 fiscal 2015 147 fiscal 2014 respectively increase fiscal 2015 2014 driven higher financing associated product sales related services offerings increase fiscal 2015 partially offset unfavorable currency impacts led weakness euro hp inc subsidiaries managements discussion analysis financial condition results operations continued portfolio assets ratios hpfs business model asset intensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive hpfs amounts substantially used hp however intercompany loans certain accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows 1intercompany activity eliminated consolidation 2allowance doubtful accounts financing receivables includes short longterm portions 3debt attributable hpfs consists intercompany equity treated debt segment reporting purposes intercompany debt borrowing fundingrelated activity associated hpfs subsidiaries debt attributable hpfs totaled 107 billion october 31 2015 october 31 2014 hpfs equity october 31 2015 october 31 2014 15 billion believe hpfs debttoequity ratio comparable similar financing companies october 31 2015 october 31 2014 hpfs cash equivalents short term investments 589 million 952 million respectively net portfolio assets october 31 2015 increased 2 october 31 2014 increase generally resulted new financing volume partially offset portfolio runoff unfavorable currency impacts hpfs recorded net bad debt expense operating lease equipment reserves 46 million 40 million 50 million fiscal 2015 2014 2013 respectively hp inc subsidiaries managements discussion analysis financial condition results operations continued corporate investments 1nm represents meaningful fiscal 2015 compared fiscal 2014 revenue decrease fiscal 2015 due primarily sale ip related palm acquisition prioryear period increase loss operations fiscal 2015 due primarily sale ip prioryear period higher expenses enterpriserelated business incubation activities hp labs fiscal 2014 compared fiscal 2013 revenue increase fiscal 2014 due primarily sale ip related palm acquisition decrease loss operations fiscal 2014 due primarily sale ip benefits partially offset higher expenses associated enterpriserelated business incubation activities corporate strategy hp labs global alliances liquidity capital resources use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support operating businesses capital expenditures restructuring activities principal interest payment debt income tax payments payment stockholder dividends addition investments share repurchases able supplement shortterm liquidity necessary broad access capital markets credit facilities made available various domestic foreign financial institutions access capital markets may constrained cost borrowing may increase certain business market economic conditions however access variety funding sources meet liquidity needs designed facilitate continued access capital resources conditions liquidity subject various risks including risks identified section entitled risk factors item 1a market risks identified section entitled quantitative qualitative disclosures market risk item 7a incorporated herein reference cash balances held numerous locations throughout world substantially amounts held outside us utilize variety planning financing strategies effort ensure worldwide cash available needed cash position remains strong expect cash balances anticipated cash flow generated operations access capital markets sufficient cover expected nearterm cash outlays hp inc subsidiaries managements discussion analysis financial condition results operations continued amounts held outside us generally utilized support nonus liquidity needs although portion amounts may time subject shortterm intercompany loans us amounts held outside us could repatriated us current law would subject us federal income taxes less applicable foreign tax credits repatriation foreign earnings restricted local law except foreign earnings considered indefinitely reinvested outside us provided us federal tax liability earnings financial statement purposes repatriation could result additional income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside us would meet liquidity needs ongoing cash flows external borrowings expect restrictions potential taxes incurred repatriation amounts held outside us material effect overall liquidity financial condition results operations connection separation reviewed capital structure fiscal 2015 ensure company hp inc hewlett packard enterprise would well capitalized separation october 2015 prior separation hewlett packard enterprise completed offering 146 billion senior unsecured notes redeemed paid 66 billion us dollar global notes result early extinguishment debt connection ongoing operations part due separation repaid shortterm loan 35 billion issued 182 billion repaid 184 billion commercial paper fiscal 2015 november 4 2015 incrementally redeemed paid 21 billion us dollar global notes part final settlement debt redemption issued part separation liquidity cash equivalents total debt available borrowing resources follows 1for information available borrowing resources see note 13 consolidated financial statements item 8 incorporated herein reference key cash flow metrics follows hp inc subsidiaries managements discussion analysis financial condition results operations continued operating activities net cash provided operating activities decreased approximately 58 billion fiscal 2015 compared fiscal 2014 decrease due primarily lower cash generated working capital management activities payments separation costs lower cash receipts contract manufacturers financing receivables lower net earnings current period unfavorable currency impacts well higher cash payments prepaids employee benefits net cash provided operating activities increased 07 billion fiscal 2014 compared fiscal 2013 due primarily improvements working capital management key working capital metrics follows days sales outstanding accounts receivable dso measures average number days receivables outstanding dso calculated dividing ending accounts receivable net allowance doubtful accounts 90day average net revenue fiscal 2015 increase dso due primarily lower usage cash discounts customers longer standard payment terms aruba fiscal 2014 decrease dso due primarily impact currency expansion factoring programs days supply inventory dos measures average number days procurement sale product dos calculated dividing ending inventory 90day average cost goods sold fiscal 2015 increase dos due higher inventory balance support future sales levels fiscal 2014 increase dos due higher inventory balance personal systems due part strategic advanced buys days purchases outstanding accounts payable dpo measures average number days accounts payable balances outstanding dpo calculated dividing ending accounts payable 90day average cost goods sold fiscal 2015 increase dpo primarily result purchasing linearity extension payment terms product suppliers fiscal 2014 increase dpo primarily result extension payment terms product suppliers cash conversion cycle sum dso dos less dpo items may cause cash conversion cycle particular period differ longterm sustainable rate include limited changes business mix changes payment terms extent receivables factoring seasonal trends timing revenue recognition inventory purchases within period investing activities net cash used investing activities increased approximately 27 billion fiscal 2015 compared fiscal 2014 due primarily acquisition aruba net cash used investing activities hp inc subsidiaries managements discussion analysis financial condition results operations continued flat fiscal 2014 compared fiscal 2013 due primarily higher cash utilization purchases property plant equipment offset cash generated sales availableforsale securities financing activities net cash provided financing activities 13 billion fiscal 2015 compared net cash used financing activities 66 billion fiscal 2014 change due primarily proceeds issuance senior unsecured notes october 2015 hewlett packard enterprise principal amount 146 billion higher proceeds issuance commercial paper partially offset repayment result early debt extinguishment 66 billion us dollar global notes higher repayment commercial paper compared fiscal 2014 net cash used financing activities decreased approximately 14 billion fiscal 2014 compared fiscal 2013 due primarily proceeds issuance us dollar global notes january 2014 partially offset higher debt repayments repurchases common stock information share repurchase programs see item 5 note 13 consolidated financial statements item 8 incorporated herein reference capital resources debt levels maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities cost capital targeted capital structure shortterm debt decreased 601 million longterm debt increased approximately 57 billion fiscal 2015 compared fiscal 2014 net increase total debt due primarily issuance senior unsecured notes october 2015 hewlett packard enterprise principal amount 146 billion includes 140 billion fixed rate notes 600 million floating rate notes partially offset payment result early debt extinguishment 66 billion connection separation maturities 25 billion us dollar global notes repayment 35 billion shortterm loan also issued 182 billion repaid 184 billion commercial paper fiscal 2015 november 4 2015 paid 21 billion us dollar global notes part final settlement debt redemption issued part separation shortterm debt longterm debt decreased approximately 25 billion 06 billion respectively fiscal 2014 compared fiscal 2013 net decrease total debt due primarily maturities debt fiscal 2014 issued 20 billion us dollar global notes 2012 shelf registration statement mature 2019 repaid 49 billion us dollar global notes also issued 116 billion repaid 115 billion commercial paper fiscal 2014 hp inc subsidiaries managements discussion analysis financial condition results operations continued debttoequity ratio calculated carrying amount debt divided total stockholders equity debttoequity ratio increased 016x fiscal 2015 due increase total debt balances 51 billion partially offset increase stockholders equity 10 billion end fiscal 2015 debttoequity ratio decreased 010x fiscal 2014 due decrease total debt balances 31 billion partially offset decrease stockholders equity 05 billion end fiscal 2014 weightedaverage interest rate reflects effective interest rate borrowings prevailing period reflects effect interest rate swaps information interest rate swaps see note 13 consolidated financial statements item 8 incorporated herein reference available borrowing resources following resources available obtain short longterm financing need additional liquidity information available borrowings resources see note 13 consolidated financial statements item 8 incorporated herein reference credit ratings credit risk evaluated major independent rating agencies based upon publicly available information well information obtained ongoing discussions rating downgrade triggers would accelerate maturity material amount debt previous downgrades increased cost borrowing credit facilities reduced market capacity commercial paper required posting additional collateral derivative contracts addition downgrade credit ratings rating agencies may impact us similar manner depending extent downgrade could negative impact liquidity capital position rely alternative sources funding including drawdowns credit facilities necessary offset potential reductions market capacity commercial paper hp inc subsidiaries managements discussion analysis financial condition results operations continued contractual obligations contractual obligations hp including hewlett packard enterprise october 31 2015 follows 1amounts represent principal cash payments relating shortterm longterm debt include fair value adjustments discounts premiums subsequent separation hp inc expects total future principal payments debt approximately 87 billion 2amounts represent expected interest payments relating shortterm longterm debt outstanding interest rate swap agreements accounted fair value hedges economic effect changing fixed interest rates associated us dollar global notes variable interest rates impact outstanding interest rate swaps october 31 2015 factored calculation future interest payments debt subsequent separation hp inc expects total future interest payments debt approximately 29 billion 3amounts represent operating lease obligations net total sublease income 77 million subsequent separation hp inc expects total remaining future minimum operating lease commitments approximately 367 million net sublease income 118 million 4purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations related principally inventory items purchase obligations exclude agreements cancelable without penalty purchase obligations also exclude open purchase orders routine arrangements entered ordinary course business difficult quantify meaningful way even though open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust terms based business needs prior delivery goods performance services subsequent separation hp inc expects total remaining future unconditional purchase obligations approximately 915 million 5retirement postretirement benefit plan contributions october 31 2015 hp including hewlett packard enterprise expects contribute approximately 384 million nonus pension plans approximately 37 million cover benefit payments us nonqualified plan participants approximately 46 million cover benefit claims hps postretirement benefit plans fiscal 2016 subsequent separation hp inc expects contribute approximately hp inc subsidiaries managements discussion analysis financial condition results operations continued 18 million nonus pension plans approximately 36 million cover benefit payments us nonqualified plan participants approximately 43 million cover benefit claims hps postretirement benefit plans policy fund pension plans meet least minimum contribution requirements established local government funding taxing authorities expected contributions payments pension postretirement benefit plans excluded contractual obligations table represent contractual cash outflows dependent numerous factors may result wide range outcomes information retirement postretirement benefit plans see note 4 consolidated financial statements item 8 incorporated herein reference 6restructuring plans october 31 2015 hp including hewlett packard enterprise expects future cash payments approximately 32 billion connection approved restructuring plans includes 13 billion expected paid fiscal 2016 remaining approximately 19 billion cash payments made fiscal 2025 subsequent separation hp inc expects future cash payments approximately 280 million connection approved restructuring plans includes 90 million expected paid fiscal 2016 remaining approximately 190 million cash payments made fiscal 2025 payments restructuring excluded contractual obligations table represent contractual cash outflows uncertainty timing payments information restructuring activities see note 3 consolidated financial statements item 8 incorporated herein reference 7separation costs october 31 2015 hp including hewlett packard enterprise expects future cash payments approximately 750 million connection separation charges net foreign tax payments expected paid fiscal 2016 subsequent tax credit amounts expected later years october 31 2015 also expect separationrelated capital expenditures approximately 60 million fiscal 2016 subsequent separation hp inc expects future cash payments approximately 180 million connection separation charges net foreign tax payments expected paid fiscal 2016 subsequent tax credit amounts expected later years october 31 2015 hp inc also expects separationrelated capital expenditures approximately 30 million fiscal 2016 payments separation costs excluded contractual obligations table represent contractual cash outflows uncertainty timing payments 8uncertain tax positions october 31 2015 approximately 37 billion recorded liabilities related interest penalties pertaining uncertain tax positions liabilities related interest penalties include 15 million expected paid within one year remaining amount unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters payments obligations would result settlements taxing authorities information uncertain tax positions see note 6 consolidated financial statements item 8 incorporated herein reference offbalance sheet arrangements part ongoing business participated transactions generate material relationships unconsolidated entities financial partnerships entities often referred hp inc subsidiaries managements discussion analysis financial condition results operations continued structured finance special purpose entities established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers total aggregate maximum capacity financing arrangements 33 billion october 31 2015 including aggregate maximum capacity 14 billion nonrecourse financing arrangements aggregate maximum capacity 19 billion partialrecourse facilities information thirdparty revolving shortterm financing arrangements see note 7 consolidated financial statements item 8 incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” organized follows • hp inc separation transaction discussion separation hewlett packard enterprise company hp inc’s former enterprise technology infrastructure software services financing businesses • overview discussion business highlights affecting company provide context remainder mda • critical accounting policies estimates discussion accounting policies estimates believe important understanding assumptions judgments incorporated reported financial results • results operations analysis continuing financial results comparing fiscal year 2016 fiscal year 2015 fiscal year 2015 fiscal year 2014 discussion results continuing operations followed detailed discussion results operations segment • liquidity capital resources analysis changes cash flows discussion liquidity continuing financial condition • contractual obligations overview contractual obligations retirement postretirement benefit plan contributions restructuring plans uncertain tax positions offbalance sheet arrangements continuing operations separation costs intend discussion continuing financial condition results continuing operations follows provide information assist reader understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document hp inc separation transaction november 1 2015 “distribution date” completed separation hewlett packard enterprise company “hewlett packard enterprise” hewlettpackard company’s former enterprise technology infrastructure software services financing businesses “separation” connection separation hewlettpackard company changed name hp inc “hp” distribution date stockholders record close business october 21 2015 “record date” received one share hewlett packard enterprise common stock every one share common stock held record date distributed total approximately 18 billion shares hewlett packard enterprise common stock stockholders hewlett packard enterprise independent public company trading new york stock exchange “nyse” symbol “hpe” separation beneficially shares hewlett packard enterprise common stock connection separation hewlett packard enterprise entered separation distribution agreement well various agreements provide framework relationships hp hewlett packard enterprise going forward including among others tax matters agreement employee matters agreement transition service agreement real estate matters agreement master commercial agreement information technology service agreement hp inc subsidiaries management’s discussion analysis financial condition results operations continued overview leading global provider personal computing access devices imaging printing products related technologies solutions services sell individual consumers small mediumsized businesses large enterprises including customers government health education sectors three segments financial reporting purposes personal systems printing corporate investments personal systems segment offers commercial personal computers “pcs” consumer pcs workstations thin clients commercial tablets mobility devices retail pointofsale systems displays related accessories software support services commercial consumer markets printing segment provides consumer commercial printer hardware supplies media solutions services well scanning devices corporate investments include hp labs certain business incubation projects • personal systems strategic focus profitable growth improved market segmentation respect enhanced innovation multioperating systems multiarchitecture geography customer segments key attributes additionally hp investing premium mobility form factors convertible notebooks detachable notebooks commercial tablets mobility devices order meet customer preference mobile thinner lighter devices expect decrease rate market decline believe well positioned due competitive product lineup • printing strategic focus business printing shift contractual solutions graphics business printing includes delivering solutions smb enterprise customers multifunction pagewide printers including jetintelligence lineup laserjet printers shift contractual solutions includes increased focus managed print services instant ink presents strong aftermarket supplies opportunities graphics space focused innovations indigo latex product offerings plan continue focus shifting mix installed base higher value units expanding innovative ink laser graphics 3d printing programs continue execute key initiatives focusing products targeted high usage categories introducing new revenue delivery models ink office initiative continuing shift installed base valuable units commercial market focus placing higher value printer units offer positive annuity toner ink design deployment a3 products solutions accelerating growth graphic solutions products launching developing first 3d printers third quarter fiscal year 2016 announced decision make onetime investment time reduce level supplies inventory across channels change supplies sales model supports strategy maintaining consistent value proposition shifting push model pull model driven market demand allows less price variability continue experience challenges representative trends uncertainties may affect business results operations one set challenges relates dynamic accelerating market trends decline pc device market home printing second set challenges relates changes competitive landscape primary competitors exerting increased competitive pressure targeted areas entering new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model changes gotomarket execution • personal systems witnessing soft demand pc market customers hold onto pcs longer thereby extending pc refresh cycles demand pcs impacted weaker macroeconomic conditions currency depreciation latin america canada certain asian european markets anticipate continued market headwinds • printing experiencing impact demand challenges consumer commercial markets also experiencing overall competitive pricing environment yet see evidence broad move japanese competitors less aggressive given strength yen obtain number components single sources due technology availability price quality considerations instance source laser printer engines laser toner cartridges canon decision either party renew agreement canon limit reduce scope agreement could adversely affect net revenue laserjet products however longstanding business relationship canon anticipate nonrenewal agreement may also face challenges result june 23 2016 referendum british voters exit european union commonly known “brexit” outcome brexit impact business cannot known terms hp inc subsidiaries management’s discussion analysis financial condition results operations continued timing united kingdom’s exit clearer time may face various brexitrelated challenges may include uncertainty markets volatility exchange rates weaker macroeconomic conditions address challenges continue pursue innovation view towards developing new products services aligned generating market demand meeting needs customers partners addition need continue improve operations particular focus enhancing endtoend processes efficiencies also need continue optimize sales coverage models align sales incentives strategic goals improve channel execution strengthen capabilities areas strategic focus develop capitalize market opportunities discussion trends uncertainties factors could impact continuing operating results see section entitled “risk factors” item 1a annual report form 10k critical accounting policies estimates general consolidated financial statements hp prepared accordance united states “us” generally accepted accounting principles “gaap” require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities readily apparent sources management discussed development selection disclosure estimates audit committee hp’s board directors management believes accounting estimates employed resulting amounts reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows summary significant accounting policies included note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured well revenue recognition principles met including industryspecific revenue recognition guidance enter contracts sell products services many sales agreements contain standard terms conditions agreements enter contain nonstandard terms conditions many arrangements include multiple elements result significant contract interpretation may required determine appropriate accounting including identification deliverables considered separate units accounting allocation transaction price among elements arrangement timing revenue recognition elements recognize revenue delivered elements separate units accounting delivered elements standalone value customer elements standalone value recognize revenue consistent pattern delivery final deliverable arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract hp inc subsidiaries management’s discussion analysis financial condition results operations continued establish selling prices used deliverable based vendor specific objective evidence “vsoe” selling price available thirdparty evidence “tpe” vsoe selling price available estimated selling price “esp” neither vsoe selling price tpe available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority evaluate tpe selling price reviewing largely similar interchangeable competitor products services standalone sales similarly situated customers esp established based management’s judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles may modify develop new gotomarket practices future may result changes selling prices impacting vsoe selling price esp arrangements multiple elements transaction price allocated individual units accounting inception arrangement based relative selling price however aforementioned factors may result different allocation transaction price deliverables multiple element arrangements entered future periods may change pattern timing revenue recognition identical arrangements executed future periods change total revenue recognized given arrangement reduce revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs estimate number customers expected redeem incentive based historical experience specific terms conditions incentive hardware products recognize revenue generated direct sales end customers indirect sales channel partners including resellers distributors valueadded solution providers revenue recognition criteria satisfied indirect sales channel partners recognize revenue time delivery channel partner economic substance apart hp completed obligations related sale recognize revenue fixedprice support maintenance contracts ratably contract period warranty accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor onsite services depending upon product last three fiscal years annual warranty expense actual warranty costs averaged approximately 22 25 annual net revenue respectively restructuring charges engaged restructuring actions require management estimate timing amount severance employee separation costs workforce reduction enhanced early retirement programs fair value assets made redundant obsolete fair value lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs distinct ongoing operational costs information technology costs incurred connection separation full description restructuring actions refer discussions restructuring “results operations” note 4 “restructuring charges” consolidated financial statements item 8 incorporated herein reference retirement postretirement benefits pension postretirement benefit costs obligations depend various assumptions major assumptions relate primarily discount rates mortality rates expected increases compensation levels expected long hp inc subsidiaries management’s discussion analysis financial condition results operations continued term return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period mortality rates help predict expected life plan participants based historical demographic study plan expected increase compensation levels assumption reflects longterm actual experience future expectations expected longterm return plan assets determined based asset allocations historical portfolio results historical asset correlations management’s expected returns asset class evaluate expected return assumptions annually including reviewing current capital market assumptions assess reasonableness expected longterm return plan assets update expected longterm return assets observe sufficient level evidence would suggest longterm expected return changed fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm performance relative expected longterm performance lesser extent differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year unless updated result interim remeasurement major assumptions vary plan weightedaverage rates used set forth note 5 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference following table provides impact change 25 basis points weightedaverage assumptions discount rate expected increase compensation levels expected longterm return plan assets would net periodic benefit cost fiscal year 2016 taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize determining need valuation allowance consider future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided united states federal taxes plan reinvest earnings indefinitely outside united states plan distributions foreign earnings based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount expect indefinitely invest outside united states amounts expect distribute united states provide united hp inc subsidiaries management’s discussion analysis financial condition results operations continued states federal taxes due amounts expected distributed united states result certain employment actions capital investments undertaken income manufacturing activities certain jurisdictions subject reduced tax rates cases wholly exempt taxes fiscal years 2027 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact future earnings repatriated united states related future effective tax rate subject income taxes united states approximately 58 countries subject routine corporate income tax audits many jurisdictions believe positions taken tax returns fully supported tax authorities may challenge positions may fully sustained examination relevant tax authorities accordingly income tax provision includes amounts intended satisfy assessments may result challenges determining income tax provision potential assessments recording related effects requires management judgments estimates amounts ultimately paid resolution audit could materially different amounts previously included income tax provision therefore could material impact income tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions intercompany transactions related interest discussion taxes earnings refer note 7 “taxes earnings” consolidated financial statements item 8 incorporated herein reference inventory state inventory lower cost market firstin firstout basis make adjustments reduce cost inventory net realizable value product group level estimated excess obsolescence factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues goodwill review goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable opt perform qualitative assessment test reporting unit’s goodwill impairment directly perform twostep impairment test based qualitative assessment determine fair value reporting unit likely ie likelihood 50 percent less carrying amount twostep impairment test performed first step impairment test compare fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach estimate fair value reporting unit based present value estimated future cash flows base cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions base discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weight fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available estimate fair value reporting unit using income approach fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount perform second step goodwill impairment test measure amount impairment loss second step measure reporting unit’s assets including unrecognized intangible assets liabilities noncontrolling interests fair value hypothetical analysis calculate implied fair value goodwill reporting unit manner reporting unit acquired business combination implied fair value reporting unit’s goodwill less carrying amount difference recorded impairment loss annual goodwill impairment analysis performed using qualitative assessment option first day fourth quarter fiscal year 2016 resulted conclusion likely fair value reporting hp inc subsidiaries management’s discussion analysis financial condition results operations continued units exceeded respective carrying values result concluded first step goodwill impairment test necessary fair value derivative instruments use derivative instruments manage variety risks including risks related foreign currency exchange rates interest rates use forwards swaps times options hedge certain foreign currency interest rate exposures use derivative instruments speculative purposes october 31 2016 gross notional value derivative portfolio 179 billion assets liabilities related derivative instruments measured fair value 325 million 97 million respectively october 31 2016 fair value price would receive sell asset pay transfer liability orderly transaction market participants measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date determination fair value often involves significant judgments assumptions determining appropriate discount rate factors risk liquidity premiums identifying similarities differences market transactions weighting differences accordingly making appropriate adjustments market transactions reflect risks specific asset liability valued generally use industry standard valuation models measure fair value derivative positions prices active markets available identical asset liability use industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign currency exchange rates forward spot prices discussion fair value measurements derivative instruments refer note 10 “fair value” note 11 “financial instruments” respectively consolidated financial statements item 8 incorporated herein reference loss contingencies involved various lawsuits claims investigations proceedings including consisting intellectual property “ip” commercial securities employment employee benefits environmental matters arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information events pertaining particular case pursuant separation distribution agreement share responsibility hewlett packard enterprise certain matters discussed note 15 “litigation contingencies” consolidated financial statements item 8 incorporated herein reference hewlett packard enterprise agreed indemnify us whole part respect certain matters based experience believe damage amounts claimed specific litigation contingencies matters discussed note 15 “litigation contingencies” meaningful indicator hp’s potential liability litigation inherently unpredictable however believe valid defenses respect legal matters pending us nevertheless cash flows results operations could materially affected particular period resolution one contingencies believe recorded adequate provisions matters october 31 2016 reasonably possible material loss incurred excess amounts recognized financial statements recent accounting pronouncements summary recent accounting pronouncements applicable consolidated financial statements see note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference results operations hp inc subsidiaries management’s discussion analysis financial condition results operations continued revenue international operations historically represented expect continue represent majority overall net revenue result net revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing performance excluding impact foreign currency fluctuations supplementally present yearoveryear percentage change net revenue constant currency basis assumes change foreign currency exchange rates prioryear period adjust repricing demand impacts changes foreign currency exchange rates information provided net revenue viewed without effect fluctuations foreign currency exchange rates consistent management evaluates net revenue results trends constant currency disclosure provided addition substitute yearoveryear percentage change net revenue gaap basis companies may calculate define similarly labeled items differently may limit usefulness measure comparative purposes results operations dollars percentage net revenue follows net revenue fiscal year 2016 total net revenue continuing operations decreased 63 decreased 2 constant currency basis compared fiscal year 2015 net revenue united states increased 17 180 billion net revenue outside united states decreased 104 302 billion primary factors contributing net revenue decline unfavorable currency impacts weak market demand competitive pricing pressures change supplies sales model net revenue decline driven decline supplies commercial consumer printers commercial consumer desktops consumer notebooks partially offset growth commercial notebooks fiscal year 2015 total net revenue continuing operations decreased 92 decreased 47 constant currency basis compared fiscal year 2014 net revenue united states decreased 26 177 billion net revenue outside united states decreased 122 337 billion primary factors contributing net revenue decline unfavorable currency impacts particularly emea weak market demand competitive pricing pressures net revenue decline driven desktops supplies partially offset growth notebooks graphics products detailed discussion factors contributing changes segment net revenue included “segment information” hp inc subsidiaries management’s discussion analysis financial condition results operations continued gross margin gross margin continuing operations decreased 187 fiscal year 2016 compared 193 fiscal year 2015 decline gross margin performance primarily due unfavorable currency impacts partially offset operational improvements gross margin continuing operations decreased 193 fiscal year 2015 compared 198 fiscal year 2014 primary factors impacting gross margin performance competitive pricing environment unfavorable currency impacts partially offset favorable component costs personal systems favorable mix ink graphics supplies operational cost improvements detailed discussion factors contributing changes segment gross margins included “segment information” operating expenses research development “rd” rd expense increased 2 fiscal year 2016 compared fiscal year 2015 primarily due incremental investments a3 3d printing partially offset favorable currency impacts rd expense decreased 8 fiscal year 2015 compared fiscal year 2014 primarily due favorable currency impacts selling general administrative “sga” sga expense decreased 19 fiscal year 2016 compared fiscal year 2015 primarily due gains divestiture certain software assets open text corporation lower corporate governance overhead costs related preseparation combined entity cost saving initiatives favorable currency impacts effects partially offset gain divestiture snapfish prioryear period sga expense decreased 12 fiscal year 2015 compared fiscal year 2014 primarily due favorable currency impacts declines gotomarket costs result lower commissions productivity initiatives amortization intangible assets amortization expense decreased 86 million 27 million fiscal year 2016 fiscal year 2015 respectively primarily due prior acquisitions reaching end respective amortization periods restructuring charges restructuring charges increased 142 million fiscal year 2016 primarily due severance pay infrastructure related charges restructuring plan initially announced september 2015 “fiscal 2015 plan” october 10 2016 board directors approved restructuring plan “fiscal 2017 plan” implemented fiscal year 2019 hp recognized 24 million charges related fiscal 2017 plan fourth quarter fiscal year 2016 restructuring charges decreased 113 million fiscal year 2015 primarily due lower charges restructuring plan initially announced may 2012 “fiscal 2012 plan” hp recognized 39 million charges related fiscal 2015 plan fourth quarter fiscal year 2015 interest net hp inc subsidiaries management’s discussion analysis financial condition results operations continued interest net expense decreased 600 million fiscal year 2016 decrease primarily due changes indemnification receivables hewlett packard enterprise certain tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement lower foreign currency losses partially offset lower interest income interest net expense decreased 5 million fiscal year 2015 decrease due lower miscellaneous expense provision taxes effective tax rates 291 53 243 fiscal years 2016 2015 2014 respectively effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lower tax jurisdictions throughout world jurisdictions favorable tax rates significant impact effective tax rate periods presented puerto rico singapore china malaysia ireland plan reinvest certain earnings jurisdictions indefinitely outside united states therefore provided us taxes indefinitely reinvested earnings addition factors overall tax rates fiscal year 2016 impacted adjustments valuation allowances uncertain tax positions reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 7 “taxes earnings” consolidated financial statements item 8 incorporated herein reference fiscal 2016 recorded 301 million net income tax charges related items unique year continuing operations amounts primarily include uncertain tax position charges 525 million related preseparation tax matters addition recorded 62 million net tax benefits restructuring charges 52 million net tax benefits related release foreign valuation allowances 41 million net tax benefits arising retroactive research development credit provided consolidated appropriations act 2016 signed law december 2015 70 million tax benefit fiscal year 2015 recorded 12 billion net income tax benefits related items unique year amounts included 17 billion tax benefits due release valuation allowances pertaining certain us deferred tax assets 449 million tax charges related uncertain tax positions pension transfers 70 million tax benefits related state tax impacts 6 million income tax charges related various items addition recorded 33 million income tax charges restructuring pensionrelated costs fiscal year 2014 recorded 69 million net income tax benefits related items unique year amounts included 37 million income tax benefits related provision return adjustments 25 million income tax charges related state rate changes 41 million income tax benefits adjustments related uncertain tax positions 16 million income tax benefits related items segment information description products services segment found note 3 “segment information” consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes segments disclosed personal systems hp inc subsidiaries management’s discussion analysis financial condition results operations continued components net revenue weighted net revenue change business unit follows fiscal year 2016 compared fiscal year 2015 personal systems net revenue decreased 49 decreased 09 constant currency basis fiscal year 2016 net revenue decline personal systems primarily due unfavorable currency impacts weak market demand personal systems net revenue decreased result 35 decline unit volume along 1 decline average selling price “asp” compared prioryear period unit volume decline primarily due overall decline desktops consumer notebooks partially offset unit volume growth commercial notebooks decline asp primarily due competitive pricing commercial segment partially offset favorable pricing consumer segment favorable mix shift consumer highend premium products consumer commercial revenue decreased 5 primarily due weak market demand partially offset increase commercial notebooks pc services net revenue declined 2 notebooks 9 desktops 7 workstations 9 compared prioryear period net revenue decline primarily due lower sales consumer tablets personal systems options partially offset revenue growth pc services personal systems earnings operations percentage net revenue increased 06 percentage points fiscal year 2016 increase primarily due growth gross margin driven favorable commodity costs combined product mix increase pc services effects partially offset unfavorable currency impacts revenue operating expenses percentage net revenue increased 01 percentage point primarily driven increase field selling cost fiscal year 2015 compared fiscal year 2014 personal systems net revenue decreased 83 decreased 31 constant currency basis fiscal year 2015 net revenue decline personal systems primarily due unfavorable currency impacts particularly emea weakening market demand personal systems net revenue decreased result 5 decline asp 3 decline unit volume decline asp primarily due unfavorable currency impacts shift consumer pcs low end products hp inc subsidiaries management’s discussion analysis financial condition results operations continued lower mix commercial pcs within personal systems unit volume decline primarily due unit volume decline desktops partially offset unit volume growth notebooks consumer commercial net revenue commercial clients decreased 8 primarily due unfavorable currency impacts decline commercial desktops result weak market demand higher net revenue prioryear period resulting replacement windows xp operating system net revenue consumer clients decreased 8 primarily due unfavorable currency impacts decline consumer desktops net revenue declined 17 desktop pcs 2 notebook pcs 9 workstations 10 net revenue decline primarily due decline consumer tablets sale intellectual property assets prioryear period unfavorable currency impacts effects partially offset increased sales extended warranties personal systems earnings operations percentage net revenue decreased 05 percentage points fiscal year 2015 result decline gross margin combined increase operating expenses percentage net revenue decline gross margin primarily due unfavorable currency impacts lower mix commercial products partially offset favorable component costs operational cost improvements operating expenses percentage net revenue increased primarily due size net revenue decline higher administrative expenses result lower bad debt recoveries compared prioryear period higher rd investments commercial mobility immersive computing products effects partially offset decline field selling costs result favorable currency impacts operational cost improvements printing components net revenue weighted net revenue change business unit follows fiscal year 2016 compared fiscal year 2015 hp inc subsidiaries management’s discussion analysis financial condition results operations continued printing net revenue decreased 140 decreased 93 constant currency basis fiscal year 2016 decline net revenue primarily due unfavorable currency impacts weakness demand impact change supplies sales model competitive pricing pressures factors resulted net revenue decline across supplies consumer commercial hardware net revenue supplies decreased 151 compared prioryear period primarily due unfavorable currency impacts demand weakness combined competitive pricing environment impact change supplies sales model printer unit volume decreased 12 asp increased 2 compared prioryear period printer unit volume decreased due weakness demand pricing discipline focus placing positive npv units printer asp increased primarily due favorable mix shift highvalue printers partially offset unfavorable currency impacts net revenue commercial hardware decreased 6 fiscal year 2016 compared prioryear period primarily driven 6 decline unit volume decrease peripheral printing solutions unit volume commercial hardware declined primarily due unit volume decline laserjet printers asp commercial hardware increased slightly primarily due mix shift highvalue printer sales offset unfavorable currency impacts printer unit volume consumer hardware declined 15 combined decline printing solutions largely driven divestiture snapfish prioryear period 9 decline asp resulted 30 decline consumer hardware net revenue fiscal year 2016 compared prioryear period unit volume decline consumer hardware primarily due weakness demand pricing discipline continued efforts place positive npv units asp consumer hardware decreased primarily due unfavorable currency impacts printing earnings operations percentage net revenue decreased 06 percentage points fiscal year 2016 compared prioryear period due decline gross margin partially offset gains divestiture certain software assets gross margin decline primarily due unfavorable currency impacts supplies mix partially offset operational improvements favorable mix printers operating expenses decreased primarily due gains divestiture certain software assets open text corporation costsaving initiatives fiscal year 2015 compared fiscal year 2014 printing net revenue decreased 85 decreased 51 constant currency basis fiscal year 2015 decline net revenue primarily due unfavorable currency impacts decline supplies weak market demand competitive pricing pressures effects partially offset growth graphics products regional perspective printing experienced net revenue decline across regions primarily emea particularly russia result challenges markets net revenue supplies decreased 6 primarily due unfavorable currency impacts demand weakness toner ink partially offset growth graphics supplies demand weakness toner particularly emea led net revenue decline russia printer unit volumes declined 7 asp decreased 7 printer unit volume declined primarily due decline laserjet home printer units effects partially offset growth graphics printer units asp printers decreased primarily due highly competitive pricing environment unfavorable currency impacts inkjet laserjet printers net revenue commercial hardware decreased 9 driven 7 decline printer unit volume 4 decline asp partially offset net revenue increase peripheral solutions commercial hardware decline unit volume primarily due overall decline laserjet printer units partially offset growth graphics printer units asp decline commercial hardware primarily due competitive pricing environment unfavorable currency impacts net revenue consumer hardware decreased 21 driven 13 decline asp 7 decline unit volume decline peripheral solutions asp decline consumer hardware primarily due competitive pricing environment unfavorable currency impacts unit volume decline consumer hardware primarily due lower sales home smb printer units printing earnings operations percentage net revenue declined 02 percentage points fiscal year 2015 due decline gross margin partially offset lower operating expenses percentage net revenue decline gross margin primarily due competitive pricing environment hardware unfavorable currency impacts effects partially offset favorable mix ink graphics supplies favorable currency impacts japanese yen operating expenses percentage net revenue decreased primarily due cost saving initiatives lower marketing expenses impact divestiture photo printing service snapfish favorable currency impacts hp inc subsidiaries management’s discussion analysis financial condition results operations continued corporate investments 1 “nm” represents meaningful fiscal year 2016 compared fiscal year 2015 loss operations fiscal year 2016 primarily due expenses associated incubation projects fiscal year 2015 compared fiscal year 2014 net revenue decrease fiscal year 2015 primarily due sale intellectual property assets related palm acquisition prioryear period increase loss operations fiscal year 2015 primarily due sale intellectual property assets prioryear period higher expenses associated incubation projects hp labs liquidity capital resources use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support operating businesses capital expenditures restructuring activities maturing debt income tax payments payment stockholder dividends addition investments share repurchases able supplement shortterm liquidity necessary broad access capital markets credit facilities made available various domestic foreign financial institutions access capital markets may constrained cost borrowing may increase certain business market economic conditions however access variety funding sources meet liquidity needs designed facilitate continued access capital resources conditions liquidity subject various risks including risks identified section entitled “risk factors” item 1a market risks identified section entitled “quantitative qualitative disclosures market risk” item 7a incorporated herein reference cash balances held numerous locations throughout world majority amounts held outside united states utilize variety planning financing strategies effort ensure worldwide cash available needed cash position remains strong expect cash balances anticipated cash flow generated operations access capital markets sufficient cover expected nearterm cash outlays september 2016 hp entered definitive agreement acquire samsung electronics co ltd’s printer business 105 billion transaction expected close within 12 months pending regulatory review customary closing conditions amounts held outside united states generally utilized support nonus liquidity needs although portion amounts may time subject shortterm intercompany loans united states amounts held outside united states could repatriated united states current law would subject us federal income taxes less applicable foreign tax credits repatriation foreign earnings restricted local law except foreign earnings considered indefinitely reinvested outside united states provided us federal tax liability earnings financial statement purposes repatriation could result additional income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside united states would meet liquidity needs ongoing cash flows external hp inc subsidiaries management’s discussion analysis financial condition results operations continued borrowings expect restrictions potential taxes incurred repatriation amounts held outside united states material effect overall liquidity financial condition results operations liquidity cash equivalents total debt continuing operations follows historical statements cash flows represent combined cash flows key cash flow metrics hp prior separation revised reflect effect separation information discontinued operations see note 2 “discontinued operations” consolidated financial statements notes thereto included item 8 “financial statements supplementary data” incorporated herein reference key cash flow metrics follows operating activities net cash provided operating activities decreased 33 billion fiscal year 2016 compared fiscal year 2015 since net cash provided operating activities fiscal year 2015 included impact discontinued operations included net cash provided operating activities fiscal year 2016 result separation net cash provided operating activities decreased approximately 58 billion fiscal year 2015 compared fiscal year 2014 decrease due primarily lower cash generated working capital management activities payments separation costs lower cash receipts contract manufacturers financing receivables lower net earnings current period unfavorable currency impacts well higher cash payments prepaid expenses employee benefits working capital metrics management utilizes current cash conversion cycle information manage working capital level table presents cash conversion cycle october 31 2016 october 31 2015 hp inc subsidiaries management’s discussion analysis financial condition results operations continued cash conversion cycle sum days sales outstanding accounts receivable “dso” days supply inventory “dos” less days purchases outstanding accounts payable “dpo” items may cause cash conversion cycle particular period differ longterm sustainable rate include limited changes business mix changes payment terms extent receivables factoring seasonal trends timing revenue recognition inventory purchases within period dso measures average number days receivables outstanding dso calculated dividing ending accounts receivable net allowance doubtful accounts 90day average net revenue fiscal year 2016 decrease dso compared fiscal year 2015 primarily due favorable revenue linearity strong collections partially offset unfavorable currency impacts fiscal year 2015 increase dso compared fiscal year 2014 primarily due lower usage cash discounts customers dos measures average number days procurement sale product dos calculated dividing ending inventory 90day average cost goods sold fiscal year 2016 dos flat compared fiscal year 2015 due strong inventory management offset higher inventory balance support future sales levels fiscal year 2015 increase dos compared fiscal year 2014 due higher inventory balance support future sales levels dpo measures average number days accounts payable balances outstanding dpo calculated dividing ending accounts payable 90day average cost goods sold fiscal year 2016 increase dpo compared fiscal year 2015 primarily result extension payment terms product suppliers increased strategic inventory purchases fiscal year 2015 increase dpo compared fiscal year 2014 primarily result purchasing linearity extension payment terms product suppliers investing activities net cash used investing activities decreased 56 billion fiscal year 2016 compared fiscal year 2015 due capital expenditures payments made connection business acquisitions net cash acquired fiscal year 2015 discontinued operations net cash used investing activities increased approximately 27 billion fiscal year 2015 compared fiscal year 2014 primarily due acquisition aruba networks inc transferred hewlett packard enterprise part separation financing activities net cash used financing activities increased 158 billion fiscal year 2016 primarily due cash transfer 104 billion hewlett packard enterprise connection separation redemption 21 billion us dollar global notes cash utilization 20 billion repurchases common stock dividends net cash used financing activities decreased approximately 79 billion fiscal year 2015 compared net cash used financing activities 66 billion fiscal year 2014 change primarily due proceeds issuance senior unsecured notes october 2015 hewlett packard enterprise principal amount 146 billion higher proceeds issuance commercial paper partially offset redemption 66 billion us dollar global notes higher repayment commercial paper compared fiscal year 2014 capital resources debt levels hp inc subsidiaries management’s discussion analysis financial condition results operations continued maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities cost capital targeted capital structure shortterm debt decreased 21 billion longterm debt increased 01 billion fiscal year 2016 compared fiscal year 2015 net decrease total debt primarily due redemption 21 billion fixed rate us dollar global notes november 2015 shortterm debt decreased 04 billion longterm debt decreased 89 billion fiscal year 2015 compared fiscal year 2014 net decrease total debt primarily due redemption 66 billion us dollar global notes connection separation maturities 25 billion us dollar global notes fiscal year 2015 month november 2015 paid 21 billion redemption us dollar global notes part final settlement debt redeemed part separation debttoequity ratio calculated carrying amount debt divided total stockholders’ equity debttoequity ratio decreased 208x fiscal year 2016 primarily due negative equity resulting transfer net assets 325 billion hewlett packard enterprise redemption 21 billion fixedrate us dollar global notes due separation fiscal year 2016 generated operating cash flow 32 billion debttoequity ratio decreased 035x fiscal year 2015 due decrease total debt balances 93 billion coupled increase total stockholders’ equity 10 billion end fiscal year 2015 weightedaverage interest rate reflects effective interest rate borrowings prevailing period reflects effect interest rate swaps information interest rate swaps see note 11 “financial instruments” consolidated financial statements notes thereto item 8 “financial statements supplementary data” october 31 2016 maintain senior unsecured committed revolving credit facility aggregate lending commitments 40 billion available april 2 2019 primarily support issuance commercial paper funds borrowed revolving credit facility may also used general corporate purposes available borrowing resources october 31 2016 available borrowing resources 822 million uncommitted lines credit addition 40 billion senior unsecured committed revolving credit facility discussed information borrowings see note 12 “borrowings” consolidated financial statements item 8 part ii incorporated herein reference credit ratings credit risk evaluated major independent rating agencies based upon publicly available information well information obtained ongoing discussions rating downgrade triggers would accelerate maturity material amount debt previous downgrades increased cost borrowing credit facilities reduced market capacity commercial paper required posting additional collateral derivative contracts addition downgrade credit ratings rating agencies may impact us similar manner depending extent downgrade could negative impact liquidity capital position access alternative sources funding including drawdowns credit facilities necessary offset potential reductions market capacity commercial paper hp inc subsidiaries management’s discussion analysis financial condition results operations continued contractual obligations contractual obligations october 31 2016 follows 1 amounts represent principal cash payments relating shortterm longterm debt include fair value adjustments discounts premiums 2 amounts represent expected interest payments relating shortterm longterm debt outstanding interest rate swap agreements accounted fair value hedges economic effect changing fixed interest rates associated us dollar global notes variable interest rates impact outstanding interest rate swaps october 31 2016 factored calculation future interest payments debt 3 purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations related principally inventory items purchase obligations exclude agreements cancelable without penalty purchase obligations also exclude open purchase orders routine arrangements entered ordinary course business difficult quantify meaningful way even though open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust terms based business needs prior delivery goods performance services 4 amounts represent operating lease obligations net total sublease income 218 million 5 amounts represent capital lease obligations including total capital lease interest obligations 35 million 6 retirement postretirement benefit plan contributions fiscal year 2017 anticipate making contributions 26 million nonus pension plans approximately 33 million cover benefit payments us nonqualified pension plan participants approximately 9 million cover benefit claims postretirement benefit plans policy fund pension plans meet least minimum contribution requirements established local government funding taxing authorities expected contributions payments pension postretirement benefit plans excluded contractual obligations table represent contractual cash outflows dependent numerous factors may result wide range outcomes information retirement postretirement benefit plans see note 5 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference 7 cost savings plans expect make future cash payments 384 million 534 million connection cost savings plans fiscal year 2019 payments excluded contractual obligations table represent contractual cash outflows uncertainty timing payments information restructuring activities see note 4 “restructuring charges” consolidated financial statements item 8 incorporated herein reference 8 uncertain tax positions october 31 2016 approximately 19 billion recorded liabilities related interest penalties pertaining uncertain tax positions unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters payments obligations would result settlements taxing authorities information uncertain tax positions hp inc subsidiaries management’s discussion analysis financial condition results operations continued see note 7 “taxes earnings” consolidated financial statements item 8 incorporated herein reference offbalance sheet arrangements part ongoing business participated transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers information thirdparty shortterm financing arrangements see note 8 “balance sheet details” consolidated financial statements item 8 incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” organized follows • hp inc separation transaction discussion separation hewlett packard enterprise company hp inc’s former enterprise technology infrastructure software services financing businesses • overview discussion business highlights affecting company provide context remainder mda • critical accounting policies estimates discussion accounting policies estimates believe important understanding assumptions judgments incorporated reported financial results • results operations analysis continuing financial results comparing fiscal year 2017 fiscal year 2016 fiscal year 2016 fiscal year 2015 discussion results continuing operations followed detailed discussion results operations segment • liquidity capital resources analysis changes cash flows discussion liquidity continuing financial condition • contractual obligations overview contractual obligations retirement postretirement benefit plan contributions costsaving plans uncertain tax positions offbalance sheet arrangements continuing operations discussion financial condition results continuing operations follows provides information assist reader understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document hp inc separation transaction november 1 2015 completed separation hewlett packard enterprise company “hewlett packard enterprise” hewlettpackard company’s former enterprise technology infrastructure software services financing businesses “separation” connection separation hewlettpackard company changed name hp inc “hp” connection separation hewlett packard enterprise entered separation distribution agreement well various agreements provide framework relationships hp hewlett packard enterprise going forward including among others tax matters agreement employee matters agreement real estate matters agreement master commercial agreement hp inc subsidiaries management’s discussion analysis financial condition results operations continued overview leading global provider personal computing access devices imaging printing products related technologies solutions services sell individual consumers small mediumsized businesses “smbs” large enterprises including customers government health education sectors three segments financial reporting purposes personal systems printing corporate investments personal systems segment offers commercial consumer personal computers “pcs” workstations thin clients commercial tablets mobility devices retail pointofsale systems displays related accessories software support services commercial consumer markets printing segment provides consumer commercial printer hardware supplies solutions services well scanning devices corporate investments include hp labs certain business incubation projects • personal systems strategic focus profitable growth hyper market segmentation respect enhanced innovation multioperating systems multiarchitecture geography customer segments key attributes additionally investing premium mobility form factors convertible notebooks detachable notebooks mobility devices order meet customer preference mobile thinner lighter devices beginning market shift contractual solutions includes increased focus device service believe well positioned due competitive product lineup • printing strategic focus business printing shift contractual solutions graphics well expanding footprint 3d printing marketplace business printing includes delivering solutions smbs enterprise customers multifunction pagewide printers including jetintelligence lineup laserjet printers shift contractual solutions includes increased focus managed print services instant ink presents strong aftermarket supplies opportunities graphics space focused innovations indigo latex product offerings plan continue focus shifting mix installed base higher value units expanding innovative ink laser graphics 3d printing programs continue execute key initiatives focusing highvalue products targeted high usage categories introducing new revenue delivery models focus placing higher value printer units offer strong annuity toner ink design deployment a3 products solutions accelerating growth graphic solutions 3d printing continue experience challenges representative trends uncertainties may affect business results operations one set challenges relates dynamic market trends flat pc device home printing markets second set challenges relates changes competitive landscape primary competitors exerting competitive pressure targeted areas entering new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model changes gotomarket execution • personal systems face challenges continued increases commodity costs especially memory uncertainty pc market’s ability absorb price increases driven higher commodity costs • printing seeing signs stabilization demand consumer commercial markets still experiencing overall competitive pricing environment obtained number components single sources due technology availability price quality considerations instance source majority a4 portion a3 portfolio laser printer engines laser toner cartridges canon decision either party renew agreement canon limit reduce scope agreement could adversely affect net revenue laserjet products however longstanding business relationship canon anticipate renewal agreement business financial performance also depend significantly worldwide economic conditions accordingly face global macroeconomic challenges june 23 2016 referendum british voters exit european union commonly known “brexit” uncertainty markets weaker macroeconomic conditions impact global macroeconomic challenges business cannot known time address challenges continue pursue innovation view towards developing new products services aligned generating market demand meeting needs customers partners addition need continue improve operations particular focus enhancing endtoend processes efficiencies also need continue optimize sales coverage models align sales incentives strategic goals improve channel execution strengthen capabilities areas strategic focus develop capitalize market opportunities hp inc subsidiaries management’s discussion analysis financial condition results operations continued typically experience higher net revenues first fourth quarters compared quarters fiscal year due part seasonal holiday demand historical seasonal patterns considered reliable indicators future net revenues financial performance discussion trends uncertainties factors could impact continuing operating results see section entitled “risk factors” item 1a annual report form 10k critical accounting policies estimates general consolidated financial statements hp prepared accordance united states “us” generally accepted accounting principles “gaap” require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities readily apparent sources management discussed development selection disclosure estimates audit committee hp’s board directors management believes accounting estimates employed resulting amounts reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows summary significant accounting policies included note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured well revenue recognition principles met including industryspecific revenue recognition guidance enter contracts sell products services many sales agreements contain standard terms conditions agreements enter contain nonstandard terms conditions many arrangements include multiple elements result significant contract interpretation may required determine appropriate accounting including identification deliverables considered separate units accounting allocation transaction price among elements arrangement timing revenue recognition elements recognize revenue delivered elements separate units accounting delivered elements standalone value customer elements standalone value recognize revenue consistent pattern delivery final deliverable arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract establish selling prices used deliverable based vendor specific objective evidence “vsoe” selling price available thirdparty evidence “tpe” vsoe selling price available estimated selling price “esp” neither vsoe selling price tpe available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority hp inc subsidiaries management’s discussion analysis financial condition results operations continued evaluate tpe selling price reviewing largely similar interchangeable competitor products services standalone sales similarly situated customers esp established based management’s judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles may modify develop new gotomarket practices future may result changes selling prices impacting vsoe selling price esp arrangements multiple elements transaction price allocated individual units accounting inception arrangement based relative selling price however aforementioned factors may result different allocation transaction price deliverables multiple element arrangements entered future periods may change pattern timing revenue recognition identical arrangements executed future periods change total revenue recognized given arrangement reduce revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs estimate number customers expected redeem incentive based historical experience specific terms conditions incentive hardware products recognize revenue generated direct sales end customers indirect sales channel partners including resellers distributors valueadded solution providers revenue recognition criteria satisfied indirect sales channel partners recognize revenue time delivery channel partner economic substance apart hp completed obligations related sale recognize revenue fixedprice support maintenance contracts ratably contract period warranty accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor onsite services depending upon product last three fiscal years annual warranty expense actual warranty costs averaged approximately 20 23 annual net revenue respectively restructuring charges engaged restructuring actions require management estimate timing amount severance employee separation costs workforce reduction enhanced early retirement programs fair value assets made redundant obsolete fair value lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs distinct ongoing operational costs information technology costs incurred connection separation full description restructuring actions refer discussions restructuring “results operations” note 3 “restructuring charges” consolidated financial statements item 8 incorporated herein reference retirement postretirement benefits pension postretirement benefit costs obligations depend various assumptions major assumptions relate primarily discount rates mortality rates expected increases compensation levels expected longterm return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period mortality rates help predict expected life plan participants based historical demographic study plan expected increase compensation levels assumption reflects longterm actual experience future expectations expected longterm return plan assets hp inc subsidiaries management’s discussion analysis financial condition results operations continued determined based asset allocations historical portfolio results historical asset correlations management’s expected returns asset class evaluate expected return assumptions annually including reviewing current capital market assumptions assess reasonableness expected longterm return plan assets update expected longterm return assets observe sufficient level evidence would suggest longterm expected return changed fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm performance relative expected longterm performance lesser extent differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year unless updated result interim remeasurement major assumptions vary plan weightedaverage rates used set forth note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference following table provides impact change 25 basis points weightedaverage assumptions discount rate expected increase compensation levels expected longterm return plan assets would net periodic benefit cost fiscal year 2017 taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize determining need valuation allowance consider future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided united states federal taxes plan reinvest earnings indefinitely outside united states plan distributions foreign earnings based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount expect indefinitely invest outside united states amounts expect distribute united states provide united states federal taxes due amounts expected distributed united states result certain employment actions capital investments undertaken income manufacturing activities certain jurisdictions subject reduced tax rates cases wholly exempt taxes fiscal years 2027 material changes hp inc subsidiaries management’s discussion analysis financial condition results operations continued estimates cash working capital longterm investment requirements various jurisdictions business could impact future earnings repatriated united states related future effective tax rate subject income taxes united states approximately 58 countries subject routine corporate income tax audits many jurisdictions believe positions taken tax returns fully supported tax authorities may challenge positions may fully sustained examination relevant tax authorities accordingly income tax provision includes amounts intended satisfy assessments may result challenges determining income tax provision potential assessments recording related effects requires management judgments estimates amounts ultimately paid resolution audit could materially different amounts previously included income tax provision therefore could material impact income tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions intercompany transactions related interest discussion taxes earnings refer note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference inventory state inventory lower cost market firstin firstout basis make adjustments reduce cost inventory net realizable value product group level estimated excess obsolescence factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues goodwill review goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable opt perform qualitative assessment test reporting unit’s goodwill impairment perform quantitative impairment test based qualitative assessment determine fair value reporting unit likely ie likelihood 50 percent less carrying amount quantitative impairment test performed quantitative impairment test compare fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach estimate fair value reporting unit based present value estimated future cash flows base cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions base discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weight fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available estimate fair value reporting unit using income approach fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired fair value reporting unit less carrying amount goodwill impaired excess reporting unit’s carrying value fair value recognized impairment loss annual goodwill impairment analysis performed using qualitative assessment option first day fourth quarter fiscal year 2017 resulted conclusion likely fair value reporting units exceeded respective carrying values result concluded first step goodwill impairment test necessary fair value derivative instruments use derivative instruments manage variety risks including risks related foreign currency exchange rates interest rates use forwards swaps times options hedge certain foreign currency interest rate exposures use derivative instruments speculative purposes october 31 2017 gross notional value derivative portfolio 25 billion assets liabilities related derivative instruments measured fair value 121 million 372 million respectively october 31 2017 hp inc subsidiaries management’s discussion analysis financial condition results operations continued fair value price would receive sell asset pay transfer liability orderly transaction market participants measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date determination fair value often involves significant judgments assumptions determining appropriate discount rate factors risk liquidity premiums identifying similarities differences market transactions weighting differences accordingly making appropriate adjustments market transactions reflect risks specific asset liability valued generally use industry standard valuation models measure fair value derivative positions prices active markets available identical asset liability use industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign currency exchange rates forward spot prices discussion fair value measurements derivative instruments refer note 9 “fair value” note 10 “financial instruments” respectively consolidated financial statements item 8 incorporated herein reference loss contingencies involved various lawsuits claims investigations proceedings including consisting intellectual property “ip” commercial securities employment employee benefits environmental matters arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information events pertaining particular case pursuant separation distribution agreement share responsibility hewlett packard enterprise certain matters discussed note 14 “litigation contingencies” consolidated financial statements item 8 incorporated herein reference hewlett packard enterprise agreed indemnify us whole part respect certain matters based experience believe damage amounts claimed specific litigation contingencies matters discussed note 14 “litigation contingencies” meaningful indicator hp’s potential liability litigation inherently unpredictable however believe valid defenses respect legal matters pending us nevertheless cash flows results operations could materially affected particular period resolution one contingencies believe recorded adequate provisions matters october 31 2017 reasonably possible material loss incurred excess amounts recognized financial statements recent accounting pronouncements summary recent accounting pronouncements applicable consolidated financial statements see note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference results operations revenue international operations historically represented expect continue represent majority overall net revenue result net revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing performance excluding impact foreign currency fluctuations supplement yearoveryear percentage change net revenue yearoveryear percentage change net revenue constant currency basis excludes change foreign currency exchange fluctuations hedging activities prioryear period adjust repricing demand impacts changes foreign currency exchange rates information provided net revenue viewed without effect fluctuations foreign currency exchange rates consistent management evaluates net revenue results trends management believe excluded items reflective ongoing operating results constant currency measures provided addition substitute yearoveryear percentage change net revenue gaap basis companies may calculate define similarly labeled items differently may limit usefulness measure comparative purposes hp inc subsidiaries management’s discussion analysis financial condition results operations continued results operations dollars percentage net revenue follows net revenue fiscal year 2017 total net revenue increased 79 increased 87 constant currency basis compared fiscal year 2016 net revenue united states increased 71 193 billion net revenue outside united states increased 84 328 billion increase net revenue primarily driven growth notebooks desktops supplies revenue partially offset unfavorable foreign currency impacts fiscal year 2016 total net revenue decreased 63 decreased 20 constant currency basis compared fiscal year 2015 net revenue united states increased 17 180 billion net revenue outside united states decreased 104 302 billion primary factors contributing net revenue decline unfavorable foreign currency impacts weak market demand competitive pricing pressures change supplies sales model net revenue decline driven decline supplies commercial consumer printers commercial consumer desktops consumer notebooks partially offset growth commercial notebooks detailed discussion factors contributing changes segment net revenue included “segment information” gross margin gross margin 184 fiscal year 2017 compared 187 fiscal year 2016 primary factors impacting gross margin decrease lower personal system gross margin driven higher commodity costs unfavorable foreign currency impacts higher mix personal systems revenue partially offset productivity improvements printing gross margin 187 fiscal year 2016 compared 193 fiscal year 2015 decline gross margin performance primarily due unfavorable foreign currency impacts partially offset operational improvements hp inc subsidiaries management’s discussion analysis financial condition results operations continued detailed discussion factors contributing changes segment gross margins included “segment information” operating expenses research development “rd” rd expense decreased 2 fiscal year 2017 compared fiscal year 2016 primarily due lower spend result launch a3 products fiscal year 2016 partially offset continuing investment printing rd expense increased 2 fiscal year 2016 compared fiscal year 2015 primarily due incremental investments a3 3d printing partially offset favorable foreign currency impacts selling general administrative “sga” sga expense increased 14 fiscal year 2017 compared fiscal year 2016 primarily due gain divestiture marketing optimization assets fiscal year 2016 increase field selling costs sga expense decreased 19 fiscal year 2016 compared fiscal year 2015 primarily due gains divestiture certain software assets open text corporation lower corporate governance overhead costs related preseparation combined entity costsaving initiatives favorable foreign currency impacts effects partially offset gain divestiture snapfish prioryear period amortization intangible assets amortization expense decreased 15 million 86 million fiscal year 2017 fiscal year 2016 respectively yearoveryear primarily due assets prior acquisitions reaching end respective amortization periods restructuring charges restructuring charges increased 157 million fiscal year 2017 compared prioryear period primarily due restructuring plan announced october 2016 “fiscal 2017 plan” certain nonrecurring costs including result separation restructuring charges increased 142 million fiscal year 2016 compared prioryear period primarily due severance pay infrastructure related charges restructuring plan initially announced september 2015 “fiscal 2015 plan” interest net interest net expense increased 455 million fiscal year 2017 compared prioryear period increase primarily due lower tax indemnification income fiscal year 2017 hewlett packard enterprise certain tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement interest net expense decreased 600 million fiscal year 2016 compared prioryear period decrease primarily due higher tax indemnification income fiscal year 2016 hewlett packard enterprise tax matters agreement lower foreign currency losses partially offset lower interest income provision taxes effective tax rates 229 291 53 fiscal 2017 2016 2015 respectively effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lower tax jurisdictions throughout world jurisdictions favorable tax rates significant impact effective tax rate periods presented puerto rico singapore china malaysia ireland plan reinvest certain earnings jurisdictions indefinitely outside united states therefore provided hp inc subsidiaries management’s discussion analysis financial condition results operations continued us taxes indefinitely reinvested earnings addition factors overall tax rates fiscal year 2017 impacted adjustments valuation allowances state income taxes overall tax rates fiscal year 2016 impacted adjustments valuation allowances uncertain tax positions reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference fiscal year 2017 recorded 72 million net income tax benefit related discrete items provision taxes amounts primarily include tax benefits 84 million related restructuring charges 12 million related us federal provision return adjustments 45 million related samsung acquisitionrelated charges 13 million net tax benefits addition recorded tax charges 11 million related changes state valuation allowances 22 million state provision return adjustments 49 million related uncertain tax positions fiscal year 2016 recorded 301 million net income tax charges related discrete items provision taxes continuing operations amounts primarily include uncertain tax position charges 525 million related preseparation tax matters addition recorded 62 million net tax benefits restructuring charges 52 million net tax benefits related release foreign valuation allowances 41 million net tax benefits arising retroactive research development credit provided consolidated appropriations act 2016 signed law december 2015 70 million tax benefit fiscal year 2015 recorded 12 billion net income tax benefits related discrete items provision taxes continuing operations amounts included 17 billion tax benefits due release valuation allowances pertaining certain us deferred tax assets 449 million tax charges related uncertain tax positions pension transfers 70 million tax benefits related state tax impacts 6 million income tax charges related various items addition recorded 33 million income tax charges restructuring pensionrelated costs segment information description products services segment found note 2 “segment information” consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes segments disclosed personal systems components net revenue weighted net revenue change business unit follows hp inc subsidiaries management’s discussion analysis financial condition results operations continued fiscal year 2017 compared fiscal year 2016 personal systems net revenue increased 113 increased 123 constant currency basis fiscal year 2017 net revenue increase primarily due growth notebooks desktops workstations partially offset unfavorable foreign currency impacts net revenue increase driven 67 increase unit volume combined 43 increase average selling prices “asps” compared fiscal year 2016 increase unit volume primarily due growth notebooks workstations increase asps primarily due favorable pricing partially offset unfavorable foreign currency impacts consumer revenue increased 16 fiscal year 2017 driven growth notebooks desktops result higher unit volume combined higher asps commercial revenue increased 9 fiscal year 2017 driven growth notebooks workstations net revenue increased 16 notebooks 9 workstations 3 desktops fiscal year 2017 personal systems earnings operations percentage net revenue decreased 02 percentage points fiscal year 2017 decrease primarily due decline gross margin partially offset decrease operating expenses decrease gross margin primarily due increase commodity cost unfavorable foreign currency impacts partially offset higher asps operating expenses percentage net revenue decreased primarily due operating expense management fiscal year 2016 compared fiscal year 2015 personal systems net revenue decreased 49 decreased 09 constant currency basis fiscal year 2016 net revenue decline personal systems primarily due unfavorable foreign currency impacts weak market demand personal systems net revenue decreased result 35 decline unit volume along 1 decline asps compared prioryear period unit volume decline primarily due overall decline desktops consumer notebooks partially offset unit volume growth commercial notebooks decline asps primarily due competitive pricing commercial segment partially offset favorable pricing consumer segment favorable mix shift consumer highend premium products hp inc subsidiaries management’s discussion analysis financial condition results operations continued consumer commercial revenue decreased 5 primarily due weak market demand partially offset increase commercial notebooks pc services net revenue declined 2 notebooks 9 desktops 7 workstations 9 compared prioryear period net revenue decline primarily due lower sales consumer tablets personal systems options partially offset revenue growth pc services personal systems earnings operations percentage net revenue increased 06 percentage points fiscal year 2016 increase primarily due growth gross margin driven favorable commodity costs combined product mix increase pc services effects partially offset unfavorable foreign currency impacts revenue operating expenses percentage net revenue increased 01 percentage point primarily driven increase field selling cost printing components net revenue weighted net revenue change business unit follows fiscal year 2017 compared fiscal year 2016 printing net revenue increased 30 increased 35 constant currency basis fiscal year 2017 increase net revenue primarily driven increase supplies revenue net revenue supplies increased 46 compared prioryear period primarily due change supplies sales model prioryear period better discount management partially offset unfavorable foreign currency impacts printer unit volume increased 34 asps decreased 09 compared prioryear period increase printer unit volume primarily driven unit increases consumer hardware larger opportunity place incremental units positive net present value printer asps decreased primarily due unfavorable foreign currency impacts hp inc subsidiaries management’s discussion analysis financial condition results operations continued net revenue commercial hardware decreased 2 compared prioryear period driven decline printing solutions largely due divestiture marketing optimization assets prioryear period partially offset revenue 3d printing fiscal year 2017 asps decreased 01 unit volume increased 20 unit volume increased primarily due larger opportunity place incremental units positive net present value decrease asps primarily due unfavorable foreign currency impacts partially offset mix shift higherend printers net revenue consumer hardware increased 3 compared prioryear period due 4 increase printer unit volume partially offset 04 decrease asps unit volume increase driven home business decrease asps primarily due unfavorable foreign currency impacts partially offset better discount management printing earnings operations percentage net revenue decreased 03 percentage points fiscal year 2017 compared prioryear period primarily due increase operating expenses partially offset improved gross margin gross margin increased due operational improvements partially offset unfavorable foreign currency impacts operating expenses increased primarily due gain divestiture marketing optimization assets prioryear period increase marketing investments fiscal year 2016 compared fiscal year 2015 printing net revenue decreased 140 decreased 93 constant currency basis fiscal year 2016 decline net revenue primarily due unfavorable foreign currency impacts weakness demand impact change supplies sales model competitive pricing pressures factors resulted net revenue decline across supplies consumer commercial hardware net revenue supplies decreased 15 compared prioryear period primarily due unfavorable foreign currency impacts demand weakness combined competitive pricing environment impact change supplies sales model printer unit volume decreased 12 asps increased 2 compared prioryear period printer unit volume decreased due weakness demand pricing discipline focus placing positive npv units printer asps increased primarily due favorable mix shift highvalue printers partially offset unfavorable foreign currency impacts net revenue commercial hardware decreased 7 fiscal year 2016 compared prioryear period primarily driven 8 decline unit volume decrease peripheral printing solutions unit volume commercial hardware declined primarily due unit volume decline laserjet printers asps commercial hardware increased 2 primarily due mix shift highvalue printer sales offset unfavorable foreign currency impacts printer unit volume consumer hardware declined 12 combined decline printing solutions largely driven divestiture snapfish prioryear period 2 decline asps resulted 19 decline consumer hardware net revenue fiscal year 2016 compared prioryear period unit volume decline consumer hardware primarily due weakness demand pricing discipline continued efforts place positive npv units asps consumer hardware decreased primarily due unfavorable foreign currency impacts printing earnings operations percentage net revenue decreased 06 percentage points fiscal year 2016 compared prioryear period due decline gross margin partially offset gains divestiture certain software assets gross margin decline primarily due unfavorable foreign currency impacts supplies mix partially offset operational improvements favorable mix printers operating expenses decreased primarily due gains divestiture certain software assets open text corporation costsaving initiatives corporate investments loss operations corporate investments fiscal years 2017 2016 2015 primarily due expenses associated incubation projects hp labs liquidity capital resources use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support operating businesses capital expenditures acquisitions restructuring activities maturing debt income tax payments payment stockholder dividends addition investments share repurchases hp inc subsidiaries management’s discussion analysis financial condition results operations continued able supplement shortterm liquidity necessary broad access capital markets credit facilities made available various domestic foreign financial institutions access capital markets may constrained cost borrowing may increase certain business market economic conditions access variety funding sources meet liquidity needs designed facilitate continued access capital resources conditions liquidity subject various risks including risks identified section entitled “risk factors” item 1a market risks identified section entitled “quantitative qualitative disclosures market risk” item 7a incorporated herein reference cash balances held numerous locations throughout world majority amounts held outside united states utilize variety planning financing strategies effort ensure worldwide cash available needed cash position remains strong expect cash balances anticipated cash flow generated operations access capital markets sufficient cover expected nearterm cash outlays november 1 2017 hp made cash payment 11 billion samsung electronics co ltd connection acquisition printer business amounts held outside united states generally utilized support nonus liquidity needs although portion amounts may time subject shortterm intercompany loans united states amounts held outside united states could repatriated united states current law would subject us federal income taxes less applicable foreign tax credits repatriation foreign earnings restricted local law except foreign earnings considered indefinitely reinvested outside united states provided us federal tax liability earnings financial statement purposes repatriation could result additional income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside united states would meet liquidity needs ongoing cash flows external borrowings expect restrictions potential taxes incurred amounts repatriated united states material effect overall liquidity financial condition results operations liquidity cash equivalents marketable debt securities total debt continuing operations follows 1 includes highly liquid us treasury notes us agency securities nonus government bonds corporate debt securities money market funds classify investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations historical statements cash flows represent combined cash flows key cash flow metrics hp prior separation revised reflect effect separation information discontinued operations see note 17 “discontinued operations” consolidated financial statements notes thereto included item 8 “financial statements supplementary data” incorporated herein reference key cash flow metrics follows hp inc subsidiaries management’s discussion analysis financial condition results operations continued operating activities net cash provided operating activities increased 04 billion fiscal year 2017 compared fiscal year 2016the increase primarily due higher cash generated working capital management activities net cash provided operating activities decreased 38 billion fiscal year 2016 compared fiscal year 2015 since net cash provided operating activities fiscal year 2015 included impact discontinued operations included net cash provided operating activities fiscal year 2016 result separation working capital metrics management utilizes current cash conversion cycle information manage working capital level table presents cash conversion cycle cash conversion cycle sum days dso dos less dpo items may cause cash conversion cycle particular period differ longterm sustainable rate include limited changes business mix changes payment terms extent receivables factoring seasonal trends timing revenue recognition inventory purchases within period dso measures average number days receivables outstanding dso calculated dividing ending accounts receivable net allowance doubtful accounts 90day average net revenue fiscal year 2017 decrease dso compared fiscal year 2016 primarily due strong collections fiscal year 2016 decrease dso compared fiscal year 2015 primarily due favorable revenue linearity strong collections partially offset unfavorable foreign currency impacts dos measures average number days procurement sale product dos calculated dividing ending inventory 90day average cost goods sold fiscal year 2017 dos higher primarily due leveraging balance sheet particularly higher strategic buys sea shipments better assure supply commodities short supply fiscal year 2016 dos flat compared fiscal year 2015 due strong inventory management offset higher inventory balance support future sales levels dpo measures average number days accounts payable balances outstanding dpo calculated dividing ending accounts payable 90day average cost goods sold fiscal year 2017 dpo higher primarily due increased inventory purchases extension payment terms product suppliers fiscal year 2016 increase dpo compared fiscal year 2015 primarily result extension payment terms product suppliers increased strategic inventory purchases investing activities net cash used investing activities increased 18 billion fiscal year 2017 compared fiscal year 2016 primarily due net investment activity 11 billion classified availableforsale investments within current assets collateral 02 billion related derivatives proceeds business divestiture 05 billion fiscal year 2016 net cash used investing activities decreased 56 billion fiscal year 2016 compared fiscal year 2015 due capital expenditures payments made connection business acquisitions net cash acquired fiscal year 2015 discontinued operations financing activities net cash used financing activities decreased 132 billion fiscal year 2017 compared fiscal year 2016 net cash used financing activities fiscal year 2016 included cash transfer 104 billion hewlett packard enterprise connection separation redemption 21 billion us dollar global notes fiscal year 2017 included higher outstanding commercial paper 09 billion net cash used financing activities increased 152 billion fiscal year 2016 compared fiscal year 2015 primarily due cash transfer 104 billion hewlett packard enterprise connection separation redemption 21 billion us dollar global notes cash utilization 20 billion repurchases common stock dividends hp inc subsidiaries management’s discussion analysis financial condition results operations continued capital resources debt levels maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities cost capital targeted capital structure shortterm debt increased 10 billion fiscal year 2017 compared fiscal year 2016 net increase total debt primarily due higher outstanding commercial paper 09 billion shortterm debt decreased 21 billion longterm debt increased 01 billion fiscal year 2016 compared fiscal year 2015 net decrease total debt primarily due redemption 21 billion fixed rate us dollar global notes november 2015 debttoequity ratio calculated carrying amount debt divided total stockholders’ deficit equity debttoequity ratio increased 054x fiscal year 2017 compared fiscal year 2016 due increase total debt balances 10 billion debttoequity ratio decreased 206x fiscal year 2016 compared fiscal year 2015 primarily due negative equity resulting transfer net assets 325 billion hewlett packard enterprise redemption 21 billion fixedrate us dollar global notes due separation fiscal year 2017 2016 generated operating cash flow 37 billion 33 billion respectively weightedaverage interest rate reflects effective interest rate borrowings prevailing period reflects effect interest rate swaps information interest rate swaps see note 10 “financial instruments” consolidated financial statements notes thereto item 8 “financial statements supplementary data” available borrowing resources following resources available obtain short longterm financing october 31 2017 maintain senior unsecured committed revolving credit facility aggregate lending commitments 40 billion available april 2 2019 primarily support issuance commercial paper funds borrowed revolving credit facility may also used general corporate purposes increased issuance authorization commercial paper program 40 billion 60 billion november 2017 december 2017 also entered revolving credit facility certain institutional lenders provides us 15 billion available borrowings november 30 2018 information borrowings see note 11 “borrowings” consolidated financial statements item 8 incorporated herein reference credit ratings credit risk evaluated major independent rating agencies based upon publicly available information well information obtained ongoing discussions rating downgrade triggers would accelerate maturity material amount debt previous downgrades increased cost borrowing credit facilities reduced market capacity commercial paper required posting additional collateral derivative contracts addition downgrade credit ratings rating agencies may impact us similar manner depending extent downgrade could negative impact hp inc subsidiaries management’s discussion analysis financial condition results operations continued liquidity capital position access alternative sources funding including drawdowns credit facilities necessary offset potential reductions market capacity commercial paper hp inc subsidiaries management’s discussion analysis financial condition results operations contractual obligations contractual obligations october 31 2017 follows 1 amounts represent principal cash payments relating shortterm longterm debt include fair value adjustments discounts premiums 2 amounts represent expected interest payments relating shortterm longterm debt outstanding interest rate swap agreements accounted fair value hedges economic effect changing fixed interest rates associated us dollar global notes variable interest rates impact outstanding interest rate swaps october 31 2017 factored calculation future interest payments debt 3 purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations related principally inventory items purchase obligations exclude agreements cancelable without penalty purchase obligations also exclude open purchase orders routine arrangements entered ordinary course business difficult quantify meaningful way even though open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust terms based business needs prior delivery goods performance services 4 amounts represent operating lease obligations net total sublease income 174 million 5 amounts represent capital lease obligations including total capital lease interest obligations 45 million 6 retirement postretirement benefit plan contributions fiscal year 2018 anticipate making contributions approximately 24 million nonus pension plans 33 million cover benefit payments us nonqualified pension plan participants 7 million cover benefit claims postretirement benefit plans policy fund pension plans meet least minimum contribution requirements established local government funding taxing authorities expected contributions payments pension postretirement benefit plans excluded contractual obligations table represent contractual cash outflows dependent numerous factors may result wide range outcomes information retirement postretirement benefit plans see note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference 7 cost savings plans expect make future cash payments 173 million 323 million connection cost savings plans fiscal year 2021 payments excluded contractual obligations table represent contractual cash outflows uncertainty timing payments information restructuring activities part cost improvements see note 3 “restructuring charges” consolidated financial statements item 8 incorporated herein reference 8 uncertain tax positions october 31 2017 approximately 21 billion recorded liabilities related interest penalties pertaining uncertain tax positions unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters payments obligations would result settlements taxing authorities information uncertain tax positions hp inc subsidiaries management’s discussion analysis financial condition results operations continued see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference offbalance sheet arrangements part ongoing business participated transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers information thirdparty shortterm financing arrangements see note 7 “supplementary financial information” consolidated financial statements item 8 incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” organized follows • overview discussion business highlights affecting company provide context remainder mda • separation transaction discussion separation hewlett packard enterprise company hp inc’s former enterprise technology infrastructure software services financing businesses • critical accounting policies estimates discussion accounting policies estimates believe important understanding assumptions judgments incorporated reported financial results • results operations analysis continuing financial results comparing fiscal year 2018 fiscal year 2017 fiscal year 2017 fiscal year 2016 discussion results continuing operations followed detailed discussion results operations segment • liquidity capital resources analysis changes cash flows discussion liquidity financial condition • contractual obligations overview contractual obligations retirement postretirement benefit plan contributions costsaving plans uncertain tax positions offbalance sheet arrangements discussion financial condition results continuing operations follows provides information assist reader understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document hp inc subsidiaries management’s discussion analysis financial condition results operations continued overview leading global provider personal computing access devices imaging printing products related technologies solutions services sell individual consumers smbs large enterprises including customers government health education sectors three reportable segments personal systems printing corporate investments personal systems segment offers commercial consumer desktop notebook pcs workstations thin clients commercial mobility devices retail pos systems displays related accessories software support services printing segment provides consumer commercial printer hardware supplies solutions services well scanning devices corporate investments include hp labs certain business incubation projects • personal systems strategic focus profitable growth hyper market segmentation respect enhanced innovation multioperating systems multiarchitecture geography customer segments key attributes additionally investing premium form factors convertible notebooks meet customer preference mobile thinner lighter devices increased focus device service market begins shift contractual solutions believe well positioned due competitive product lineup • printing strategic growth focus shifting contractual solutions graphics well expanding footprint 3d printing marketplace business printing includes delivering solutions smbs enterprise customers multifunction pagewide printers including jetintelligence lineup laserjet printers shift contractual solutions includes increased focus managed print services instant ink presents strong aftermarket supplies opportunities graphics space focused innovations indigo latex product offerings plan continue focus shifting mix installed base higher value units expanding innovative ink laser graphics 3d printing programs continue execute key initiatives focusing highvalue products targeted high usage categories introducing new revenue delivery models focus placing higher value printer units offer strong annuity toner ink design deployment a3 products solutions accelerating growth graphic solutions 3d printing continue experience challenges representative trends uncertainties may affect business results operations one set challenges relates dynamic market trends forecasted declining pc client markets flat home printing markets second set challenges relates changes competitive landscape primary competitors exerting competitive pressure targeted areas entering new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model changes gotomarket execution • personal systems face challenges industry component availability • printing seeing signs stabilization demand consumer commercial markets still experiencing overall competitive pricing environment obtain many components single sources due technology availability price quality considerations instance source majority a4 portion a3 portfolio laser printer engines laser toner cartridges canon decision either party renew agreement canon limit reduce scope agreement could adversely affect net revenue laserjet products however longstanding business relationship canon anticipate renewal agreement also seeing increases commodity costs impacting bill materials business financial performance also depend significantly worldwide economic conditions accordingly face global macroeconomic challenges tariffdriven headwinds uncertainty markets volatility exchange rates weaker macroeconomic conditions evolving dynamics global trade environment impact global macroeconomic challenges business cannot known time address challenges continue pursue innovation view towards developing new products services aligned generating market demand meeting needs customers partners addition continue work improving operations particular focus enhancing endtoend processes efficiencies also continue work optimizing sales coverage models align sales incentives strategic goals improve channel execution strengthen capabilities areas strategic focus develop capitalize market opportunities typically experience higher net revenues fourth quarter compared quarters fiscal year due part seasonal holiday demand historical seasonal patterns considered reliable indicators future net revenues financial performance discussion trends uncertainties factors could impact continuing operating results see section entitled “risk factors” item 1a annual report form 10k hp inc subsidiaries management’s discussion analysis financial condition results operations continued separation transaction november 1 2015 completed separation hewlett packard enterprise hewlettpackard company’s former enterprise technology infrastructure software services financing businesses entered separation distribution agreement well various agreements provide framework relationships hp hewlett packard enterprise going forward including among others tax matters agreement employee matters agreement real estate matters agreement master commercial agreement critical accounting policies estimates general consolidated financial statements hp prepared accordance united states “us” generally accepted accounting principles “gaap” require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities readily apparent sources management discussed development selection disclosure estimates audit committee hp’s board directors management believes accounting estimates employed resulting amounts reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows summary significant accounting policies included note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured well revenue recognition principles met including industryspecific revenue recognition guidance enter contracts sell products services many sales agreements contain standard terms conditions agreements contain nonstandard terms conditions many arrangements include multiple elements result significant contract interpretation may required determine appropriate accounting including identification deliverables considered separate units accounting allocation transaction price among elements arrangement timing revenue recognition elements recognize revenue delivered elements separate units accounting delivered elements standalone value customer elements standalone value recognize revenue consistent pattern delivery final deliverable arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract establish selling prices used deliverable based vendor specific objective evidence “vsoe” selling price available thirdparty evidence “tpe” vsoe selling price available estimated selling price “esp” neither vsoe selling price tpe available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority evaluate tpe selling price reviewing largely similar interchangeable competitor products services standalone sales similarly situated customers esp established based management’s judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles may modify hp inc subsidiaries management’s discussion analysis financial condition results operations continued develop new gotomarket practices future may result changes selling prices impacting vsoe selling price esp arrangements multiple elements transaction price allocated individual units accounting inception arrangement based relative selling price however aforementioned factors may result different allocation transaction price deliverables multiple element arrangements entered future periods may change pattern timing revenue recognition identical arrangements executed future periods change total revenue recognized given arrangement reduce revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs estimate number customers expected redeem incentive based historical experience specific terms conditions incentive hardware products recognize revenue generated direct sales end customers indirect sales channel partners including resellers distributors valueadded solution providers revenue recognition criteria satisfied indirect sales channel partners recognize revenue time delivery channel partner economic substance apart hp completed obligations related sale recognize revenue fixedprice support maintenance contracts ratably contract period warranty accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor onsite services depending upon product last three fiscal years annual warranty expense actual warranty costs averaged approximately 18 20 annual net revenue respectively restructuring charges engaged restructuring actions require management estimate timing amount severance employee separation costs workforce reduction programs fair value assets made redundant obsolete fair value lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs distinct ongoing operational costs information technology costs incurred connection separation full description restructuring actions refer discussions restructuring “results operations” note 3 “restructuring charges” consolidated financial statements item 8 incorporated herein reference retirement postretirement benefits pension postretirement benefit costs obligations depend various assumptions major assumptions relate primarily discount rates mortality rates expected increases compensation levels expected longterm return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period mortality rates help predict expected life plan participants based historical demographic study plan expected increase compensation levels assumption reflects longterm actual experience future expectations expected longterm return plan assets determined based asset allocations historical portfolio results historical asset correlations management’s expected returns asset class evaluate expected return assumptions annually including reviewing current capital market assumptions assess reasonableness expected longterm return plan assets update expected longterm return assets observe sufficient level evidence would suggest longterm expected return changed fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm performance relative expected longterm performance lesser extent differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures hp inc subsidiaries management’s discussion analysis financial condition results operations continued recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year unless updated result interim remeasurement major assumptions vary plan weightedaverage rates used set forth note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference following table provides impact change 25 basis points weightedaverage assumptions discount rate expected increase compensation levels expected longterm return plan assets would net periodic benefit cost fiscal year 2018 taxes earnings tax cuts jobs act “the tcja” made significant changes us tax law tcja lowered us statutory federal income tax rate 35 21 effective january 1 2018 also imposing onetime transition tax accumulated foreign earnings fiscal year 2018 recorded provisional tax benefit 760 million provisional estimate sec staff accounting bulletin “sab” 118 december 2017 sec staff issued sab 118 addresses company recognizes provisional estimates company necessary information available prepared analyzed including computations reasonable detail complete accounting effect changes tcja measurement period ends company obtained prepared analyzed information necessary finalize accounting cannot extend beyond one year final impact tcja may differ provisional estimates due changes interpretations tcja legislative action address questions arise tcja changes accounting standard income taxes related interpretations response tcja updates changes estimates used provisional amounts fiscal year 2018 recorded provisional tax benefit 760 million related 56 billion net benefit decrease deferred tax liability unremitted foreign earnings partially offset 33 billion net expense deemed repatriation tax payable installments eight years 12 billion net expense remeasurement deferred tax assets liabilities new us statutory tax rate 317 million net expense related realization us deferred taxes expected realized lower rate resolution provisional estimates tcja effects different assumptions made us could material impact financial condition operating results prior enactment tcja effective tax rate included impact certain undistributed foreign earnings provided us federal taxes planned reinvest earnings indefinitely outside united states plan distributions foreign earnings based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount expect indefinitely invest outside united states amounts expect distribute united states provide us federal taxes due amounts expected distributed united states result certain employment actions capital investments undertaken income manufacturing activities certain jurisdictions subject reduced tax rates cases wholly exempt taxes fiscal years 2027 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact future earnings repatriated united states related future effective tax rate effects tcja related policies referenced discussed detail note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse hp inc subsidiaries management’s discussion analysis financial condition results operations continued record valuation allowance reduce deferred tax assets amount likely realize determining need valuation allowance consider future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income jurisdictions deferred tax assets located subject income taxes united states approximately 60 countries subject routine corporate income tax audits many jurisdictions believe positions taken tax returns fully supported tax authorities may challenge positions may fully sustained examination relevant tax authorities accordingly income tax provision includes amounts intended satisfy assessments may result challenges determining income tax provision potential assessments recording related effects requires management judgments estimates amounts ultimately paid resolution audit could materially different amounts previously included income tax provision therefore could material impact income tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions intercompany transactions pension related interest discussion taxes earnings refer note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference inventory state inventory lower cost market firstin firstout basis make adjustments reduce cost inventory net realizable value product group level estimated excess obsolescence factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues business combinations allocate fair value purchase consideration assets acquired liabilities assumed noncontrolling interests acquiree generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquiree recorded goodwill may involve engaging independent thirdparties perform appraisal determining fair values assets acquired liabilities assumed noncontrolling interests acquiree management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill review goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable elect perform qualitative assessment test reporting unit’s goodwill impairment perform quantitative impairment test based qualitative assessment determine fair value reporting unit likely ie likelihood 50 percent less carrying amount quantitative impairment test performed quantitative impairment test compare fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach estimate fair value reporting unit based present value estimated future cash flows base cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions base discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weight fair value derived market approach depending level comparability publiclytraded hp inc subsidiaries management’s discussion analysis financial condition results operations continued companies reporting unit market comparables meaningful available estimate fair value reporting unit using income approach fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired fair value reporting unit less carrying amount goodwill impaired excess reporting unit’s carrying value fair value recognized impairment loss annual goodwill impairment analysis performed using qualitative assessment option first day fourth quarter fiscal year 2018 resulted conclusion likely fair value reporting units exceeded respective carrying values result concluded quantitative impairment test necessary fair value derivative instruments use derivative instruments manage variety risks including risks related foreign currency exchange rates interest rates use forwards swaps times options hedge certain foreign currency interest rate exposures use derivative instruments speculative purposes october 31 2018 gross notional value derivative portfolio 24 billion assets liabilities related derivative instruments measured fair value 515 million 195 million respectively october 31 2018 fair value price would receive sell asset pay transfer liability orderly transaction market participants measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date determination fair value often involves significant judgments assumptions determining appropriate discount rate factors risk liquidity premiums identifying similarities differences market transactions weighting differences accordingly making appropriate adjustments market transactions reflect risks specific asset liability valued generally use industry standard valuation models measure fair value derivative positions prices active markets available identical asset liability use industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign currency exchange rates forward spot prices discussion fair value measurements derivative instruments refer note 9 “fair value” note 10 “financial instruments” respectively consolidated financial statements item 8 incorporated herein reference loss contingencies involved various lawsuits claims investigations proceedings including consisting intellectual property “ip” commercial securities employment employee benefits environmental matters arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information events pertaining particular case pursuant separation distribution agreement share responsibility hewlett packard enterprise certain matters discussed note 14 “litigation contingencies” consolidated financial statements item 8 incorporated herein reference hewlett packard enterprise agreed indemnify us whole part respect certain matters based experience believe damage amounts claimed specific litigation contingencies matters discussed note 14 “litigation contingencies” meaningful indicator hp’s potential liability litigation inherently unpredictable however believe valid defenses respect legal matters pending us nevertheless cash flows results operations could materially affected particular period resolution one contingencies believe recorded adequate provisions matters october 31 2018 reasonably possible material loss incurred excess amounts recognized financial statements recent accounting pronouncements summary recent accounting pronouncements applicable consolidated financial statements see note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference hp inc subsidiaries management’s discussion analysis financial condition results operations continued results operations revenue international operations historically represented expect continue represent majority overall net revenue result net revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing performance excluding impact foreign currency fluctuations supplement yearoveryear percentage change net revenue yearoveryear percentage change net revenue constant currency basis excludes effect foreign currency exchange fluctuations calculated translating current period revenues using monthly average exchange rates comparative period hedging activities prioryear period adjust repricing demand impacts changes foreign currency exchange rates information provided net revenue viewed without effect fluctuations foreign currency exchange rates consistent management evaluates net revenue results trends management believe excluded items reflective ongoing operating results constant currency measures provided addition substitute yearoveryear percentage change net revenue gaap basis companies may calculate define similarly labeled items differently may limit usefulness measure comparative purposes results operations dollars percentage net revenue follows net revenue fiscal year 2018 total net revenue increased 123 increased 101 constant currency basis compared fiscal year 2017 net revenue united states increased 66 206 billion net revenue outside united states increased 157 379 billion increase net revenue primarily driven growth notebooks desktops supplies commercial printing hardware revenue favorable foreign currency impacts fiscal year 2017 total net revenue increased 79 increased 87 constant currency basis compared fiscal year 2016 net revenue united states increased 71 193 billion net revenue outside united states increased 84 328 billion increase net revenue primarily driven growth notebooks desktops supplies revenue partially offset unfavorable foreign currency impacts detailed discussion factors contributing changes segment net revenue included “segment information” gross margin hp inc subsidiaries management’s discussion analysis financial condition results operations continued gross margin 182 fiscal year 2018 compared 184 fiscal year 2017 decrease primarily due higher commercial hardware unit placements printing increase commodity logistics costs personal systems partially offset higher pricing personal systems favorable foreign currency impacts gross margin 184 fiscal year 2017 compared 187 fiscal year 2016 primary factors impacting gross margin decrease lower personal system gross margin driven higher commodity costs unfavorable foreign currency impacts higher mix personal systems revenue partially offset productivity improvements printing detailed discussion factors contributing changes segment gross margins included “segment information” operating expenses research development “rd” rd expense increased 18 fiscal year 2018 compared fiscal year 2017 primarily due continuing investment printing including acquisition samsung’s printer business rd expense decreased 2 fiscal year 2017 compared fiscal year 2016 primarily due lower spend result launch a3 products fiscal year 2016 partially offset continuing investment printing selling general administrative “sga” sga expense increased 11 fiscal year 2018 compared fiscal year 2017 primarily driven incremental gotomarket investments support revenue growth including acquisition samsung’s printer business sga expense increased 14 fiscal year 2017 compared fiscal year 2016 primarily due gain divestiture marketing optimization assets fiscal year 2016 increase field selling costs restructuring charges restructuring charges decreased 230 million fiscal year 2018 compared prioryear period primarily due lower charges restructuring plan announced october 2016 “fiscal 2017 plan” amended may 2018 restructuring charges increased 157 million fiscal year 2017 compared prioryear period primarily due fiscal 2017 plan certain nonrecurring costs including result separation acquisitionrelated charges acquisitionrelated charges fiscal years 2018 2017 2016 relate primarily thirdparty professional legal fees integrationrelated costs well fair value adjustments certain acquired assets inventory amortization intangible assets amortization expense increased 79 million fiscal year 2018 compared prioryear period due intangible assets resulting primarily acquisition samsung’s printer business amortization expense decreased 15 million fiscal year 2017 compared prioryear period primarily due assets prior acquisitions reaching end respective amortization periods interest net interest net expense increased 808 million fiscal year 2018 compared prioryear period primarily due reversal indemnification receivables hewlett packard enterprise pertaining various income tax audit settlements loss extinguishment debt interest net expense increased 455 million fiscal year 2017 compared prioryear period primarily due lower tax indemnification income fiscal year 2017 hewlett packard enterprise certain tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement benefit provision taxes result us tax reform blended us federal statutory rate 23 computed fiscal year ending october 31 2018 effective tax rates 768 229 291 fiscal years 2018 2017 2016 respectively fiscal year 2018 effective tax rate generally differs us federal statutory rate 233 primarily due transitional impacts us tax reform resolution various audits tax litigation fiscal years 2017 2016 effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lowertax jurisdictions throughout world jurisdictions favorable tax rates significant impact effective tax rate periods presented puerto rico singapore china malaysia hp inc subsidiaries management’s discussion analysis financial condition results operations continued ireland gross income tax benefits related favorable tax rates addition transitional impacts us tax reform resolution various audits tax litigation additionally overall effective tax rate fiscal year 2017 impacted adjustments valuation allowances state income taxes overall effective tax rate fiscal year 2016 impacted adjustments valuation allowances uncertain tax positions reconciliation effective tax rate us federal statutory rate 233 fiscal year 2018 35 fiscal years 2017 2016 explanation provision taxes see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference fiscal year 2018 recorded 28 billion net income tax benefit related discrete items provision taxes include impacts tcja discussed note 6 “taxes earnings” consolidated financial statements item 8 report yet completed analysis full impact tcja however october 31 2018 recorded provisional tax benefit 760 million related 56 billion net benefit decrease deferred tax liability unremitted foreign earnings partially offset 33 billion net expense deemed repatriation tax payable installments eight years 12 billion net expense remeasurement deferred assets liabilities new us statutory tax rate 317 million net expense related realization us deferred taxes expected realized lower rate fiscal year 2018 also included tax benefits related audit settlements 15 billion valuation allowance releases 601 million pertaining change ability utilize certain foreign us deferred tax assets due change geographic earnings mix benefits partially offset net tax charges 34 million fiscal year 2018 addition discrete items mentioned recorded excess tax benefits 42 million stock options restricted stock units performanceadjusted restricted stock units fiscal year 2017 recorded 72 million net income tax benefit related discrete items provision taxes amounts primarily include tax benefits 84 million related restructuring charges 12 million related us federal provision return adjustments 45 million related samsung acquisitionrelated charges 13 million net tax benefits addition recorded tax charges 11 million related changes state valuation allowances 22 million state provision return adjustments 49 million related uncertain tax positions fiscal year 2016 recorded 301 million net income tax charges related discrete items provision taxes continuing operations amounts primarily include uncertain tax position charges 525 million related preseparation tax matters addition recorded 62 million net tax benefits restructuring charges 52 million net tax benefits related release foreign valuation allowances 41 million net tax benefits arising retroactive research development credit provided consolidated appropriations act 2016 signed law december 2015 70 million tax benefit segment information description products services segment found note 2 “segment information” consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes segments disclosed realignment effective beginning first quarter fiscal year 2018 hp implemented organizational change align segment business unit financial reporting closely current business structure organizational change resulted transfer longlife consumables commercial supplies within printing segment certain revenues related service arrangements eliminated purposes reporting hp’s consolidated net revenue reclassified segments hp reflected change segment business unit information prior reporting periods asif basis reporting change impact previously reported consolidated net revenue earnings operations net earnings net eps personal systems hp inc subsidiaries management’s discussion analysis financial condition results operations continued components net revenue weighted net revenue change business unit follows fiscal year 2018 compared fiscal year 2017 personal systems net revenue increased 130 increased 105 constant currency basis fiscal year 2018 compared prioryear period net revenue increase primarily due growth notebooks desktops favorable foreign currency impacts net revenue increase driven 66 60 increase unit volume average selling prices “asps” respectively compared prioryear period increase unit volume primarily due growth notebooks desktops increase asps primarily due higher pricing driven increased commodity logistics costs favorable foreign currency impacts positive mix shifts consumer commercial revenue increased 11 14 respectively fiscal year 2018 compared prioryear period driven growth notebooks desktops workstations result higher unit volume combined higher asps net revenue increased 14 notebooks 12 desktops 10 workstations fiscal year 2018 personal systems earnings operations percentage net revenue increased 01 percentage points fiscal year 2018 increase primarily due higher asps partially offset increase commodity logistics costs fiscal year 2017 compared fiscal year 2016 personal systems net revenue increased 113 increased 122 constant currency basis fiscal year 2017 net revenue increase primarily due growth notebooks desktops workstations partially offset unfavorable foreign currency impacts net revenue increase driven 67 43 increase unit volume asps respectively compared fiscal year 2016 increase unit volume primarily due growth notebooks workstations increase asps primarily due favorable pricing partially offset unfavorable foreign currency impacts consumer revenue increased 16 fiscal year 2017 driven growth notebooks desktops result higher unit volume combined higher asps commercial revenue increased 9 fiscal year 2017 driven growth notebooks workstations net revenue increased 16 notebooks 9 workstations 3 desktops fiscal year 2017 personal systems earnings operations percentage net revenue decreased 02 percentage points fiscal year 2017 decrease primarily due decline gross margin partially offset decrease operating expenses decrease gross margin primarily due increase commodity cost unfavorable foreign currency impacts hp inc subsidiaries management’s discussion analysis financial condition results operations continued partially offset higher asps operating expenses percentage net revenue decreased primarily due operating expense management printing components net revenue weighted net revenue change business unit follows fiscal year 2018 compared fiscal year 2017 printing net revenue increased 111 increased 95 constant currency basis fiscal year 2018 increase net revenue primarily driven increase supplies hardware revenue favorable foreign currency impacts net revenue supplies increased 84 compared prioryear period including acquisition samsung’s printer business printer unit volume increased 127 asps increased 16 compared prioryear period increase printer unit volume primarily driven unit increases commercial consumer hardware including samsungbranded printers printer asps increased primarily due favorable foreign currency impacts partially offset dilution impact samsungbranded lowend a4 products net revenue commercial hardware increased 233 compared prioryear period including revenue samsung branded printers laserjet pagewide printers unit volume increased 845 asps decreased 342 unit volume increased primarily due samsungbranded printers decrease asps primarily due dilution impact samsungbranded lowend a4 products net revenue consumer hardware increased 60 compared prioryear period due 38 increase printer unit volume 24 increase asps unit volume increase driven inkjet laserjet home business increase asps primarily due favorable foreign currency impacts printing earnings operations percentage net revenue decreased 08 percentage points fiscal year 2018 compared prioryear period primarily due increase operating expenses lower gross margin hp inc subsidiaries management’s discussion analysis financial condition results operations continued gross margin decreased primarily due lower supplies mix dilution impact samsungbranded lowend products partially offset favorable foreign currency impacts operational improvements operating expenses increased primarily driven acquisition samsung’s printer business increases investments key growth initiatives gotomarket fiscal year 2017 compared fiscal year 2016 printing net revenue increased 33 increased 39 constant currency basis fiscal year 2017 increase net revenue primarily driven increase supplies revenue net revenue supplies increased 45 compared prioryear period primarily due change supplies sales model prioryear period better discount management partially offset unfavorable foreign currency impacts printer unit volume increased 34 asps decreased 09 compared prioryear period increase printer unit volume primarily driven unit increases consumer hardware larger opportunity place incremental units positive net present value printer asps decreased primarily due unfavorable foreign currency impacts net revenue commercial hardware flat compared prioryear period driven decline printing solutions largely due divestiture marketing optimization assets prioryear period offset revenue managed print services 3d printing fiscal year 2017 asps decreased 01 unit volume increased 20 unit volume increased primarily due larger opportunity place incremental units positive net present value decrease asps primarily due unfavorable foreign currency impacts partially offset mix shift higherend printers net revenue consumer hardware increased 26 compared prioryear period due 35 increase printer unit volume partially offset 04 decrease asps unit volume increase driven home business decrease asps primarily due unfavorable foreign currency impacts partially offset better discount management printing earnings operations percentage net revenue decreased 04 percentage points fiscal year 2017 compared prioryear period primarily due increase operating expenses partially offset improved gross margin gross margin increased due operational improvements partially offset unfavorable foreign currency impacts operating expenses increased primarily due gain divestiture marketing optimization assets prioryear period increase marketing investments corporate investments loss operations corporate investments fiscal years 2018 2017 2016 primarily due expenses associated hp labs incubation projects liquidity capital resources use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support operating businesses capital expenditures acquisitions restructuring activities maturing debt income tax payments payment stockholder dividends addition investments share repurchases able supplement shortterm liquidity necessary broad access capital markets credit facilities made available various domestic foreign financial institutions access capital markets may constrained cost borrowing may increase certain business market economic conditions access variety funding sources meet liquidity needs designed facilitate continued access capital resources conditions liquidity subject various risks including risks identified section entitled “risk factors” item 1a market risks identified section entitled “quantitative qualitative disclosures market risk” item 7a incorporated herein reference cash balances held numerous locations throughout world majority amounts held outside united states utilize variety planning financing strategies effort ensure worldwide cash available needed cash position remains strong expect cash balances anticipated cash flow generated operations access capital markets sufficient cover expected nearterm cash outlays november 1 2018 made cash payment 422 million connection acquisition apogee group uk based office equipment dealer “oed” provider print outsourced services document process technology cash payment subject customary closing adjustments would finalized future periods amounts held outside united states generally utilized support nonus liquidity needs may time distributed united states tcja made significant changes us tax law including onetime transition tax accumulated foreign earnings payments associated onetime transition tax paid eight years beginning 2019 expect significant portion cash equivalents held foreign subsidiaries longer subject us income tax consequences upon subsequent repatriation united states result hp inc subsidiaries management’s discussion analysis financial condition results operations continued transition tax accumulated foreign earnings however portion cash may still subject foreign income tax withholding tax consequences upon repatriation evaluate impact tcja future cash needs operations may revise amount foreign earnings considered permanently reinvested foreign subsidiaries utilize funds including reducing gross debt level uses liquidity cash equivalents marketable debt securities total debt follows 1 includes highly liquid us treasury notes us agency securities nonus government bonds corporate debt securities money market funds classify investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations key cash flow metrics follows operating activities net cash provided operating activities increased 09 billion fiscal year 2018 compared fiscal year 2017 increase primarily due higher earnings operations cash generated working capital management activities net cash provided operating activities increased 04 billion fiscal year 2017 compared fiscal year 2016 increase primarily due higher cash generated working capital management activities working capital metrics management utilizes current cash conversion cycle information manage working capital level table presents cash conversion cycle cash conversion cycle sum days dso dos less dpo items may cause cash conversion cycle particular period differ longterm sustainable rate include limited changes business mix changes payment terms extent receivables factoring seasonal trends timing revenue recognition inventory purchases within period dso measures average number days receivables outstanding dso calculated dividing ending accounts receivable net allowance doubtful accounts 90day average net revenue fiscal year 2018 hp inc subsidiaries management’s discussion analysis financial condition results operations continued increase dso compared fiscal year 2017 primarily due unfavorable revenue linearity fiscal year 2017 decrease dso compared fiscal year 2016 primarily due strong collections dos measures average number days procurement sale product dos calculated dividing ending inventory 90day average cost goods sold fiscal year 2018 dos lower primarily due focus inventory management fiscal year 2017 dos higher primarily due leveraging balance sheet particularly higher strategic buys sea shipments better assure supply commodities short supply dpo measures average number days accounts payable balances outstanding dpo calculated dividing ending accounts payable 90day average cost goods sold fiscal year 2018 dpo remained flat compared fiscal year 2017 fiscal year 2017 dpo higher primarily due increased inventory purchases extension payment terms product suppliers investing activities net cash used investing activities decreased 10 billion fiscal year 2018 compared fiscal year 2017 primarily due decrease investments classified availableforsale investments within current assets 16 billion collateral related derivatives 04 billion partially offset payment 10 billion acquisition samsung’s printer business net cash used investing activities increased 18 billion fiscal year 2017 compared fiscal year 2016 primarily due net investment activity 11 billion classified availableforsale investments within current assets collateral 02 billion related derivatives proceeds business divestiture 05 billion fiscal year 2016 financing activities net cash used financing activities increased 44 billion fiscal year 2018 compared fiscal year 2017 primarily due payment repurchase approximately 185 billion debt higher share repurchase amount 11 billion higher outstanding commercial paper 09 billion fiscal year 2017 net cash used financing activities decreased 132 billion fiscal year 2017 compared fiscal year 2016 net cash used financing activities fiscal year 2016 included cash transfer 104 billion hewlett packard enterprise connection separation redemption 21 billion us dollar global notes fiscal year 2017 included higher outstanding commercial paper 09 billion capital resources debt levels maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities cost capital targeted capital structure shortterm debt increased 04 billion longterm debt decreased 22 billion fiscal year 2018 compared fiscal year 2017 net decrease total debt primarily due payment repurchase approximately 185 billion aggregate principal amount us dollar global notes shortterm debt increased 10 billion fiscal year 2017 compared fiscal year 2016 net increase total debt primarily due higher outstanding commercial paper 09 billion debttoequity ratio calculated carrying amount debt divided total stockholders’ deficit debttoequity ratio changed 707x fiscal year 2018 compared fiscal year 2017 primarily due decrease stockholders’ deficit balance 28 billion debttoequity ratio changed 054x fiscal year 2017 compared fiscal year 2016 due increase total debt balances 10 billion hp inc subsidiaries management’s discussion analysis financial condition results operations continued weightedaverage interest rate reflects effective interest rate borrowings prevailing period reflects effect interest rate swaps information interest rate swaps see note 10 “financial instruments” consolidated financial statements notes thereto item 8 “financial statements supplementary data” available borrowing resources following resources available obtain short longterm financing october 31 2018 maintain senior unsecured committed revolving credit facility aggregate lending commitments 40 billion available march 30 2023 primarily support issuance commercial paper funds borrowed revolving credit facility may also used general corporate purposes october 31 2018 09 billion commercial paper outstanding increased issuance authorization commercial paper program 40 billion 60 billion november 2017 december 2017 also entered additional revolving credit facility certain institutional lenders provided us 15 billion available borrowings november 30 2018 elected terminate 15 billion revolving credit facility early effective august 17 2018 information borrowings see note 11 “borrowings” consolidated financial statements item 8 incorporated herein reference credit ratings credit risk evaluated major independent rating agencies based publicly available information well information obtained ongoing discussions rating downgrade triggers would accelerate maturity material amount debt previous downgrades increased cost borrowing credit facilities reduced market capacity commercial paper required posting additional collateral derivative contracts addition downgrade credit ratings rating agencies may impact us similar manner depending extent downgrade could negative impact liquidity capital position access alternative sources funding including drawdowns credit facilities necessary offset potential reductions market capacity commercial paper hp inc subsidiaries management’s discussion analysis financial condition results operations continued contractual obligations contractual obligations october 31 2018 follows 1 amounts represent principal cash payments relating shortterm longterm debt include fair value adjustments discounts premiums 2 amounts represent expected interest payments relating shortterm longterm debt outstanding interest rate swap agreements accounted fair value hedges economic effect changing fixed interest rates associated us dollar global notes variable interest rates impact outstanding interest rate swaps october 31 2018 factored calculation future interest payments debt 3 purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations related principally inventory items purchase obligations exclude agreements cancelable without penalty purchase obligations also exclude open purchase orders routine arrangements entered ordinary course business difficult quantify meaningful way even though open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust terms based business needs prior delivery goods performance services 4 amounts represent operating lease obligations net total sublease income 129 million 5 amounts represent capital lease obligations including total capital lease interest obligations 58 million 6 retirement postretirement benefit plan contributions fiscal year 2019 anticipate making contributions approximately 46 million nonus pension plans 32 million cover benefit payments us nonqualified pension plan participants 6 million cover benefit claims postretirement benefit plans policy fund pension plans meet least minimum contribution requirements established local government funding taxing authorities expected contributions payments pension postretirement benefit plans excluded contractual obligations table represent contractual cash outflows dependent numerous factors may result wide range outcomes information retirement postretirement benefit plans see note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference 7 cost savings plans expect make future cash payments approximately 286 million connection cost savings plans fiscal year 2019 payments excluded contractual obligations table represent contractual cash outflows uncertainty timing payments information restructuring activities part cost improvements see note 3 “restructuring charges” consolidated financial statements item 8 incorporated herein reference 8 uncertain tax positions october 31 2018 approximately 13 billion recorded liabilities related interest penalties pertaining uncertain tax positions unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters payments obligations would result settlements taxing authorities information uncertain tax positions see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference 9 payment onetime transition taxes tcja made significant changes us tax law resulting onetime deemed repatriation transition tax accumulated foreign earnings approximately 33 billion expect hp inc subsidiaries management’s discussion analysis financial condition results operations continued actual cash payments tax much lower expect reduce overall liability half tax credits balance sheet tax attributes used offbalance sheet arrangements part ongoing business participated transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers information thirdparty shortterm financing arrangements see note 7 “supplementary financial information” consolidated financial statements item 8 incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” organized follows • overview discussion business highlights affecting company provide context remainder mda • critical accounting policies estimates discussion accounting policies estimates believe important understanding assumptions judgments incorporated reported financial results • results operations analysis financial results comparing fiscal year 2019 fiscal year 2018 fiscal year 2018 fiscal year 2017 discussion results operations followed detailed discussion results operations segment • liquidity capital resources analysis changes cash flows discussion liquidity financial condition • contractual obligations overview contractual obligations retirement postretirement benefit plan contributions costsaving plans uncertain tax positions offbalance sheet arrangements discussion financial condition results operations follows provides information assist reader understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document hp inc subsidiaries management’s discussion analysis financial condition results operations continued overview leading global provider personal computing access devices imaging printing products related technologies solutions services sell individual consumers smbs large enterprises including customers government health education sectors three reportable segments personal systems printing corporate investments personal systems segment offers commercial consumer desktop notebook pcs workstations thin clients commercial mobility devices retail pos systems displays related accessories software support services printing segment provides consumer commercial printer hardware supplies solutions services well scanning devices corporate investments include hp labs certain business incubation investment projects • personal systems strategic focus profitable growth market segmentation respect enhanced innovation multioperating systems multiarchitecture geography customer segments key attributes additionally investing end point services solutions focused services including daas market begins shift contractual solutions believe well positioned due competitive product lineup • printing strategic focus contractual solutions graphics well expanding footprint 3d printing digital manufacturing marketplace contractual solutions continued focus managed print services instant ink graphics focused innovations indigo latex product offerings continue experience challenges representative trends uncertainties may affect business results operations one set challenges relates dynamic market trends forecasted declining pc client markets home printing markets second set challenges relates changes competitive landscape primary competitors exerting competitive pressure targeted areas entering new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model changes gotomarket execution evolving distribution reseller landscape increasing online omnichannel presence additional challenges face segment level set forth • personal systems face challenges industry component availability competitive pricing environment • printing competitive pricing environment including nonoriginal supplies includes imitation refill remanufactured alternatives weakened market certain geographies associated pricing sensitivity customers present challenges also face challenges printing due multitier distribution network primarily emea including limiting grey marketing potential misuse pricing programs also obtain many printing components single sources due technology availability price quality considerations instance source majority a4 portion a3 portfolio laser printer engines laser toner cartridges canon decision either party renew agreement canon limit reduce scope agreement could adversely affect net revenue laserjet products however longstanding business relationship canon anticipate renewal agreement business financial performance also depend significantly worldwide economic conditions accordingly face global macroeconomic challenges tariffdriven headwinds uncertainty markets volatility exchange rates weaker macroeconomic conditions evolving dynamics global trade environment full impact global macroeconomic challenges business cannot known time address challenges continue pursue innovation view towards developing new products services aligned generating market demand meeting needs customers partners addition continue work improving operations adapting business models particular focus enhancing endtoend processes analytics efficiencies also continue work optimizing sales coverage models aligning sales incentives strategic goals improving channel execution inventory management strengthening capabilities areas strategic focus strengthening pricing discipline developing capitalizing market opportunities specifically october 2019 announced costreduction operational efficiency initiatives intended simplify way work move closer customers facilitate specific investment business efforts include transforming operating model integrate sales force single commercial organization reducing structural costs across company restructuring plan approved september 2019 “fiscal 2020 plan” expect invest savings efforts across businesses including investing build digital capabilities time expect investments make us efficient allow us advance positions personal systems printing also disrupting new industries see attractive medium longterm growth opportunities however rate able invest business returns able achieve investments hp inc subsidiaries management’s discussion analysis financial condition results operations continued affected many factors including efforts address execution industry macroeconomic challenges facing business discussed result may experience delays anticipated timing activities related efforts anticipated benefits efforts may materialize typically experience higher net revenues fourth quarter compared quarters fiscal year due part seasonal holiday demand historical seasonal patterns considered reliable indicators future net revenues financial performance discussion trends uncertainties factors could impact operating results see section entitled “risk factors” item 1a annual report form 10k critical accounting policies estimates general consolidated financial statements hp prepared accordance united states “us” generally accepted accounting principles “gaap” require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities readily apparent sources management discussed development selection disclosure estimates audit committee hp’s board directors management believes accounting estimates employed resulting amounts reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows summary significant accounting policies included note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue depicting transfer promised goods services customers amount reflects consideration expected entitled exchange goods services evaluate customers’ ability pay based various factors like historical payment experience financial metrics customer credit scores enter contracts sell products services many sales contracts contain standard terms conditions contracts contain nonstandard terms conditions many arrangements include multiple performance obligations result significant contract interpretation may required determine appropriate accounting including identification performance obligations distinct allocation transaction price among performance obligations arrangement timing transfer control promised goods services performance obligations evaluate performance obligation arrangement determine whether represents distinct good services performance obligation constitutes distinct goods services customer benefit goods services either together resources readily available customer performance obligation distinct within context contract transaction price amount consideration expect entitled exchange transferring goods services customer transaction price includes variable amount estimate amount using either expected value likely amount method reduce transaction price time revenue recognition customer distributor programs incentive offerings rebates promotions volumebased incentives expected returns use estimates determine expected variable consideration programs based historical experience expected consumer behavior market conditions sales arrangement contains multiple performance obligations hardware andor services allocate revenue performance obligation proportion selling price selling price performance obligation based standalone selling price “ssp” establish ssp using price charged performance obligation sold hp inc subsidiaries management’s discussion analysis financial condition results operations continued separately “observable price” instances using price established management relevant authority observable price available establish ssp based management’s judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product lifecycle consideration also given market conditions competitor pricing strategies technology industry life cycles may modify develop new gotomarket practices future may result changes selling prices impacting standalone selling price determination applying aforementioned management judgments estimates may change pattern timing revenue recognition identical arrangements executed future periods change total revenue recognized given arrangement arrangements multiple performance obligations transaction price allocated performance obligation inception arrangement based relative selling price revenue recognized performance obligation satisfied transferring control promised good service customer generally invoice customer upon delivery goods services payments due per contract terms fixed price support maintenance service contracts nature standready obligations payments generally received advance customers revenue recognized straightline basis duration contract instances revenue derived sales thirdparty vendor products services record revenue gross basis principal transaction net basis acting agent customer vendor consider several factors determine whether acting principal agent notably whether primary obligor customer established pricing inventory credit risks warranty accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor onsite services depending upon product last three fiscal years annual warranty expense actual warranty costs averaged approximately 18 annual net revenue restructuring charges engaged restructuring actions require management estimate timing amount severance employee separation costs workforce reduction enhanced early retirement programs fair value assets made redundant obsolete fair value lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs distinct ongoing operational costs incurred connection separation information technology rationalization efforts full description restructuring actions refer discussions restructuring “results operations” note 3 “restructuring charges” consolidated financial statements item 8 incorporated herein reference retirement postretirement benefits pension postretirement benefit costs obligations depend various assumptions major assumptions relate primarily discount rates mortality rates expected increases compensation levels expected longterm return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period mortality rates help predict expected life plan participants based historical demographic study plan expected increase compensation levels assumption reflects longterm actual experience future expectations expected longterm return plan assets determined based asset allocations historical portfolio results historical asset correlations management’s expected returns asset class evaluate expected return assumptions annually including reviewing current capital market assumptions assess reasonableness expected longterm return plan assets update expected longterm return assets observe sufficient level evidence would suggest longterm expected return changed fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm performance relative expected longterm performance lesser extent differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures hp inc subsidiaries management’s discussion analysis financial condition results operations continued recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year unless updated result interim remeasurement major assumptions vary plan weightedaverage rates used set forth note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference following table provides impact change 25 basis points weightedaverage assumptions discount rate expected increase compensation levels expected longterm return plan assets would net periodic benefit cost fiscal year 2019 taxes earnings tax cuts jobs act “tcja” made significant changes us tax law tcja lowered us statutory federal income tax rate 35 21 effective january 1 2018 also imposing onetime transition tax accumulated foreign earnings december 2017 sec staff issued sab 118 allows registrants record provisional amounts one year “measurement period” january 2019 completed accounting tax effects tcja material changes provisional amounts recorded measurement period january 2018 fasb released guidance accounting tax global minimum tax provisions tcja global minimum tax provisions impose tax foreign income excess deemed return tangible assets foreign corporations elected treat global minimum tax inclusions period costs result certain employment actions capital investments undertaken income manufacturing activities certain jurisdictions subject reduced tax rates cases wholly exempt taxes fiscal years 2027 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact future earnings repatriated united states related future effective tax rate effects tcja related policies referenced discussed detail note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize determining need valuation allowance consider future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income jurisdictions deferred tax assets located subject income taxes united states approximately 58 countries subject routine corporate income tax audits many jurisdictions believe positions taken tax returns fully supported tax authorities may challenge positions may fully sustained examination relevant tax authorities accordingly income tax provision includes amounts intended satisfy assessments may result challenges determining income tax provision potential assessments recording related effects hp inc subsidiaries management’s discussion analysis financial condition results operations continued requires management judgments estimates amounts ultimately paid resolution audit could materially different amounts previously included income tax provision therefore could material impact income tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment domestic operations including allocation income among different jurisdictions intercompany transactions pension related interest discussion taxes earnings refer note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference inventory state inventory lower cost market firstin firstout basis make adjustments reduce cost inventory net realizable value product group level estimated excess obsolescence factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues business combinations allocate fair value purchase consideration assets acquired liabilities assumed noncontrolling interests acquiree generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquiree recorded goodwill may involve engaging independent thirdparties perform appraisal determining fair values assets acquired liabilities assumed noncontrolling interests acquiree management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill review goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable elect perform qualitative assessment test reporting unit’s goodwill impairment perform quantitative impairment test based qualitative assessment determine fair value reporting unit likely ie likelihood 50 percent less carrying amount quantitative impairment test performed quantitative impairment test compare fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach estimate fair value reporting unit based present value estimated future cash flows base cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions base discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weight fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available estimate fair value reporting unit using income approach fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired fair value reporting unit less carrying amount goodwill impaired excess reporting unit’s carrying value fair value recognized impairment loss annual goodwill impairment analysis performed using qualitative assessment option first day fourth quarter fiscal year 2019 resulted conclusion likely fair value reporting units exceeded respective carrying values result concluded quantitative impairment test necessary fair value derivative instruments use derivative instruments manage variety risks including risks related foreign currency exchange rates interest rates existing assets liabilities use forwards swaps times options hedge certain foreign currency interest rate return certain investments exposures use derivative instruments speculative purposes october 31 2019 gross notional value derivative portfolio 24 billion assets liabilities related derivative instruments measured fair value 392 million 166 million respectively october 31 2019 hp inc subsidiaries management’s discussion analysis financial condition results operations continued fair value price would receive sell asset pay transfer liability orderly transaction market participants measurement date absence active markets identical assets liabilities measurements involve developing assumptions based market observable data absence data internal information consistent market participants would use hypothetical transaction occurs measurement date determination fair value often involves significant judgments assumptions determining appropriate discount rate factors risk liquidity premiums identifying similarities differences market transactions weighting differences accordingly making appropriate adjustments market transactions reflect risks specific asset liability valued generally use industry standard valuation models measure fair value derivative positions prices active markets available identical asset liability use industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign currency exchange rates forward spot prices discussion fair value measurements derivative instruments refer note 9 “fair value” note 10 “financial instruments” respectively consolidated financial statements item 8 incorporated herein reference loss contingencies involved various lawsuits claims investigations proceedings including consisting intellectual property “ip” commercial securities employment employee benefits environmental matters arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information events pertaining particular case pursuant separation distribution agreement share responsibility hewlett packard enterprise certain matters discussed note 14 “litigation contingencies” consolidated financial statements item 8 incorporated herein reference hewlett packard enterprise agreed indemnify us whole part respect certain matters based experience believe damage amounts claimed specific litigation contingencies matters discussed note 14 “litigation contingencies” meaningful indicator hp’s potential liability litigation inherently unpredictable however believe valid defenses respect legal matters pending us nevertheless cash flows results operations could materially affected particular period resolution one contingencies believe recorded adequate provisions matters october 31 2019 reasonably possible material loss incurred excess amounts recognized financial statements recent accounting pronouncements summary recent accounting pronouncements applicable consolidated financial statements see note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference results operations revenue international operations historically represented expect continue represent majority overall net revenue result net revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing performance excluding impact foreign currency fluctuations supplement yearoveryear percentage change net revenue yearoveryear percentage change net revenue constant currency basis excludes effect foreign currency exchange fluctuations calculated translating current period revenues using monthly average exchange rates comparative period hedging activities prioryear period adjust repricing demand impacts changes foreign currency exchange rates information provided net revenue viewed without effect fluctuations foreign currency exchange rates consistent management evaluates net revenue results trends management believe excluded items reflective ongoing operating results constant currency measures provided addition substitute yearoveryear percentage change net revenue gaap basis companies may calculate define similarly labeled items differently may limit usefulness measure comparative purposes hp inc subsidiaries management’s discussion analysis financial condition results operations continued results operations dollars percentage net revenue follows net revenue fiscal year 2019 total net revenue increased 05 increased 20 constant currency basis compared prioryear period net revenue united states remained flat 206 billion net revenue outside united states increased 07 382 billion increase net revenue primarily driven growth notebooks desktops workstations personal systems partially offset unfavorable foreign currency impacts decline printing supplies fiscal year 2018 total net revenue increased 123 increased 101 constant currency basis compared prioryear period net revenue united states increased 66 206 billion net revenue outside united states increased 157 379 billion increase net revenue primarily driven growth notebooks desktops supplies commercial printing hardware revenue favorable foreign currency impacts detailed discussion factors contributing changes segment net revenue included “segment information” gross margin gross margin 190 fiscal year 2019 compared 182 fiscal year 2018 increase primarily due higher rate personal systems driven lower supply chain costs gross margin 182 fiscal year 2018 compared 184 fiscal year 2017 decrease primarily due higher commercial hardware unit placements printing increase commodity logistics costs personal systems partially offset higher pricing personal systems favorable foreign currency impacts detailed discussion factors contributing changes segment gross margins included “segment information” operating expenses research development “rd” rd expense increased 7 fiscal year 2019 compared prioryear period primarily due continuing investments innovation key growth initiatives rd expense increased 18 fiscal year 2018 compared prioryear period primarily due continuing investment printing including acquisition samsung’s printer business selling general administrative “sga” hp inc subsidiaries management’s discussion analysis financial condition results operations continued sga expense increased 5 fiscal year 2019 compared prioryear period primarily driven increased investments key growth initiatives gotomarket personal systems investment digital infrastructure sga expense increased 13 fiscal year 2018 compared prioryear period primarily driven incremental gotomarket investments support revenue growth including acquisition samsung’s printer business restructuring charges restructuring charges increased 143 million fiscal year 2019 compared prioryear period primarily due charges fiscal 2020 plan restructuring plan approved october 2016 “fiscal 2017 plan” later amended may 2018 restructuring charges decreased 230 million fiscal year 2018 compared prioryear period primarily due lower charges fiscal 2017 plan acquisitionrelated charges acquisitionrelated charges fiscal years 2019 2018 2017 relate primarily thirdparty professional legal fees integrationrelated costs well fair value adjustments certain acquired assets inventory amortization intangible assets amortization expense increased 36 million fiscal year 2019 compared prioryear period due intangible assets resulting primarily acquisition apogee group amortization expense increased 79 million fiscal year 2018 compared prioryear period due intangible assets resulting primarily acquisition samsung’s printer business interest net interest net expense increased 536 million fiscal year 2019 compared prioryear period primarily due tax indemnifications related termination tax matters agreement “tma” hewlett packard enterprise fourth quarter fiscal year 2019 interest net expense increased 726 million fiscal year 2018 compared prioryear period primarily due reversal indemnification receivables hewlett packard enterprise pertaining various income tax audit settlements loss extinguishment debt benefit provision taxes effective tax rates 249 768 229 fiscal years 2019 2018 2017 respectively fiscal year 2019 effective tax rate generally differs us federal statutory rate 21 primarily due resolution various audits changes valuation allowances impacts us tax reform fiscal year 2018 effective tax rate generally differs us federal statutory rate 233 primarily due transitional impacts us tax reform resolution various audits tax litigation fiscal year 2017 effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings lowertax jurisdictions throughout world jurisdictions favorable tax rates significant impact effective tax rate periods presented puerto rico singapore china malaysia ireland additionally overall effective tax rate fiscal year 2017 impacted adjustments valuation allowances state income taxes reconciliation effective tax rate us federal statutory rate 21 233 35 fiscal years 2019 2018 2017 respectively explanation provision income taxes see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference fiscal year 2019 recorded 13 billion net income tax benefit related discrete items provision taxes amount includes tax benefits related audit settlements 10 billion 75 million due ability utilize tax attributes 57 million restructuring benefits net valuation allowance releases 94 million also recorded benefits 78 million related us tax reform result new guidance issued us internal revenue service “irs” benefits partially offset uncertain tax position charges 51 million fiscal year 2019 addition discrete items mentioned recorded excess tax benefits 20 million associated stock options restricted stock units performanceadjusted restricted stock units fiscal year 2018 recorded 28 billion net income tax benefit related discrete items provision taxes include impacts tcja discussed note 6 “taxes earnings” consolidated financial statements item 8 report yet completed analysis full impact tcja however october 31 2018 recorded provisional tax benefit 760 million related 56 billion net benefit decrease deferred tax liability unremitted foreign earnings partially offset 33 billion net expense deemed repatriation tax payable installments eight years 12 billion net expense remeasurement deferred assets liabilities new us statutory tax rate 317 million net expense related realization us deferred taxes expected hp inc subsidiaries management’s discussion analysis financial condition results operations continued realized lower rate fiscal year 2018 also included tax benefits related audit settlements 15 billion valuation allowance releases 601 million pertaining change ability utilize certain foreign us deferred tax assets due change geographic earnings mix benefits partially offset net tax charges 34 million fiscal year 2018 addition discrete items mentioned recorded excess tax benefits 42 million associated stock options restricted stock units performanceadjusted restricted stock units fiscal year 2017 recorded 72 million net income tax benefit related discrete items provision taxes amounts primarily include tax benefits 84 million related restructuring charges 12 million related us federal provision return adjustments 45 million related samsung acquisitionrelated charges 13 million net tax benefits addition recorded tax charges 11 million related changes state valuation allowances 22 million state provision return adjustments 49 million related uncertain tax positions segment information description products services segment found note 2 “segment information” consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes segments disclosed realignment effective beginning first quarter fiscal year 2019 implemented organizational change align business unit financial reporting closely current business structure organizational change resulted transfer certain samsungbranded product categories commercial consumer within printing segment reflected change business unit information prior reporting periods asif basis reporting change impact previously reported segment net revenue consolidated net revenue earnings operations net earnings net earnings per share “eps” personal systems components net revenue weighted net revenue change business unit follows 1 weighted net revenue change percentage points measures contribution business unit towards overall segment revenue growth calculated dividing change revenue business unit prioryear period total segment revenue prioryear period fiscal year 2019 compared fiscal year 2018 personal systems net revenue increased 27 increased 49 constant currency basis fiscal year 2019 compared prioryear period net revenue increase primarily due growth notebooks desktops workstations partially offset unfavorable foreign currency impacts net revenue increase driven 22 increase unit volume 05 increase average selling prices “asps” compared prioryear period increase unit volume primarily due growth notebooks desktops increase asps primarily due positive mix shifts higher pricing partially offset unfavorable foreign currency impacts commercial revenue increased 70 primarily hp inc subsidiaries management’s discussion analysis financial condition results operations continued driven higher unit volume partially offset unfavorable foreign currency impacts consumer revenue decreased 55 primarily driven lower unit volume respectively fiscal year 2019 compared prioryear period net revenue increased 17 notebooks 41 desktops 64 workstations fiscal year 2019 compared prioryear period personal systems earnings operations percentage net revenue increased 12 percentage points fiscal year 2019 compared prioryear period primarily due increase gross margin partially offset increase operating expenses increase gross margin primarily due lower supply chain costs higher asps increase operating expenses primarily due increased investments key growth initiatives gotomarket fiscal year 2018 compared fiscal year 2017 personal systems net revenue increased 130 increased 105 constant currency basis fiscal year 2018 compared prioryear period net revenue increase primarily due growth notebooks desktops favorable foreign currency impacts net revenue increase driven 66 increase unit volume 60 increase asps compared prioryear period increase unit volume primarily due growth notebooks desktops increase asps primarily due higher pricing driven increased commodity logistics costs favorable foreign currency impacts positive mix shifts consumer commercial revenue increased 11 14 respectively fiscal year 2018 compared prioryear period driven growth notebooks desktops workstations result higher unit volume combined higher asps net revenue increased 14 notebooks 12 desktops 10 workstations fiscal year 2018 compared prioryear period personal systems earnings operations percentage net revenue increased 01 percentage points fiscal year 2018 compared prioryear period increase primarily due higher asps partially offset increase commodity logistics costs printing components net revenue weighted net revenue change business unit follows 1 weighted net revenue change percentage points measures contribution business unit towards overall segment revenue growth calculated dividing change revenue business unit prior period total segment revenue prioryear period fiscal year 2019 compared fiscal year 2018 printing net revenue decreased 36 decreased 30 constant currency basis fiscal year 2019 compared prioryear period decline net revenue primarily driven decline supplies consumer hardware revenue unfavorable foreign currency impacts partially offset increase commercial hardware revenue net revenue supplies decreased 48 compared prioryear period primarily due demand weakness printer unit volume hp inc subsidiaries management’s discussion analysis financial condition results operations continued decreased 48 compared prioryear period decrease printer unit volume driven unit decrease consumer hardware net revenue commercial hardware increased 22 compared prioryear period primarily due acquisition apogee group net revenue consumer hardware decreased 67 compared prioryear period due 54 decrease printer unit volume 17 decrease asps unit volume decrease driven inkjet home consumer business laserjet home business decrease asps primarily due unfavorable foreign currency impacts printing earnings operations percentage net revenue increased 01 percentage points fiscal year 2019 compared prioryear period primarily due higher gross margin gross margin increased primarily due rate improvement commercial hardware partially offset lower supplies revenue fiscal year 2018 compared fiscal year 2017 printing net revenue increased 111 increased 95 constant currency basis fiscal year 2018 compared prioryear period increase net revenue primarily driven increase supplies hardware revenue favorable foreign currency impacts net revenue supplies increased 84 compared prioryear period including acquisition samsung’s printer business printer unit volume increased 127 asps increased 17 compared prioryear period increase printer unit volume primarily driven unit increases commercial consumer hardware including samsungbranded printers printer asps increased primarily due favorable foreign currency impacts partially offset dilution impact samsungbranded lowend a4 products net revenue commercial hardware increased 190 compared prioryear period including revenue samsungbranded printers laserjet pagewide printers unit volume increased 396 asps decreased 170 unit volume increased primarily due samsungbranded printers decrease asps primarily due dilution impact samsungbranded lowend a4 products net revenue consumer hardware increased 126 compared prioryear period due 93 increase printer unit volume 34 increase asps unit volume increase driven samsungbranded printers inkjet laserjet home business increase asps primarily due favorable foreign currency impacts printing earnings operations percentage net revenue decreased 09 percentage points fiscal year 2018 compared prioryear period primarily due increase operating expenses lower gross margin gross margin decreased primarily due lower supplies mix dilution impact samsungbranded lowend products partially offset favorable foreign currency impacts operational improvements operating expenses increased primarily driven acquisition samsung’s printer business increases investments key growth initiatives gotomarket corporate investments loss operations corporate investments fiscal years 2019 2018 2017 primarily due expenses associated hp labs incubation investment projects liquidity capital resources use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support operating businesses capital expenditures acquisitions restructuring activities maturing debt income tax payments payment stockholder dividends addition investments share repurchases able supplement shortterm liquidity necessary broad access capital markets credit facilities made available various domestic foreign financial institutions access capital markets may constrained cost borrowing may increase certain business market economic conditions access variety funding sources meet liquidity needs designed facilitate continued access capital resources conditions liquidity subject various risks including risks identified section entitled “risk factors” item 1a market risks identified section entitled “quantitative qualitative disclosures market risk” item 7a incorporated herein reference cash equivalents balances held numerous locations throughout world majority amounts held outside united states utilize variety planning financing strategies effort ensure worldwide cash available needed cash position remains strong expect cash balances anticipated cash flow generated operations access capital markets sufficient cover expected nearterm cash outlays amounts held outside united states generally utilized support nonus liquidity needs may time distributed united states tcja made significant changes us tax law including onetime transition tax accumulated foreign earnings payments associated onetime transition tax paid eight years began fiscal year 2019 expect significant portion cash equivalents held foreign subsidiaries hp inc subsidiaries management’s discussion analysis financial condition results operations continued longer subject us income tax consequences upon subsequent repatriation united states result transition tax accumulated foreign earnings however portion cash may still subject foreign income tax withholding tax consequences upon repatriation evaluate future cash needs operations may revise amount foreign earnings considered permanently reinvested foreign subsidiaries utilize funds including reducing gross debt level uses liquidity cash equivalents marketable debt securities total debt follows 1 includes highly liquid us treasury notes us agency securities nonus government bonds corporate debt securities money market funds classify investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations key cash flow metrics follows operating activities net cash provided operating activities increased marginally 01 billion fiscal year 2019 compared fiscal year 2018 net cash provided operating activities increased 09 billion fiscal year 2018 compared fiscal year 2017 increase primarily due higher earnings operations cash generated working capital management activities working capital metrics management utilizes current cash conversion cycle information manage working capital level table presents cash conversion cycle cash conversion cycle sum days dso dos less dpo items may cause cash conversion cycle particular period differ longterm sustainable rate include limited changes business mix changes payment terms extent receivables factoring seasonal trends timing revenue recognition inventory purchases within period dso measures average number days receivables outstanding dso calculated dividing ending accounts receivable net allowance doubtful accounts 90day average net revenue fiscal years 2019 hp inc subsidiaries management’s discussion analysis financial condition results operations continued 2018 increase dso compared fiscal years 2018 2017 respectively primarily due unfavorable revenue linearity dos measures average number days procurement sale product dos calculated dividing ending inventory 90day average cost goods sold fiscal year 2019 decrease dos compared fiscal year 2018 primarily due reduction inventory driven reclassification certain balances current assets pursuant adoption new revenue standard first quarter fiscal 2019 fiscal year 2018 dos lower primarily due focus inventory management dpo measures average number days accounts payable balances outstanding dpo calculated dividing ending accounts payable 90day average cost goods sold fiscal year 2019 increase dpo compared fiscal year 2018 higher primarily due working capital management activities partially offset lower inventory purchasing volume fiscal year 2018 dpo remained flat compared fiscal year 2017 investing activities net cash used investing activities decreased 03 billion fiscal year 2019 compared fiscal year 2018 primarily due lower net payments acquisitions net cash used investing activities decreased 10 billion fiscal year 2018 compared fiscal year 2017 primarily due decrease investments classified availableforsale investments within current assets 16 billion collateral related derivatives 04 billion partially offset payment 10 billion acquisition samsung’s printer business financing activities net cash used financing activities decreased 08 billion fiscal year 2019 compared fiscal year 2018 primarily due lower payment debt 15 billion partially offset decrease outstanding commercial paper amounts 07 billion net cash used financing activities increased 44 billion fiscal year 2018 compared fiscal year 2017 primarily due payment repurchase approximately 185 billion debt higher share repurchase amount 11 billion higher outstanding commercial paper 09 billion fiscal year 2017 capital resources debt levels maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities cost capital targeted capital structure shortterm debt decreased 11 billion fiscal year 2019 compared fiscal year 2018 primarily due decrease outstanding commercial paper amounts 09 billion longterm debt decreased 22 billion fiscal year 2018 compared fiscal year 2017 primarily due payment repurchase approximately 185 billion aggregate principal amount us dollar global notes debttoequity ratio calculated carrying amount debt divided total stockholders’ deficit debttoequity ratio changed 51x fiscal year 2019 compared fiscal year 2018 primarily due increase stockholders’ deficit balance 06 billion debttoequity ratio changed 71x fiscal year 2018 compared fiscal year 2017 primarily due decrease stockholders’ deficit balance 28 billion weightedaverage interest rate reflects effective interest rate borrowings prevailing period reflects effect interest rate swaps information interest rate swaps see note 10 “financial instruments” consolidated financial statements notes thereto item 8 “financial statements supplementary data” hp inc subsidiaries management’s discussion analysis financial condition results operations continued available borrowing resources following resources available obtain short longterm financing 2016 shelf registration statement expire december 2019 around time expect file new shelf registration statement october 31 2019 maintain senior unsecured committed revolving credit facility aggregate lending commitments 40 billion available march 30 2023 primarily support issuance commercial paper funds borrowed revolving credit facility may also used general corporate purposes information borrowings see note 11 “borrowings” consolidated financial statements item 8 incorporated herein reference credit ratings credit risk evaluated major independent rating agencies based upon publicly available information well information obtained ongoing discussions rating downgrade triggers would accelerate maturity material amount debt previous downgrades increased cost borrowing credit facility reduced market capacity commercial paper required posting additional collateral derivative contracts addition downgrade credit ratings rating agencies may impact us similar manner depending extent downgrade could negative impact liquidity capital position access alternative sources funding including drawdowns credit facility necessary offset potential reductions market capacity commercial paper hp inc subsidiaries management’s discussion analysis financial condition results operations continued contractual obligations contractual obligations october 31 2019 follows 1 amounts represent principal cash payments relating shortterm longterm debt include fair value adjustments discounts premiums 2 amounts represent expected interest payments relating shortterm longterm debt outstanding interest rate swap agreements accounted fair value hedges economic effect changing fixed interest rates associated us dollar global notes variable interest rates impact outstanding interest rate swaps october 31 2019 factored calculation future interest payments debt 3 purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations related principally inventory items purchase obligations exclude agreements cancelable without penalty purchase obligations also exclude open purchase orders routine arrangements entered ordinary course business difficult quantify meaningful way even though open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust terms based business needs prior delivery goods performance services 4 amounts represent operating lease obligations net total sublease income 130 million 5 amounts represent capital lease obligations including total capital lease interest obligations 64 million 6 retirement postretirement benefit plan contributions fiscal year 2020 expect contribute approximately 76 million nonus pension plans 36 million cover benefit payments us nonqualified plan participants 6 million cover benefit claims postretirement benefit plans policy fund pension plans meet least minimum contribution required local government funding taxing authorities expected contributions payments pension postretirement benefit plans excluded contractual obligations table represent contractual cash outflows dependent numerous factors may result wide range outcomes information retirement postretirement benefit plans see note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference 7 cost savings plans result approved restructuring plans including fiscal 2020 plan expect make future cash payments approximately 10 billion expect make future cash payments 418 million fiscal year 2020 remaining cash payments fiscal year 2023 payments excluded contractual obligations table represent contractual cash outflows uncertainty timing payments information restructuring activities part cost improvements see note 3 “restructuring charges” consolidated financial statements item 8 incorporated herein reference 8 uncertain tax positions october 31 2019 approximately 509 million recorded liabilities related interest penalties pertaining uncertain tax positions unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters payments obligations would result settlements taxing authorities information uncertain tax positions see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference hp inc subsidiaries management’s discussion analysis financial condition results operations continued 9 payment onetime transition taxes tcja made significant changes us tax law resulting onetime gross transition tax 30 billion accumulated foreign earnings expect actual cash payments tax much lower expect reduce overall liability half existing future credits balance sheet tax attributes used payments associated onetime transition tax paid eight years began fiscal year 2019 offbalance sheet arrangements part ongoing business participated transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers information thirdparty shortterm financing arrangements see note 7 “supplementary financial information” consolidated financial statements item 8 incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations “mda” organized follows •overview discussion business highlights affecting company provide context remainder mda •critical accounting policies estimates discussion accounting policies estimates believe important understanding assumptions judgments incorporated reported financial results •results operations analysis financial results comparing fiscal year 2020 fiscal year 2019 fiscal year 2019 fiscal year 2018 discussion results operations followed detailed discussion results operations segment •liquidity capital resources analysis changes cash flows discussion liquidity financial condition •contractual obligations overview contractual obligations retirement postretirement benefit plan contributions costsaving plans uncertain tax positions offbalance sheet arrangements discussion financial condition results operations follows provides information assist reader understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion read conjunction consolidated financial statements related notes appear elsewhere document hp inc subsidiaries management’s discussion analysis financial condition results operations continued overview leading global provider personal computing access devices imaging printing products related technologies solutions services sell individual consumers smbs large enterprises including customers government health education sectors three reportable segments personal systems printing corporate investments personal systems segment offers commercial consumer desktop notebook pcs workstations thin clients commercial mobility devices retail pos systems displays related accessories software support services printing segment provides consumer commercial printer hardware supplies solutions services well scanning devices corporate investments include hp labs certain business incubation investment projects •in personal systems strategic focus profitable growth innovation market segmentation focus respect enhanced innovation multioperating systems multiarchitecture geography customer segments key attributes additionally investing endpoint services solutions focused services including device service market begins shift contractual solutions driving innovation enable productivity collaboration nearterm demand continues work home distance learning pc become essential tool create consume collaborate believe well positioned due competitive product lineup •in printing strategic focus contractual solutions serve consumers smbs large enterprises instant ink services managed print services “mps” offerings providing digital printing solutions graphics segments applications including commercial publishing labels packaging textiles well expanding footprint 3d printing across digital manufacturing strategic applications continue experience challenges representative trends uncertainties may affect business results operations one set challenges relates dynamic market trends forecasted declining home printing markets second set challenges relates changes competitive landscape primary competitors exerting competitive pressure targeted areas entering new markets emerging competitors introducing new technologies business models alliance partners businesses increasingly becoming competitors others third set challenges relates business model changes gotomarket execution evolving distribution reseller landscape increasing online omnichannel presence additional challenges face segment level set forth •in personal systems face challenges industry component availability competitive pricing environment •in printing competitive pricing environment including nonoriginal supplies includes imitation refill remanufactured alternatives weakened market certain geographies associated pricing sensitivity customers present challenges also obtain many printing components single sources due technology availability price quality considerations instance source majority a4 portion a3 portfolio laser printer engines laser toner cartridges canon decision either party renew agreement canon limit reduce scope agreement could adversely affect net revenue laserjet products however longstanding business relationship canon anticipate renewal agreement business financial performance also depend significantly worldwide economic conditions accordingly face global macroeconomic challenges particularly light effects covid19 pandemic discussed tariffdriven headwinds uncertainty markets volatility exchange rates evolving dynamics global trade environment full impact global macroeconomic challenges business cannot known time address challenges continue pursue innovation view towards developing new products services aligned generating market demand meeting needs customers partners addition continue work improving operations adapting business models particular focus enhancing endtoend processes analytics efficiencies also continue work optimizing sales coverage models aligning sales incentives strategic goals improving channel execution inventory management strengthening capabilities areas strategic focus strengthening pricing discipline developing capitalizing market opportunities specifically october 2019 announced costreduction operational efficiency initiatives intended simplify way work move closer customers facilitate specific investment business updated february 2020 efforts included transforming operating model integrate sales force single commercial organization reducing structural costs across company restructuring plan approved september 2019 “fiscal 2020 plan” expect invest savings efforts across businesses including investing hp inc subsidiaries management’s discussion analysis financial condition results operations build digital capabilities time expect investments make us efficient allow us advance positions personal systems printing also disrupting new industries see attractive medium longterm growth opportunities however rate able invest business returns able achieve investments affected many factors including efforts address execution industry macroeconomic challenges facing business discussed result may experience delays anticipated timing activities related efforts anticipated benefits efforts may materialize typically experience higher net revenues fourth quarter compared quarters fiscal year due part seasonal holiday demand historical seasonal patterns considered reliable indicators future net revenues financial performance covid19 response late 2019 covid19 first identified march 2020 world health organization declared outbreak covid19 pandemic rapid spread covid19 prompted governments businesses take unprecedented measures response including restrictions travel business operations temporary closures businesses quarantines shelterinplace orders reflected discussions follow covid19 pandemic actions taken governments businesses individuals response pandemic variety impacts results operations cash flows fiscal year ended october 31 2020 significant section summarizes response significant impacts experienced date also included additional details applicable throughout sections report continue actively monitor situation review plans based requirements recommendations federal state local authorities •our employees focused protecting health safety employees covid19 pandemic quickly pivoted vast majority employees work home safety measure second quarter fiscal year 2020 arrangements designed allow continued operation nonproduction businesscritical functions including financial reporting systems internal controls third quarter fiscal year 2020 implemented onetime workfromhome reimbursement program employees improve workspaces manufacturing critical functions could transition remote model quickly implemented safety hygiene training protocols physical distancing safety gear mandates site visitor restrictions alternate staffing shifts enhanced cleaning sanitization practices protect employees labs manufacturing production facilities also implemented contact tracing initiatives •our community committed taking actions protect communities serve also putting resources behind efforts support local communities assist public health response donated millions dollars technology support across personal systems printing help students families communities including hospitals affected areas ◦the hp 3d printing team digital manufacturing team working global digital manufacturing community mobilize 3d printing teams technology experience production capacity help deliver critical parts effort battle covid19 pandemic along partners customers produced 4 million 3d printed parts face shields respirators nasal swabs items distribution hospitals ◦we donated hp bioprinters associated supply cassettes free charge research laboratories us europe help accelerate drug vaccine research combat covid19 ◦in april 2020 hp puerto rico kicked largescale manufacturing muchneeded hand sanitizer since delivered 55000 liters local hospitals police stations nursing homes fire stations medical wellness service providers hp’s customer service facilities well select sites us ◦we made hp sure click pro security software freely available september 2020 help protect cyber threats hp nonhp windows 10 pcs large portion population currently working home ◦we committed donating millions dollars products grants support blended learning local communities impacted covid19 around globe large portion world’s students currently learning home •our customers partners committed customers partners meeting needs taken meaningful actions remain close customers partners including implementing variety hp inc subsidiaries management’s discussion analysis financial condition results operations relief initiatives help navigate operational financial challenges provided variety financing leasing options end customers provided shortterm market countryspecific incentives partners hp implemented predictable flatrate incentive program relaxed compensation models also expanded virtual engagement options including free access cybersecurity support ondemand training partners opt customized online digital learning paths designed meet specific priorities also introducing programs designed enable customers partners adapt current work environment hp managed print cloud services hp flexworker solutions program •supply chain fiscal year ended october 31 2020 experienced disruptions manufacturing supply chain included temporary factory closures china southeast asia impacted factories well suppliers outsourcing partners resulting higher costs temporary supply shortages manufacturing capacity returned largely normalized levels end fiscal year 2020 fourth quarter fiscal year 2020 managed ongoing logistics industrywide component availability challenges due strong demand •demand covid19 created new different demand dynamics market creating challenges opportunities across businesses geographies personal systems saw increased demand globally focus moved keeping people connected productive secure reemphasized essential role pc plays everyday life also saw mix shift demand commercial consumer desktops notebooks driven strength chromebooks education printing saw slowdown office graphics offices remain closed large events continue canceled fourth quarter fiscal 2020 saw progress commercial print driven improved performance smbs sector expect gradual recovery overall commercial print market although recovery may uneven given varying pace economic recovery resurgence covid19 cases countries also continue see increased demand hardware ink supplies consumer printing side customers set home office remote working school environment remote learning expect strength consumer printing gradually subside offices schools reopen •liquidity extent duration disruption covid19 pandemic remain uncertain result liquidity working capital needs may impacted future periods believe businesses strong cash flow generators maintain strong balance sheet meet liquidity needs believe current cash equivalents cash flow operating activities available commercial paper authorization new borrowings credit facilities sufficient meet operating cash requirements planned capital expenditures interest principal payments borrowings pension postretirement funding requirements authorized share repurchases annual dividend payments foreseeable future full extent impact covid19 pandemic business results operations cash flows financial position currently uncertain depend many factors within control including limited duration scope pandemic effectiveness actions taken contain mitigate pandemic prevent limit reoccurrence governmental business individuals’ actions continue taken response pandemic general economic uncertainty key global markets financial market volatility global economic conditions levels economic growth pace recovery covid19 pandemic subsides see section entitled “risk factors” item 1a annual report form 10k information related risks uncertainties unsolicited exchange offer march 2 2020 xerox holdings corporation “xerox” commenced unsolicited exchange offer outstanding shares hp’s common stock “offer” xerox also previously nominated candidates election hp’s board directors hp’s 2020 annual meeting stockholders march 31 2020 xerox announced offer terminated subsequently withdrew slate director nominees order respond xerox’s actions hp incurred certain costs year ended october 31 2020 discussion trends uncertainties factors could impact operating results see section entitled “risk factors” item 1a annual report form 10k hp inc subsidiaries management’s discussion analysis financial condition results operations critical accounting policies estimates general consolidated financial statements hp prepared accordance united states “us” generally accepted accounting principles “gaap” require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent liabilities october 31 2020 impact covid19 business continued unfold result many estimates assumptions required increased judgment may carry higher degree variability volatility events continue evolve additional information becomes available estimates may change future periods management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying amount assets liabilities readily apparent sources management discussed development selection disclosure estimates audit committee hp’s board directors management believes accounting estimates employed resulting amounts reasonable however actual results may differ estimates making estimates judgments future events inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows summary significant accounting policies included note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition recognize revenue depicting transfer promised goods services customers amount reflects consideration expected entitled exchange goods services evaluate customers’ ability pay based various factors like historical payment experience financial metrics customer credit scores enter contracts sell products services many sales contracts contain standard terms conditions contracts contain nonstandard terms conditions many arrangements include multiple performance obligations result significant contract interpretation may required determine appropriate accounting including identification performance obligations distinct allocation transaction price among performance obligations arrangement timing transfer control promised goods services performance obligations evaluate performance obligation arrangement determine whether represents distinct good services performance obligation constitutes distinct goods services customer benefit goods services either together resources readily available customer performance obligation distinct within context contract transaction price amount consideration expect entitled exchange transferring goods services customer transaction price includes variable amount estimate amount using either expected value likely amount method reduce transaction price time revenue recognition customer distributor programs incentive offerings rebates promotions volumebased incentives expected returns use estimates determine expected variable consideration programs based historical experience expected consumer behavior market conditions sales arrangement contains multiple performance obligations hardware andor services allocate revenue performance obligation proportion selling price selling price performance obligation based standalone selling price “ssp” establish ssp using price charged performance obligation sold separately “observable price” instances using price established management relevant authority observable price available establish ssp based management’s judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product lifecycle consideration also given market conditions competitor pricing strategies technology industry life cycles may modify develop new gotomarket practices future may result changes selling prices impacting standalone selling price determination applying aforementioned management judgments estimates may change pattern timing revenue recognition identical arrangements executed future periods change total hp inc subsidiaries management’s discussion analysis financial condition results operations revenue recognized given arrangement arrangements multiple performance obligations transaction price allocated performance obligation inception arrangement based relative selling price revenue recognized performance obligation satisfied transferring control promised good service customer generally invoice customer upon delivery goods services payments due per contract terms fixedprice support maintenance service contracts nature standready obligations payments generally received advance customers revenue recognized straightline basis duration contract instances revenue derived sales thirdparty vendor products services record revenue gross basis principal transaction net basis acting agent customer vendor consider several factors determine whether acting principal agent notably whether primary obligor customer established pricing inventory credit risks warranty accrue estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failure outside baseline experience warranty terms generally range 90 days three years parts labor onsite services depending upon product actual product failure rates repair costs differ estimates revisions estimated warranty obligation may required retirement postretirement benefits pension postretirement benefit costs obligations depend various assumptions major assumptions relate primarily discount rates mortality rates expected increases compensation levels expected longterm return plan assets discount rate assumption based current investment yields highquality fixedincome securities maturities similar expected benefits payment period mortality rates help predict expected life plan participants based historical demographic study plan expected increase compensation levels assumption reflects longterm actual experience future expectations expected longterm return plan assets determined based asset allocations historical portfolio results historical asset correlations management’s expected returns asset class evaluate expected return assumptions annually including reviewing current capital market assumptions assess reasonableness expected longterm return plan assets fiscal year significant differences may arise actual return expected longterm return plan assets historically differences actual return expected longterm return plan assets resulted changes target actual asset allocation shortterm performance relative expected longterm performance lesser extent differences target actual investment allocations timing benefit payments compared expectations use derivatives intended effect asset allocation changes hedge certain investment liability exposures recognition net periodic benefit cost calculation expected longterm return plan assets uses fair value plan assets beginning fiscal year unless updated result interim remeasurement major assumptions vary plan weightedaverage rates used set forth note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference following table provides impact change 25 basis points weightedaverage assumptions discount rate expected increase compensation levels expected longterm return plan assets would net periodic benefit cost fiscal year 2020 hp inc subsidiaries management’s discussion analysis financial condition results operations taxes earnings result certain employment actions capital investments undertaken income manufacturing activities certain jurisdictions subject reduced tax rates cases wholly exempt taxes fiscal years 2029 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact future earnings repatriated united states related future effective tax rate calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns adjust current deferred tax provisions based income tax returns generally filed third fourth quarters subsequent fiscal year recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize determining need valuation allowance consider future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies event determine likely unable realize part deferred tax assets future would increase valuation allowance recognize corresponding charge earnings comprehensive income period make determination likewise later determine likely realize deferred tax assets would reverse applicable portion previously recognized valuation allowance order us realize deferred tax assets must able generate sufficient taxable income jurisdictions deferred tax assets located subject income taxes united states approximately 60 countries subject routine corporate income tax audits many jurisdictions believe positions taken tax returns fully supported tax authorities may challenge positions may fully sustained examination relevant tax authorities accordingly income tax provision includes amounts intended satisfy assessments may result challenges determining income tax provision potential assessments recording related effects requires management judgments estimates amounts ultimately paid resolution audit could materially different amounts previously included income tax provision therefore could material impact income tax provision net income cash flows accrual uncertain tax positions attributable primarily uncertainties concerning tax treatment domestic operations including allocation income among different jurisdictions intercompany transactions pension related interest discussion taxes earnings refer note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference inventory state inventory lower cost market firstin firstout basis make adjustments reduce cost inventory net realizable value product group level estimated excess obsolescence factors influencing adjustments include changes demand technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues business combinations allocate fair value purchase consideration assets acquired liabilities assumed noncontrolling interests acquiree generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquiree recorded goodwill may involve engaging independent third parties perform appraisal determining fair values assets acquired liabilities assumed noncontrolling interests acquiree management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available hp inc subsidiaries management’s discussion analysis financial condition results operations goodwill review goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable qualitative assessment first performed determine fair value reporting unit likely less carrying amount judgment assessment qualitative factors impairment may include changes business climate market conditions events impacting reporting unit determine impairment likely based qualitative assessment quantitative assessment impairment performed performing quantitative goodwill impairment test includes determination fair value reporting unit involves significant estimates assumptions estimates assumptions include among others revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates future economic market conditions determination appropriate market comparables determine carrying amount exceeds fair value goodwill impaired excess recognized impairment loss contingencies involved various lawsuits claims investigations proceedings including consisting intellectual property “ip” commercial securities employment employee benefits environmental matters arise ordinary course business record liability believe probable liability incurred amount loss reasonably estimated significant judgment required determine probability incurred liability estimated amount liability review matters least quarterly adjust liabilities reflect impact negotiations settlements rulings advice legal counsel updated information events pertaining particular case pursuant separation distribution agreement share responsibility hewlett packard enterprise certain matters discussed note 14 “litigation contingencies” consolidated financial statements item 8 incorporated herein reference hewlett packard enterprise agreed indemnify us whole part respect certain matters based experience believe damage amounts claimed specific litigation contingencies matters discussed note 14 “litigation contingencies” meaningful indicator hp’s potential liability litigation inherently unpredictable however believe valid defenses respect legal matters pending us nevertheless cash flows results operations could materially affected particular period resolution one contingencies believe recorded adequate provisions matters october 31 2020 reasonably possible material loss incurred excess amounts recognized financial statements recent accounting pronouncements summary recent accounting pronouncements applicable consolidated financial statements see note 1 “overview summary significant accounting policies” consolidated financial statements item 8 incorporated herein reference results operations revenue international operations historically represented expect continue represent majority overall net revenue result net revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing performance excluding impact foreign currency fluctuations supplement yearoveryear percentage change net revenue yearoveryear percentage change net revenue constant currency basis excludes effect foreign currency exchange fluctuations calculated translating current period revenues using monthly average exchange rates comparative period hedging activities prioryear period adjust repricing demand impacts changes foreign currency exchange rates information provided net revenue viewed without effect fluctuations foreign currency exchange rates consistent management evaluates net revenue results trends management believe excluded items reflective ongoing operating results constant currency measures provided addition substitute yearoveryear percentage change net revenue gaap basis companies may calculate define similarly labeled items differently may limit usefulness measure comparative purposes hp inc subsidiaries management’s discussion analysis financial condition results operations results operations dollars percentage net revenue follows net revenue fiscal year 2020 total net revenue decreased 36 decreased 23 constant currency basis compared prioryear period net revenue united states decreased 18 202 billion net revenue outside united states decreased 46 364 billion decrease net revenue primarily driven decline desktops supplies commercial printing hardware unfavorable foreign currency impacts partially offset growth notebooks decline driven demand weakness businesses remained closed office workers continued work home partially offset strong demand notebooks fiscal year 2019 total net revenue increased 05 increased 20 constant currency basis compared prioryear period net revenue united states remained flat 206 billion net revenue outside united states increased 07 382 billion increase net revenue primarily driven growth notebooks desktops workstations personal systems partially offset unfavorable foreign currency impacts decline printing supplies detailed discussion factors contributing changes segment net revenue included “segment information” gross margin gross margin 184 fiscal year 2020 compared 190 fiscal year 2019 decrease primarily due unfavorable segment mix lower rate printing hardware partially offset higher rate personal systems driven favorable commodity costs gross margin 190 fiscal year 2019 compared 182 fiscal year 2018 increase primarily due higher rate personal systems driven lower supply chain costs detailed discussion factors contributing changes segment gross margins included “segment information” operating expenses research development “rd” rd expense decreased 14 fiscal year 2020 compared prioryear period primarily due expense management partially offset continuing investments innovation key growth initiatives rd expense increased 67 fiscal year 2019 compared prioryear period primarily due continuing investments innovation key growth initiatives hp inc subsidiaries management’s discussion analysis financial condition results operations selling general administrative “sga” sga expense decreased 86 fiscal year 2020 compared prioryear period driven structural cost savings transformation program benefits temporary discretionary cost actions sga expense increased 53 fiscal year 2019 compared prioryear period primarily driven increased investments key growth initiatives gotomarket personal systems investment digital infrastructure restructuring charges restructuring charges increased 187 million fiscal year 2020 compared prioryear period primarily due charges fiscal 2020 plan restructuring charges increased 143 million fiscal year 2019 compared prioryear period primarily due charges fiscal 2020 plan restructuring plan approved october 2016 “fiscal 2017 plan” later amended may 2018 acquisitionrelated charges acquisitionrelated charges fiscal years 2020 2019 2018 relate primarily thirdparty professional legal fees integrationrelated costs well fair value adjustments certain acquired assets inventory amortization intangible assets amortization intangible assets fiscal year ended 2020 relates primarily intangible assets resulting prior acquisitions amortization expense increased 36 million fiscal year 2019 compared prioryear period due intangible assets resulting primarily acquisition apogee group interest net interest net expense decreased 11 billion fiscal year 2020 compared prioryear period primarily due reversal indemnification receivables hewlett packard enterprise pertaining various audit settlements prior year period interest net expense increased 05 billion fiscal year 2019 compared prioryear period primarily due tax indemnifications related termination tax matters agreement “tma” hewlett packard enterprise fourth quarter fiscal year 2019 provision benefit taxes effective tax rates 120 249 768 fiscal years 2020 2019 2018 respectively fiscal year 2020 effective tax rate generally differs us federal statutory rate 21 primarily due resolution various audits favorable tax rates associated certain earnings lowertax jurisdictions throughout world fiscal year 2019 effective tax rate generally differs us federal statutory rate 21 primarily due resolution various audits changes valuation allowances impacts us tax reform fiscal year 2018 effective tax rate generally differs us federal statutory rate 233 primarily due transitional impacts us tax reform resolution various audits tax litigation jurisdictions favorable tax rates significant impact effective tax rate periods presented puerto rico singapore china malaysia reconciliation effective tax rate us federal statutory rate 21 fiscal years 2020 2019 233 fiscal year 2018 explanation provision income taxes see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference fiscal year 2020 recorded 244 million net income tax benefit related discrete items provision taxes amount includes tax benefits related audit settlements 124 million various jurisdictions 82 million related restructuring benefits additionally recorded benefits 20 million related proxy contest costs 17 million net tax benefits fiscal year 2020 excess tax benefits associated stock options restricted stock units performanceadjusted restricted stock units immaterial fiscal year 2019 recorded 13 billion net income tax benefit related discrete items provision taxes amount includes tax benefits related audit settlements 10 billion 75 million due ability utilize tax attributes 57 million restructuring benefits net valuation allowance releases 94 million also recorded benefits 78 million related us tax reform result new guidance issued us internal revenue service “irs” benefits partially offset uncertain tax position charges 51 million fiscal year 2019 addition discrete items mentioned recorded excess tax benefits 20 million associated stock options restricted stock units performanceadjusted restricted stock units hp inc subsidiaries management’s discussion analysis financial condition results operations fiscal year 2018 recorded 28 billion net income tax benefit related discrete items provision taxes include impacts tax cuts jobs act “tcja” discussed note 6 “taxes earnings” consolidated financial statements item 8 report yet completed analysis full impact tcja however october 31 2018 recorded provisional tax benefit 760 million related 56 billion net benefit decrease deferred tax liability unremitted foreign earnings partially offset 33 billion net expense deemed repatriation tax payable installments eight years 12 billion net expense remeasurement deferred assets liabilities new us statutory tax rate 317 million net expense related realization us deferred taxes expected realized lower rate fiscal year 2018 also included tax benefits related audit settlements 15 billion valuation allowance releases 601 million pertaining change ability utilize certain foreign us deferred tax assets due change geographic earnings mix benefits partially offset net tax charges 34 million fiscal year 2018 addition discrete items mentioned recorded excess tax benefits 42 million associated stock options restricted stock units performanceadjusted restricted stock units segment information description products services segment found note 2 “segment information” consolidated financial statements item 8 incorporated herein reference future changes organizational structure may result changes segments disclosed personal systems components net revenue weighted net revenue change business unit follows 1 weighted net revenue change percentage points measures contribution business unit towards overall segment revenue growth calculated dividing change revenue business unit prioryear period total segment revenue prioryear period fiscal year 2020 compared fiscal year 2019 personal systems net revenue increased 08 increased 23 constant currency basis fiscal year 2020 compared prioryear period net revenue increase primarily due growth notebooks partially offset desktops workstations unfavorable foreign currency impacts net revenue increase driven 48 increase unit volume partially offset 38 decrease average selling prices “asps” compared prioryear period increase unit volume primarily due growth notebooks resulting strong demand driven work home distance learning gaming partially offset desktops workstations decrease asps primarily due mix shifts consumer education unfavorable foreign currency impacts consumer revenue increased 128 compared prioryear period driven unit growth notebooks higher asps commercial revenue decreased 48 compared prioryear period primarily driven lower asps unit declines desktops workstations partially offset unit growth notebooks hp inc subsidiaries management’s discussion analysis financial condition results operations net revenue increased 124 notebooks decreased 186 desktops 240 workstations fiscal year 2020 compared prioryear period personal systems earnings operations percentage net revenue increased 10 percentage points fiscal year 2020 compared prioryear period primarily due increase gross margin decrease operating expenses percentage revenue increase gross margin primarily due favorable commodity costs partially offset mix shifts decrease operating expenses percentage revenue primarily due reduction marketing spend ongoing structural cost savings plan fiscal year 2019 compared fiscal year 2018 personal systems net revenue increased 27 increased 49 constant currency basis fiscal year 2019 compared prioryear period net revenue increase primarily due growth notebooks desktops workstations partially offset unfavorable foreign currency impacts net revenue increase driven 22 increase unit volume 05 increase average selling prices “asps” compared prioryear period increase unit volume primarily due growth notebooks desktops increase asps primarily due positive mix shifts higher pricing partially offset unfavorable foreign currency impacts commercial revenue increased 70 primarily driven higher unit volume partially offset unfavorable foreign currency impacts consumer revenue decreased 55 primarily driven lower unit volume respectively fiscal year 2019 compared prioryear period net revenue increased 17 notebooks 41 desktops 64 workstations fiscal year 2019 compared prioryear period personal systems earnings operations percentage net revenue increased 12 percentage points fiscal year 2019 compared prioryear period primarily due increase gross margin partially offset increase operating expenses increase gross margin primarily due lower supply chain costs higher asps increase operating expenses primarily due increased investments key growth initiatives gotomarket printing components net revenue weighted net revenue change business unit follows 1 weighted net revenue change percentage points measures contribution business unit towards overall segment revenue growth calculated dividing change revenue business unit prior period total segment revenue prioryear period fiscal year 2020 compared fiscal year 2019 printing net revenue decreased 121 decreased 112 constant currency basis fiscal year 2020 compared prioryear period decline net revenue primarily driven decline supplies commercial hardware unfavorable foreign currency impacts net revenue supplies decreased 103 compared prioryear period primarily driven demand weakness businesses operated reduced onsite capacity majority office workers continue work home asps decreased 159 printer unit volume decreased 51 compared prioryear hp inc subsidiaries management’s discussion analysis financial condition results operations period printer asps decreased primarily due mix shifts unfavorable foreign currency impact decrease printer unit volume driven unit decreases commercial consumer hardware net revenue commercial hardware decreased 233 compared prioryear period due 194 decrease printer volume 196 decrease asps printer unit volume decline due lower demand businesses operated reduced onsite capacity due covid19 decrease asps driven mix shifts competitive pricing unfavorable foreign currency impacts net revenue consumer hardware decreased 07 compared prioryear period due decrease printer unit volume 27 partially offset 20 increase asps printer unit volume decrease driven supply chain disruptions due covid19 increase asps primarily due disciplined pricing partially offset mix shifts unfavorable foreign currency impacts printing earnings operations percentage net revenue decreased 19 percentage points fiscal year 2020 compared prioryear period primarily due lower net revenue commercial hardware higher consumer mix supply chain disruptions partially offset disciplined pricing improved supplies mix fiscal year 2019 compared fiscal year 2018 printing net revenue decreased 36 decreased 30 constant currency basis fiscal year 2019 compared prioryear period decline net revenue primarily driven decline supplies consumer hardware revenue unfavorable foreign currency impacts partially offset increase commercial hardware revenue net revenue supplies decreased 48 compared prioryear period primarily due demand weakness printer unit volume decreased 48 compared prioryear period decrease printer unit volume driven unit decrease consumer hardware net revenue commercial hardware increased 22 compared prioryear period primarily due acquisition apogee group net revenue consumer hardware decreased 67 compared prioryear period due 54 decrease printer unit volume 17 decrease asps unit volume decrease driven inkjet home consumer business laserjet home business decrease asps primarily due unfavorable foreign currency impacts printing earnings operations percentage net revenue increased 01 percentage points fiscal year 2019 compared prioryear period primarily due higher gross margin gross margin increased primarily due rate improvement commercial hardware partially offset lower supplies revenue corporate investments loss operations corporate investments fiscal years 2020 2019 2018 primarily due expenses associated hp labs incubation investment projects liquidity capital resources use cash generated operations primary source liquidity impacts covid19 pandemic currently expected temporary uncertainty around extent duration liquidity working capital needs may impacted future periods believe current cash flow operating activities new borrowings available commercial paper authorization credit facilities sufficient meet hp’s operating cash requirements planned capital expenditures interest principal payments borrowings pension postretirement funding requirements authorized share repurchases annual dividend payments foreseeable future additionally event suitable businesses available acquisition offer good return opportunities company may obtain portion financing acquisitions additional borrowings access capital markets may constrained cost borrowing may increase certain business market economic conditions access variety funding sources meet liquidity needs designed facilitate continued access capital resources conditions liquidity subject various risks including risks identified section entitled “risk factors” item 1a market risks identified section entitled “quantitative qualitative disclosures market risk” item 7a incorporated herein reference february 22 2020 hp’s board directors increased hp’s share repurchase authorization 150 billion hp inc subsidiaries management’s discussion analysis financial condition results operations cash equivalents balances held numerous locations throughout world utilize variety planning financing strategies effort ensure worldwide cash available needed amounts held outside united states generally utilized support nonus liquidity needs may time distributed united states tcja made significant changes us tax law including onetime transition tax accumulated foreign earnings payments associated onetime transition tax paid eight years began fiscal year 2019 expect significant portion cash equivalents held foreign subsidiaries longer subject us income tax upon subsequent repatriation united states result transition tax accumulated foreign earnings however portion cash may still subject foreign income tax withholding tax upon repatriation evaluate future cash needs operations may revise amount foreign earnings considered permanently reinvested foreign subsidiaries utilize funds including reducing gross debt level uses liquidity cash equivalents marketable debt securities total debt follows 1includes highly liquid us treasury notes us agency securities nonus government bonds corporate debt securities money market funds classify investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations key cash flow metrics follows operating activities net cash provided operating activities decreased 03 billion fiscal year 2020 compared fiscal year 2019 primarily due lower cash generated working capital activities result changes demand dynamics due covid19 lower earnings operation net cash provided operating activities increased marginally 01 billion fiscal year 2019 compared fiscal year 2018 working capital metrics management utilizes current cash conversion cycle information manage working capital level table presents cash conversion cycle hp inc subsidiaries management’s discussion analysis financial condition results operations cash conversion cycle sum days dso dos less dpo items may cause cash conversion cycle particular period differ longterm sustainable rate include limited changes business mix changes payment terms extent receivables factoring seasonal trends timing revenue recognition inventory purchases within period dso measures average number days receivables outstanding dso calculated dividing ending accounts receivable net allowance doubtful accounts 90day average net revenue fiscal year 2020 decrease dso compared fiscal year 2019 due favorable revenue linearity strong collections fiscal year 2019 increase dso compared fiscal year 2018 primarily due unfavorable revenue linearity dos measures average number days procurement sale product dos calculated dividing ending inventory 90day average cost goods sold fiscal year 2020 increase dos compared fiscal year 2019 primarily due leveraging balance sheet particularly higher strategic buys fiscal year 2019 decrease dos compared fiscal year 2018 primarily due reduction inventory driven reclassification certain balances current assets pursuant adoption new revenue standard first quarter fiscal 2019 dpo measures average number days accounts payable balances outstanding dpo calculated dividing ending accounts payable 90day average cost goods sold fiscal year 2020 decrease dpo compared fiscal year 2019 primarily due decrease accounts payables driven lower operating expenses fiscal year 2019 increase dpo compared fiscal year 2018 higher primarily due working capital management activities partially offset lower inventory purchasing volume investing activities net cash used investing activities increased 06 billion fiscal year 2020 compared fiscal year 2019 primarily due increase investment classified availableforsale within current assets 10 billion partially offset lower net payments acquisitions 05 billion net cash used investing activities decreased 03 billion fiscal year 2019 compared fiscal year 2018 primarily due lower net payments acquisitions financing activities net cash used financing activities decreased 19 billion fiscal year 2020 compared fiscal year 2019 primarily due issuance senior notes 30 billion partially offset higher share repurchase 07 billion higher debt payment 03 billion net cash used financing activities decreased 08 billion fiscal year 2019 compared fiscal year 2018 primarily due lower payment debt 15 billion partially offset decrease outstanding commercial paper amounts 07 billion capital resources debt levels maintain debt levels establish consideration number factors including cash flow expectations cash requirements operations investment plans including acquisitions share repurchase activities cost capital targeted leverage ratio shortterm debt increased 03 billion longterm debt increased 08 billion fiscal year 2020 compared fiscal year 2019 net increase total debt primarily due issuance unsecured senior debt june 2020 principal amount 30 billion partially offset payment 16 billion cash tender offer “tender offer” redemption existing notes maturing 2020 2021 shortterm debt decreased 11 billion fiscal year 2019 compared fiscal year 2018 primarily due decrease outstanding commercial paper amounts 09 billion hp inc subsidiaries management’s discussion analysis financial condition results operations debttoequity ratio calculated carrying amount debt divided total stockholders’ deficit debttoequity ratio changed 15x fiscal year 2020 compared fiscal year 2019 primarily due increase stockholders’ deficit balance 10 billion debttoequity ratio changed 51x fiscal year 2019 compared fiscal year 2018 primarily due increase stockholders’ deficit balance 06 billion weightedaverage interest rate reflects effective interest rate borrowings prevailing period reflects effect interest rate swaps information interest rate swaps see note 10 “financial instruments” consolidated financial statements notes thereto item 8 “financial statements supplementary data” october 31 2020 maintain senior unsecured committed revolving credit facility aggregate lending commitments 40 billion available march 30 2023 primarily support issuance commercial paper may 29 2020 entered 364day revolving credit facility providing senior unsecured revolving credit facility aggregate lending commitments 10 billion available may 28 2021 funds borrowed revolving credit facilities may used general corporate purposes june 17 2020 issued 30 billion aggregate principal amount senior notes across various maturities used approximately 07 billion 09 billion proceeds issuance fund tender offer redemption respectively existing notes maturing 2020 2021 information new notes repurchase redemption existing notes see note 11 “borrowings” consolidated financial statements item 8 part ii report incorporated herein reference available borrowing resources october 31 2020 available borrowing resources 725 million uncommitted lines credit addition senior unsecured committed revolving credit facilities december 2020 filed posteffective amendment 2019 shelf registration statement include certain information required included registrants wellknown seasoned issuers term defined rule 405 securities act 1933 amended longer wellknown seasoned issuer upon filing annual report form 10k following filing annual report form 10k intend file another posteffective amendment convert registration statement proper submission type nonautomatic shelf registration statement pending effectiveness second posteffective amendment continue use 2019 shelf registration statement declared effective amended registration statement enable us offer sale time one offerings 50 billion aggregate debt securities common stock preferred stock depository shares warrants information borrowings see note 11 “borrowings” consolidated financial statements item 8 incorporated herein reference credit ratings credit risk evaluated major independent rating agencies based upon publicly available information well information obtained ongoing discussions rating downgrade triggers would accelerate maturity material amount debt previous downgrades increased cost borrowing credit facility reduced market capacity commercial paper required posting additional collateral derivative contracts addition downgrade credit ratings rating agencies may impact us similar manner depending extent downgrade could negative impact liquidity capital position access alternative sources funding including drawdowns credit facility necessary offset potential reductions market capacity commercial paper hp inc subsidiaries management’s discussion analysis financial condition results operations continued contractual obligations contractual obligations october 31 2020 follows 1amounts represent principal cash payments relating shortterm longterm debt include fair value adjustments discounts premiums 2amounts represent expected interest payments relating shortterm longterm debt outstanding interest rate swap agreements accounted fair value hedges economic effect changing fixed interest rates associated us dollar global notes variable interest rates impact outstanding interest rate swaps october 31 2020 factored calculation future interest payments debt 3purchase obligations include agreements purchase goods services enforceable legally binding us specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations related principally inventory items purchase obligations exclude agreements cancelable without penalty purchase obligations also exclude open purchase orders routine arrangements entered ordinary course business difficult quantify meaningful way even though open purchase orders considered enforceable legally binding terms generally allow us option cancel reschedule adjust terms based business needs prior delivery goods performance services 4retirement postretirement benefit plan contributions fiscal year 2021 expect contribute approximately 77 million nonus pension plans 34 million cover benefit payments us nonqualified plan participants 5 million cover benefit claims postretirement benefit plans policy fund pension plans meet least minimum contribution required local government funding taxing authorities expected contributions payments pension postretirement benefit plans excluded contractual obligations table represent contractual cash outflows dependent numerous factors may result wide range outcomes information retirement postretirement benefit plans see note 4 “retirement postretirement benefit plans” consolidated financial statements item 8 incorporated herein reference 5cost savings plans result approved restructuring plans expect make future cash payments approximately 05 billion expect make future cash payments 02 billion fiscal year 2021 remaining cash payments fiscal year 2023 payments excluded contractual obligations table represent contractual cash outflows uncertainty timing payments information restructuring activities part cost improvements see note 3 “restructuring charges” consolidated financial statements item 8 incorporated herein reference 6uncertain tax positions october 31 2020 approximately 475 million recorded liabilities related interest penalties pertaining uncertain tax positions unable make reasonable estimate cash settlement tax authorities might occur due uncertainties related tax matters payments obligations would result settlements taxing authorities information uncertain tax positions see note 6 “taxes earnings” consolidated financial statements item 8 incorporated herein reference potential payments excluded contractual obligations table represent contractual cash outflows uncertainty timing potential payments hp inc subsidiaries management’s discussion analysis financial condition results operations offbalance sheet arrangements part ongoing business participated transactions generate material relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers information thirdparty shortterm financing arrangements see note 7 “supplementary financial information” consolidated financial statements item 8 incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses large enterprises including customers government health education sectors offerings span •multivendor customer services including infrastructure technology business process outsourcing technology support maintenance application development support services consulting integration services •enterprise information technology infrastructure including enterprise storage server technology networking products solutions information management software optimizes business technology investments •personal computing access devices •imaging printingrelated products services seven business segments financial reporting purposes services enterprise storage servers ess hp software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments services ess hp software reported collectively broader hp enterprise business hp enterprise business operating segment sometimes provide financial data aggregating segments within order provide supplementary view business strategy operations currently focused following initiatives competitive positioning businesses take advantage important trends markets products services example aligning printing business capitalize key market trends shift analog digital printing growth printable content developing innovative products consumers first webconnected home printer working enable web mobile printing expanding presence highusage annuity businesses including graphics retail publishing printing growing managed print services business also positioning enterprise business capitalize trend towards converged infrastructure products integrate storage networking servers management software also delivering services converged infrastructure manner best fits clients needs client site outsourced service via internet via hybrid approach addition developed management software offerings seek satisfy increasing demand virtualization management increased automation driving operational efficiency working optimize efficiency across company part efforts continuing execute multiyear program consolidate real estate locations worldwide fewer hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued core sites order reduce spending real estate costs also continuing implement restructuring plan announced fourth quarter fiscal 2008 optimize cost structure services business restructuring plan announced may 2009 structurally change improve effectiveness several product businesses june 2010 announced started implementing new restructuring plan consolidate data centers systems tools better position growth enterprise services business includes infrastructure technology outsourcing application services business process outsourcing business units see note 8 consolidated financial statements item 8 discussion restructuring plans associated restructuring charges investing growth investing growth strengthening position core markets accelerating growth adjacent markets anticipation market trends data center consolidation automation cloud computing virtualization digitization security mobility connectivity example increasing sales coverage investing sales channels better address markets cover including expansion emerging markets creating innovative new products developing new channels connect customers addition making focused investments innovation strengthen portfolio products services offer customers acquisitions organic growth critical component strategy acquisition electronic data systems corporation eds august 2008 increased size breadth services business enabled us provide comprehensive product services solutions customers addition completion acquisition 3com corporation 3com april 2010 accelerating investments networking july 2010 completed acquisition palm inc palm enhances ability participate aggressively growing smartphone connected mobile device markets september 2010 completed acquisition 3par inc 3par expands storage portfolio enterpriseclass public private cloud computing environments october 2010 completed acquisition arcsight inc arcsight enables us offer customers integrated security platform holistic approach securing networks applications sensitive data acquisitions enabled us expand highmargin highgrowth industry segments strengthened portfolio hardware software services leveraging portfolio scale offer one industrys broadest portfolios products services leverage portfolio strategic advantage example enterprise business able provide servers storage networking products packaged services delivered customers manner choosing inhouse outsourced service via internet via hybrid environment portfolio management software completes package allowing customers manage operations efficient costeffective manner addition working optimize supply chain eliminating complexity reducing fixed costs leveraging scale ensure availability components favorable prices even shortages also expanding use industry standard components enterprise products leverage scale hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued following provides overview key fiscal 2010 financial metrics demonstrates execution translated financial performance 1includes corporate investments eliminations cash equivalents october 31 2010 totaled 109 billion decrease 24 billion october 31 2009 balance 133 billion decrease fiscal 2010 due primarily 110 billion cash used repurchase common stock 81 billion net cash paid business acquisitions 35 billion net investment property plant equipment partially offset 119 billion cash provided operations 60 billion increased net borrowings 26 billion proceeds related issuance common stock employee stock plans intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles gaap require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions summary significant accounting policies included note 1 consolidated financial statements item 8 accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements delivered elements standalone value uncertainties regarding customer acceptance resolved customernegotiated refund return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially control delivered element constitutes separate unit accounting changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract recognize revenue work progresses certain fixed price contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue income result revisions cost estimates period facts give rise revision become known recognize revenue certain design build design development andor constructions software andor systems projects using percentageofcompletion method use costtocost method measurement towards completion determined percentage cost incurred date total estimated costs project circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued specific terms conditions incentive number customers actually redeem incentive current revenue recognition policies applied fiscal 2010 2009 establish vendorspecific objective evidence vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority thirdparty evidence selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles determining best estimate selling price apply management judgment establishing margin objectives pricing strategies evaluating market conditions product life cycles may modify develop new gotomarket practices future gotomarket strategies evolve may modify pricing practices future may result changes selling prices impacting vsoe esp aforementioned factors may result different allocation revenue deliverables multiple element arrangements current fiscal year may change pattern timing revenue recognition elements change total revenue recognized arrangement 2008 pursuant previous guidance revenue arrangements multiple deliverables hp allocated revenue element based relative fair value software based vsoe fair value warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates post sales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty provision averaged approximately 35 annual net product revenue actual annual warranty costs experienced favorable trends averaged approximately 33 annual net product revenue business combinations allocate purchase price acquired companies tangible assets acquired liabilities assumed intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill engage independent thirdparty appraisal firms assist us determining fair values assets acquired liabilities assumed valuations require management make significant estimates assumptions especially respect intangible assets hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued critical estimates valuing certain intangible assets include limited future expected cash flows customer contracts customer lists distribution agreements acquired developed technologies patents expected costs develop iprd commercially viable products estimating cash flows projects completed brand awareness market position well assumptions period time brand continue used product portfolio discount rates managements estimates fair value based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates associated accounting acquisitions may change additional information becomes available regarding assets acquired liabilities assumed fully discussed note 6 consolidated financial statements item 8 valuation goodwill purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable provisions accounting standard goodwill intangibles require perform twostep impairment test goodwill first step compare fair value reporting unit carrying value general reporting units consistent reportable segments identified note 19 consolidated financial statements item 8 however certain businesses within corporate investments reporting unit one step segment level determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference also compare fair value purchased intangible assets indefinite lives carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2010 result impairment charge excess fair value carrying value hps reporting units august 1 2010 annual testing date ranged approximately hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued 760 million approximately 33 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 360 million approximately 29 billion hps reporting units restructuring engaged may continue engage restructuring actions require management utilize significant estimates related timing expenses severance employee separation costs realizable values assets made redundant obsolete lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 8 consolidated financial statements item 8 incorporated herein reference stockbased compensation expense recognize stockbased compensation expense sharebased payment awards net estimated forfeiture rate recognize compensation cost shares expected vest straightline basis requisite service period award determining appropriate fair value model calculating fair value sharebased payment awards requires subjective assumptions including expected life sharebased payment awards stock price volatility utilize blackscholes option pricing model value stock options granted principal option plans implement model examined historical pattern option exercises determine discernable activity patterns based certain employee populations analysis identified three employee populations apply blackscholes model determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility issue performancebased restricted units prus representing hypothetical shares hp common stock pru award reflects target number shares may issued award recipient determine actual number shares recipient receives end threeyear performance period based results achieved versus goals based annual cash flow operations percentage revenue total shareholder return tsr relative sp 500 performance period use historic volatility pru awards implied volatility cannot used simulating multivariate prices companies sp 500 estimate fair value prus using monte carlo simulation model tsr modifier contains market condition update estimated expense net forfeitures cash flow performance goal year end reporting period assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application management judgment result factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest actual forfeiture rate materially different estimate stockbased compensation hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued expense could significantly different recorded current period see note 2 consolidated financial statements item 8 discussion stockbased compensation taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third fourth quarters subsequent year us federal state provisions respectively recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would increase valuation allowance make corresponding charge earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2024 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states approximately eighty foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges determining income tax expense potential assessments recording related assets liabilities requires management judgments estimates evaluate uncertain tax positions accordance guidance accounting uncertainty income taxes believe reserve uncertain tax positions including related interest adequate amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations see note 14 consolidated financial statements item 8 discussion taxes earnings allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience also record specific provisions individual accounts become aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position circumstances related customers change would adjust estimates recoverability receivables either upward downward annual provision doubtful accounts averaged approximately 003 net revenue last three fiscal years using thirdparty credit risk model october 31 2010 50basispoint deterioration weightedaverage default probabilities significant customers would resulted approximately 64 million increase trade allowance end fiscal year 2010 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates fair value financial instruments measure certain financial assets liabilities fair value based valuation techniques using best information available may include quoted market prices market comparables discounted cash flow projections financial instruments primarily comprised time deposits money market funds commercial paper corporate debt securities equity securities investments common stock common stock equivalents derivative instruments cash equivalents investments hold time deposits money market funds commercial paper debt securities primarily consisting corporate foreign government notes bonds hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued common stock equivalents general applicable use quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value use quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available use internally developed valuation models whose inputs include bid prices third party valuations utilizing underlying asset assumptions derivative instruments discussed note 10 consolidated financial statements item 8 mainly hold nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures active market quotes available use industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases use management judgment develop assumptions used determine fair value retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates salary growth longterm return plan assets medical cost trend rates base discount rate assumption current investment yields high quality fixed income investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectation future economic environment well target asset allocations medical cost trend assumptions developed based historical cost data nearterm outlook assessment likely longterm trends actual results differ assumptions accumulated amortized generally estimated future working life plan participants major assumptions vary plan weightedaverage rates used set forth note 16 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved direction last several years fiscal 2010 changes weightedaverage rates hp benefit plans would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 50 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 65 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 24 million loss contingencies involved various lawsuits claims investigations proceedings arise ordinary course business record provision liability believe probable liability incurred amount reasonably estimated significant hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued judgment required determine probability estimated amount review provisions least quarterly adjust provisions reflect impact negotiations settlements rulings advice legal counsel updated information litigation inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows see note 18 consolidated financial statements item 8 discussion litigation contingencies accounting pronouncements june 2009 fasb issued new accounting standard related consolidation variable interest entities eliminates quantitative approach previously required determining primary beneficiary variable interest entity requires ongoing qualitative reassessments whether enterprise primary beneficiary variable interest entity new standard also requires additional disclosures enterprises involvement variable interest entities adopt new accounting standard first quarter fiscal 2011 expect adoption standard material effect consolidated financial statements constant currency presentation revenue international operations historically represented expect continue represent majority overall net revenue result revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing business segments performed excluding impact foreign currency fluctuations present yearoveryear percentage change revenue performance constant currency basis assumes change exchange rate prioryear period constant currency disclosure provided addition substitute yearoveryear percentage change revenue asreported basis results operations following discussion compares historical results operations gaap basis fiscal years ended october 31 2010 2009 2008 unless otherwise noted comparative performance data included reflect yearoveryear comparisons hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued results operations dollars percentage net revenue follows following fiscal years ended october 31 1cost products cost services financing interest net revenue components weighted net revenue change follows following fiscal years ended october 31 fiscal 2010 fiscal 2010 total hp net revenue increased 10 83 constant currency basis us net revenue increased 78 445 billion net revenue outside united states increased 113 815 billion reflected table psg segment largest contributor hp net revenue growth result balanced growth across regions analysis change net revenue business segment included segment information hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued fiscal 2009 fiscal 2009 global slowdown consumer spending impacted segments net revenue decreased 32 fiscal 2009 increased 13 constant currency basis unfavorable currency impact fiscal 2009 due primarily movement dollar euro fiscal 2009 services segment contributed favorably total hp net revenue change primarily result eds acquisition us net revenue increased 12 413 billion fiscal 2009 compared fiscal 2008 net revenue outside united states decreased 10 732 billion increase us net revenue fiscal 2009 primarily result acquisition eds analysis change net revenue business segment included segment information gross margin fiscal 2010 fiscal 2010 total hp gross margin increased 02 percentage points increase result increased mix networking products rate increase services effect partially offset strong revenue growth personal computers printer hardware lower gross margins services gross margin increased fiscal 2010 due primarily continued focus operating improvements including delivery efficiencies cost controls technology services business edsrelated acquisition synergies ess gross margin declined fiscal 2010 due primarily product mix shift resulting strength industry standard servers iss effect partially offset lower product costs strong volume hp software gross margin increased fiscal 2010 primarily result higher license support mix effect partially offset reduced services gross margin rate psg gross margin declined fiscal 2010 primarily result higher component costs effect partially offset lower warranty logistics expenses ipg gross margin declined fiscal 2010 due primarily higher mix hardware correspondingly lower mix supplies effect partially offset cost savings associated ongoing efforts optimize supply chain hpfs gross margin increased fiscal 2010 primarily result higher portfolio margins due favorable financing conditions higher remarketing margin effect partially offset higher bad debt corporate investments gross margin increased fiscal 2010 primarily result impact 3com acquisition along lower product costs network infrastructure products fiscal 2009 total hp gross margin decreased 06 percentage points fiscal 2009 segment perspective weighted basis ess largest impact total company gross margin decline due product mix shift rate declines hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services gross margin increased fiscal 2009 due primarily continued focus cost structure improvements including delivery efficiencies cost controls technology services business edsrelated acquisition synergies partially offset mix effect acquisition eds business lower gross margins ess gross margin decreased fiscal 2009 due primarily competitive pricing across segment business units product mix shifts hp software gross margin increased fiscal 2009 primarily result favorable support services revenue mix improved services margins effect partially offset unfavorable license revenue mix psg gross margin declined fiscal 2009 resulting average selling prices asps declining faster pace component costs combined mix shift towards lowerend products effects partially offset lower warranty supply chain costs improvements option attach rate ipg gross margin improved fiscal 2009 primarily result increase supplies mix supplies pricing effect partially offset hardware margin declines hpfs gross margin declined fiscal 2009 primarily result unfavorable currency impacts lower margins relating endoflease activities higher bad debt expenses lower margins remarketing buyout activities effect partially offset higher portfolio margins corporate investments gross margin declined fiscal 2009 primarily result unit volume decline sale network infrastructure products competitive pricing pressures operating expenses research development total research development rd expense increased fiscal 2010 due primarily additional expenses acquired companies fiscal 2010 rd expense percentage net revenue increased corporate investments hp software services decreased ess psg ipg flat hpfs total rd expense decreased fiscal 2009 due primarily favorable currency impacts related movement dollar euro well effective cost controls effect partially offset additional expenses related primarily services fiscal 2009 rd expense percentage net revenue decreased ess psg ipg increased hp software services corporate investments selling general administrative selling general administrative sga expense increased fiscal 2010 due primarily higher field selling marketing costs result investments sales resources grow revenue fiscal 2010 sga expense percentage net revenue increased corporate investments ipg decreased ess hp software psg hpfs services even invested incremental sales resources across segments total sga expense decreased fiscal 2009 due primarily favorable currency impacts related movement dollar euro lower compensation expense well effective cost hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued management impact partially offset additional expenses related eds acquisition fiscal 2009 sga expense percentage net revenue decreased segments except corporate investments amortization purchased intangible assets decrease amortization expense fiscal 2010 due primarily certain intangible assets associated prior acquisitions reaching end amortization periods effect partially offset increased amortization purchased intangible assets acquisitions completed fiscal 2010 increase amortization expense fiscal 2009 due primarily amortization expenses related intangible assets purchased part eds acquisition information amortization purchased intangibles assets see note 7 consolidated financial statements item 8 incorporated herein reference restructuring charges fiscal 2010 11 billion charges included 650 million severance facility costs related fiscal 2010 enterprise services restructuring plan 429 million severance facility costs related fiscal 2008 restructuring plan 46 million 18 million associated palm 3com restructuring plans respectively increase 1 million related adjustments restructuring plans restructuring charges fiscal 2009 640 million charges included 346 million severance facility costs related fiscal 2008 restructuring plan 297 million severance costs associated fiscal 2009 restructuring plan reduction 3 million related adjustments restructuring plans restructuring charges fiscal 2008 270 million included 246 million charges due primarily severance facility costs related eds acquisition net charge 24 million relating adjustments existing restructuring programs information restructuring charges see note 8 consolidated financial statements item 8 incorporated herein reference part ongoing business operations incurred workforce rebalancing charges severance related costs within certain business segments fiscal 2010 workforce rebalancing activities considered part normal operations continue optimize cost structure workforce rebalancing costs included business segment results expect incur additional workforce rebalancing costs future acquisitionrelated charges fiscal 2010 recorded acquisitionrelated charges 293 million primarily consulting integration costs acquisition costs retention bonuses associated eds 3com palm 3par arcsight acquisitions fiscal 2009 recorded acquisitionrelated charges 242 million primarily consulting integration costs well retention bonuses associated eds acquisition hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued interest net interest net improved 216 million fiscal 2010 improvement driven primarily lower currency losses balance sheet remeasurement items lower interest expenses debt balances due lower interest rates valueadded tax refund effect partially offset increase litigation accruals interest net decreased 721 million fiscal 2009 decrease driven primarily higher interest expenses due higher average debt balances principally related eds acquisition lower interest income result lower interest rates higher currency losses balance sheet remeasurement items additionally higher gains sale real estate fiscal 2008 compared fiscal 2009 provision taxes effective tax rates 202 186 205 fiscal 2010 2009 2008 respectively hps effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings hps operations lowertax jurisdictions throughout world hp provided us taxes international earnings hp plans reinvest earnings indefinitely outside united states increase overall tax rate fiscal 2010 due primarily decrease income tax benefits related foreign earnings decrease overall tax rate fiscal 2009 due primarily net income tax benefits recorded fiscal 2009 related foreign net operating losses adjustments estimated fiscal 2008 tax accruals upon filing 2008 income tax returns valuation allowance reversals state foreign net operating losses miscellaneous items full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 14 consolidated financial statements item 8 incorporated herein reference segment information description products services well financial data segment found note 19 consolidated financial statements item 8 incorporated herein reference realigned segment financial data fiscal years ended october 31 2009 2008 reflect changes hps organizational structure occurred beginning first quarter fiscal 2010 describe changes fully note 19 presented business segments annual report form 10k based distinct nature various businesses customer base homogeneity products technology discussions include results segments hp enterprise business services ess hp software reported collectively broader hp enterprise business describe results business segments hp enterprise business detail hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services components weighted net revenue change business unit follows following fiscal years ended october 31 services net revenue increased 07 decreased 17 adjusted currency fiscal 2010 net revenue infrastructure technology outsourcing increased 26 fiscal 2010 revenue increase due favorable currency impact growth data center services networking services net revenue technology services declined 04 fiscal 2010 revenue decline due primarily lower contract revenue tied reduced levels enterprise hardware sales prioryear period market conditions currentyear period effect partially offset favorable currency impact net revenue application services decreased 11 fiscal 2010 revenue decrease driven primarily market conditions existing contract completion effect partially offset new business favorable currency impact net revenue business process outsourcing decreased 35 fiscal 2010 revenue decrease due primarily divestiture completed end third quarter fiscal 2010 economic conditions certain industries key clients effect partially offset favorable currency impact services earnings operations percentage net revenue increased 16 percentage points fiscal 2010 operating margin increased primarily due continued focus operating improvements cost initiatives favorably impacted cost structure enterprise services business delivery efficiencies cost controls technology services business well edsrelated acquisition synergies services net revenue increased 654 716 adjusted currency fiscal 2009 increase revenues due primarily acquisition eds august 26 2008 net revenue infrastructure technology outsourcing application services business process outsourcing increased due eds acquisition net revenue increase infrastructure technology outsourcing application services business process outsourcing partially offset unfavorable currency impacts decline spending existing customers offset new growth due slowing demand current economic environment application services business process outsourcing impacted greater degree infrastructure technology outsourcing net revenue hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued technology services declined due primarily unfavorable currency impacts weak economic conditions effect partially offset growth extended warranty services earnings operations percentage net revenue increased 25 percentage points fiscal 2009 operating margin increased due primarily decrease operating expenses percentage revenue also increase gross margin fiscal 2009 operating expense declined result continued focus cost structure improvements overall cost controls gross margin services segment increased fiscal 2009 fiscal 2008 due primarily continued focus cost structure improvements including delivery efficiencies cost controls technology services business edsrelated acquisition synergies partially offset mix effect acquisition eds business lower gross margins enterprise storage servers components weighted net revenue change business unit follows following fiscal years ended october 31 ess net revenue increased 214 189 adjusted currency fiscal 2010 ess blades revenue increased 37 fiscal 2010 iss net revenue increased 35 fiscal 2010 driven primarily unit volume growth coupled increased average unit prices due improving market conditions demand latest generation iss products storage net revenue increased 9 fiscal 2010 driven primarily strong performance products related acquisition lefthand networks growth highend disk products storage networking products business critical systems bcs net revenue decreased 12 due primarily market conditions competitive pressures effect partially offset new product introductions fourth quarter fiscal 2010 ess earnings operations percentage net revenue increased 30 percentage points fiscal 2010 driven decreases operating expenses percentage net revenue effect partially offset declines gross margin operating expenses percentage net revenue decreased result operating leverage benefits increased volume cost controls gross margin decline fiscal 2010 due primarily product mix shift resulting strength iss effect partially offset lower product costs strong volume hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued ess net revenue decreased 208 160 adjusted currency fiscal 2009 revenue decline due primarily economic slowdown overall weak demand environment iss net revenue declined 20 fiscal 2009 due declines unit volume iss average unit prices declined fiscal 2009 improving second half fiscal 2009 result new product ramp total ess blades revenue declined 2 fiscal 2009 bcs net revenue decreased 27 fiscal 2009 driven decline integrity server revenue due weaker market conditions planned phaseout parisc alpha server product lines storage net revenue declined 17 fiscal 2009 due decline disk tape products result weaker demand environment effects partially offset revenue resulting acquisition lefthand networks completed first quarter fiscal 2009 fiscal 2009 ess earnings operations percentage net revenue decreased 34 percentage points due primarily decline gross margin gross margin fiscal 2009 decreased due primarily competitive pricing across segment business units product mix shifts operating expense percentage net revenue fiscal 2009 generally consistent fiscal 2008 hp software components weighted net revenue change business unit follows following fiscal years ended october 31 hp software net revenue increased 04 decreased 18 adjusted currency fiscal 2010 due growth business technology optimization bto information management business intelligence effect offset weakness sales communication media solutions fiscal 2010 support license revenue increased services revenue declined net revenue business technology optimization increased 2 fiscal 2010 due growth support license renewals net revenue software businesses decreased 3 fiscal 2010 due decline revenue sales communication media solutions resulting market conditions asia pacific region emea europe middle east africa revenue increase information management due primarily increases license support revenue increase business intelligence solutions primarily result increases support services hp software earnings operations percentage net revenue increased 21 percentage points fiscal 2010 operating margin improvement fiscal 2010 due primarily increase hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued gross margin decrease operating expenses percentage net revenue increase gross margin fiscal 2010 primarily result higher license support mix effect partially offset reduced services gross margin rate decrease operating expenses percentage net revenue fiscal 2010 due primarily lower field selling administrative acquisition integration costs hp software net revenue decreased 154 108 adjusted currency fiscal 2009 due softening enterprise spending declines large deals fiscal 2009 revenue licenses services declined effect partially offset increased support revenue result renewal rate increases net revenue bto decreased 15 fiscal 2009 compared fiscal 2008 net revenue software decreased 17 fiscal 2009 compared fiscal 2008 due declines revenues communication media solutions business intelligence solutions information management hp software earnings operations percentage net revenue increased 73 percentage points fiscal 2009 operating margin improvement fiscal 2009 due primarily increased gross margin coupled decreased operating expenses percentage net revenue increase gross margin fiscal 2009 resulted primarily favorable support services revenue mix improved services margins effect partially offset unfavorable license revenue mix decrease operating expenses percentage net revenue fiscal 2009 due primarily continued cost controls personal systems group components weighted net revenue change business unit follows following fiscal years ended october 31 psg revenue increased 154 128 adjusted currency fiscal 2010 revenue increase resulted balanced growth across regions psg unit volume net revenue increased across business units except handhelds business unit fiscal 2010 unit volume 14 commercial refresh cycle continued demand consumer notebooks drove increase shipments fiscal 2010 net revenue notebook pcs increased 12 desktop pcs revenue increased 20 workstations revenue increased 42 handhelds revenue declined 49 fiscal hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued 2010 net revenue consumer clients increased 12 commercial client revenue increased 20 net revenue increased 6 due primarily increased sales calculators home servers warranty extensions fiscal 2010 favorable impact psg net revenue unit increases accompanied 1 increase asps psg earnings operations percentage net revenue increased 03 percentage points fiscal 2010 increase driven improvements operating expenses percentage net revenue effect offset partially slight decline gross margins decrease operating expenses percentage net revenue due effective cost controls operating leverage benefits increased volume decrease gross margins result higher component costs effect partially offset lower warranty logistics expenses psg net revenue decreased 165 116 adjusted currency fiscal 2009 revenue decline primarily result overall slowdown global economy despite overall regional declines revenue china increased fiscal 2009 psg net revenue decreased across businesses fiscal 2009 unit volume increased slightly fiscal 2009 increase notebook pc volume offset decline desktop pcs workstations handheld devices unit volume increase notebook pcs due part growth hp compaq mini notebooks fiscal 2009 net revenue notebook pcs decreased 11 net revenue desktop pcs decreased 23 workstations handheld revenues declined 33 52 respectively fiscal 2009 fiscal 2009 net revenue consumer clients decreased 14 net revenue commercial clients decreased 19 net revenue increase psg related primarily increased sales extended warranties support services thirdparty branded options fiscal 2009 psg net revenue also impacted asp declines asps consumer clients declined 21 asps commercial clients declined 16 asps declined due primarily competitive pricing environment component cost reductions impact currency combined mix shift toward lowerend models asp decline fiscal 2009 offset slightly increase option monitor attach rates psg earnings operations percentage net revenue decreased 09 percentage points fiscal 2009 decrease due primarily gross margin decline resulting asps declining faster pace component costs combined mix shift toward lowerend products effects partially offset lower warranty supply chain costs improvements option attach rate decrease operating expenses percentage net revenue fiscal 2009 result effective cost controls imaging printing group hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued components weighted net revenue change business unit follows following fiscal years ended october 31 ipg net revenue increased 73 84 adjusted currency fiscal 2010 reflecting continued improvement market conditions net revenue commercial hardware increased 17 fiscal 2010 due primarily unit volume growth 19 driven improved product availability supplies net revenue increased 4 fiscal 2010 due primarily increased printing resulted stronger supply usage net revenue consumer hardware increased 9 fiscal 2010 driven primarily unit volume growth 11 ipg earnings operations percentage net revenue decreased 09 percentage points fiscal 2010 due primarily decline gross margin increases operating expenses percentage net revenue gross margin decline fiscal 2010 due primarily higher mix hardware correspondingly lower mix supplies effect partially offset cost savings associated ongoing efforts optimize supply chain increase operating expenses percentage net revenue fiscal 2010 due primarily increased marketing activities effect partially offset reduced administrative expenses ipg net revenue decreased 189 165 adjusted currency fiscal 2009 reflecting impact global economic slowdown net revenue commercial hardware declined 36 fiscal 2009 net revenue decline commercial hardware driven unit volume decline 38 fiscal 2009 due primarily worldwide market weaknesses impacting laser graphics businesses supplies net revenue declined 11 fiscal 2009 supplies net revenue decline fiscal 2009 across platforms result reductions channel inventory unfavorable currency impacts effect partially moderated supplies pricing net revenue consumer hardware declined 27 fiscal 2009 net revenue decline consumer hardware driven unit volume decline 24 fiscal 2009 reflecting weak demand environment channel inventory reductions ipg earnings operations percentage net revenue increased 26 percentage points fiscal 2009 operating margin improvement fiscal 2009 combination increase gross margin decrease operating expenses percentage net revenue improvement gross margin fiscal 2009 resulted primarily increase supplies mix supplies pricing effect partially offset hardware margin declines due unfavorable currency impacts declines average revenue per unit decrease operating expenses percentage net revenue fiscal 2009 due primarily effective cost controls hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hp financial services hpfs net revenue increased 14 fiscal 2010 net revenue increase due portfolio growth result higher customer demand higher operating lease mix due higher serviceled financing volume higher endoflease rental buyout remarketing activity along favorable currency movements hpfs earnings operations percentage net revenue increased 15 percentage points fiscal 2010 due primarily increase gross margin decrease operating expenses percentage revenue increase gross margin result higher portfolio margins due favorable financing conditions higher remarketing margin effect partially offset higher bad debt lower buyout margins decrease operating expenses percentage revenue driven primarily improved cost efficiencies hpfs net revenue decreased 09 fiscal 2009 net revenue decrease due unfavorable currency movements constant currency basis fiscal 2009 net revenue increased due primarily portfolio growth increased operating lease mix higher buyout activities effect partially offset lower levels remarketing endoflease activity hpfs earnings operations percentage net revenue increased 06 percentage points fiscal 2009 due primarily decrease operating expenses effect partially offset decline gross margin operating expense decrease due continued cost controls decline gross margin driven unfavorable currency impact lower margins relating end lease activity higher bad debt expenses lower remarketing buyout margins effect partially offset higher portfolio margins financing originations new financing originations represent amount financing provided customers equipment related software services including intercompany activity increased 149 fiscal 2010 fiscal 2009 69 fiscal 2009 fiscal 2008 increases reflect higher financing associated hp product sales services offerings resulting improved integration engagement hps sales efforts favorable currency impact portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include gross financing receivables approximately 67 billion 61 billion october 31 2010 october 31 2009 respectively net equipment operating leases 25 billion 22 billion october 31 2010 october 31 2009 respectively disclosed note 11 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 800 million 700 million october 31 2010 october 31 2009 respectively intercompany leases approximately 13 billion 10 billion october 31 2010 october 31 2009 respectively eliminated consolidation 2allowance doubtful accounts includes shortterm longterm portions allowance financing receivables 3hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs net portfolio assets october 31 2010 increased 138 october 31 2009 increase resulted higher levels financing originations fiscal 2010 favorable currency impact overall reserve coverage ratio increased percentage portfolio assets hpfs funds operations mainly combination intercompany debt equity hpfs recorded net bad debt expenses 75 million 50 million fiscal 2010 fiscal 2009 respectively hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued corporate investments net revenue corporate investments relates primarily network infrastructure products sold procurve networking 3com tippingpoint brands fiscal 2010 revenue procurve networking increased 339 driven improved market demand continued investment sales coverage revenue increase corporate investments also due revenues resulting acquisitions 3com palm hp completed april 2010 july 2010 respectively corporate investments reported positive earnings operations fiscal 2010 due primarily higher earnings operations generated network infrastructure products gross margin rate corporate investments fiscal 2010 increased primarily result impact 3com acquisition along lower product costs sale network infrastructure products earnings operations corporate investments also impacted expenses carried segment associated corporate development global alliances hp labs expenses declined fiscal 2009 fiscal 2009 net revenue corporate investments related primarily network infrastructure products sold brand procurve networking revenue network infrastructure products decreased 196 resulting slowdown networking market resulting decrease sales enterprise ethernet switch products partially offsetting revenue decline revenue resulting acquisition colubris networks inc colubris hp acquired october 2008 corporate investments reported loss operations fiscal 2009 compared positive earnings operations reported fiscal 2008 due primarily lower earnings operations generated network infrastructure products gross margin corporate investments declined fiscal 2009 result unit volume decline sale network infrastructure products competitive pricing pressure loss operations corporate investments also impacted expenses carried segment associated corporate development global alliances hp labs declined fiscal 2008 liquidity capital resources cash balances held numerous locations throughout world including substantial amounts held outside united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws provided united states federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states repatriation could result additional united states federal income tax payments future years local restrictions prevent efficient intercompany transfer funds hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued intent cash balances would remain outside united states would meet united states liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed liquidity use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support business operations capital expenditures payment stockholder dividends addition level discretionary investments share repurchases able supplement nearterm liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions liquidity subject various risks including market risks identified section entitled qualitative quantitative disclosures market risk item 7aitem 7 managements discussion analysis financial condition results operations discussion companys financial condition changes financial condition results operations appears financial review found pages 3133 3537 companys 1996 annual report shareholders pages excluding order data incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations discussion companys financial condition changes financial condition results operations appears financial review found pages 3243 companys 1998 annual report stockholders pages incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations unaudited following discussion read conjunction consolidated financial statements related notes appear elsewhere document hps consolidated financial statements periods present agilent technologies discontinued business segment accordance accounting principles board opinion 30 unless otherwise indicated following discussion relates hps continuing operations results operations 1999 hp reported net revenue growth 7 following 11 growth 1998 hp continued experience favorable market acceptance personal computer imaging printing products however continued aggressive pricing personal computer printer products sluggish performance unixregistered trademark servers enterprise storage impacted 1999 net revenue growth related operating margins net revenue grew 4 first half 1999 reflecting continued weakness asia however net revenue grew 11 second half driven strong product positions businesses economic improvement asia cost expense controls implemented hp second half 1998 favorable impact operating results 1999 offsetting impact slowdown fullyear revenue growth result fullyear operating net profit margins higher 1998 net earnings continuing operations increased 16 1999 compared 6 increase 1998 net revenue growth 7 1999 driven primarily growth imaging printing systems segment 11 revenue growth 1998 resulted primarily strong performance computing systems imaging printing systems segments compared 1998 international revenue increased 9 1999 234 billion us revenue grew 6 190 billion 1998 international revenue increased 10 us revenue increased 13 compared 1997 fluctuations currency rates minimal impact net revenue growth 1999 adversely impacted net revenue growth 1998 approximately 4 percentage points costs expenses earnings percentage net revenue follows years ended october 31 cost products sold services percentage net revenue 701 1999 compared 705 1998 691 1997 decrease cost sales percentage 1999 versus 1998 driven computing systems segment however decrease partially offset increase cost sales services segment increase 1998 cost sales percentage versus 1997 attributable primarily computing systems imaging printing systems segments hp expects hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited continued upward pressure cost sales result factors ongoing competitive pricing pressures total operating expenses composed research development selling general administrative expenses increased 9 1999 1998 years expense growth moderated result hiring controls implemented 1998 increased use outsourcing appropriate cost effective research development expense increased 3 1999 versus 1998 9 1998 compared 1997 increase spending reflects continuing investment design development new computing systems new technologies imaging printing systems selling general administrative expenses increased 11 1999 versus 1998 9 1998 compared 1997 1999 1998 growth due primarily increased selling costs related revenue growth well increased marketing costs continued introduction new products spending support eservices initiatives addition 1999 selling general administrative expenses increased result costs incurred realign hp two separate companies costs consisted primarily expenses effect spinoff agilent technologies incurred prior july 31 1999 measurement date discontinued operations accounting expenses composed primarily retention incentives given continuing hp employees involved effecting spinoff costs approximately one percentage point impact overall selling general administrative expense growth rate 1999 compared 1998 interest income net increased 178 million 1999 versus 1998 following 152 million increase 1998 compared 1997 increase years attributable primarily increase interest income associated higher average cash investment balances hps tax rate 26 1999 275 1998 295 1997 yeartoyear decreases result changes mix pretax earnings various tax jurisdictions throughout world reported net earnings continuing operations increased 16 31 billion 1999 compared 6 increase 27 billion 1998 percentage net revenue net earnings continuing operations 73 1999 compared 68 1998 71 1997 earnings discontinued operations include results businesses comprise agilent technologies earnings discontinued operations july 31 1999 measurement date discontinued operations accounting 387 million nine months ended july 31 1999 267 million 1998 604 million 1997 period august 1 1999 spinoff net earnings agilent technologies expected exceed estimated costs effect spinoff excess net earnings costs recognized net earnings realized exceed total estimated costs spinoff hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited segment information following discussion operating results hps business segments description products services well financial data segment found segment information note consolidated financial statements imaging printing systems imaging printing systems net revenue grew 11 1999 1998 following 7 increase 1998 compared 1997 net revenue growth years benefited strong sales printer hardware supplies despite strong unit growth dollar growth constrained declines average selling prices shifts lowend products net revenue growth printer hardware 1999 driven strong sales newly introduced home printers personalworkgroup office printers scanning devices home printers benefited positive acceptance lowend desktop printers color lasers drove strong growth personalworkgroup office printers made solid inroads office department category higher unit shipments new products fueled increase scanning devices despite sharp decline average selling prices growth printer hardware 1998 versus 1997 benefited strong sales personalworkgroup office printers result successful introduction new monochrome wide format printers growth printer supplies years attributable continued growth installed base growth internet shift next generation printer supply technologies earnings operations percentage net revenue 122 1999 compared 120 1998 127 1997 1998 imaging printing systems incurred approximately 120 million charges primarily voluntary employee severance programs fixed asset writedowns related outsourcing certain production operations decision outsource operations made provide flexibility manufacturing future adjusting charges earnings operations percentage net revenue would 127 1998 adjusted 05 percentage point decrease earnings operations percentage net revenue 1999 driven higher component costs attributable strengthening japanese yen shift toward lowermargin personalworkgroup office printers decrease partially offset strong sales highermargin printer supplies high volume shipments newly introduced home printers unchanged performance adjusted earnings operations ratio 1998 compared 1997 reflected lower average selling prices home printers offset strong sales highermargin supplies lower component costs associated weakening japanese yen compared 1997 years earnings operations percentage net revenue favorably impacted expense controls implemented beginning second half 1998 however impact controls offset investments made develop next generation technologies additional selling marketing expenses promote new imaging printing products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited computing systems computing systems net revenue increased 4 percent 1999 versus 1998 following 15 percent increase 1998 compared 1997 strong unit shipments number pc information storage products drove revenue growth years however actions designed maintain market share intense competition particularly 1998 contributed declines average selling prices products resulting unit volume growth outpaced revenue growth unixregistered trademark server enterprise storage revenue growth 1999 unfavorably impacted change highend storage strategy certain product transitions 1998 revenue growth benefited strong market acceptance new product introductions computing systems revenue growth 1999 reflected strong unit shipments home pcs increased sales information storage products mobile pcs highend unixregistered trademark servers introduced prior years also contributed revenue growth 1999 however weakness sales lowend midrange servers primarily north america transition new highend enterprise storage strategy mid1999 moderating impact overall revenue growth 1999 revenue growth 15 1998 due strong unit shipments home business desktop pcs new highend unixregistered trademark server products introduced 1997 1998 also contributed revenue growth 1998 sales new products also favorably impacted sales midrange unixregistered trademark servers enterprise storage products 1998 earnings operations percentage net revenue 46 1999 compared 29 1998 37 1997 17 percentage point increase 1999 versus 1998 attributable primarily favorable component prices business desktop pcs enterprise storage products improved pc inventory management shift towards highermargin enterprise storage products partially offset continued decline average selling prices shift towards lowend pc products 08 percentage point decline 1998 earnings operations percentage net revenue reflected higher sales mix lowend home pcs shift toward lowermargin pc servers intense competitive pricing several pc products impact partially offset declines component costs increased sales highermargin unixregistered trademark servers enterprise storage products expense controls implemented second half 1998 improved operational efficiencies favorable impact earnings operations ratio years services hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited services net revenue increased 13 1999 versus 1998 following 9 increase 1998 compared 1997 years strong growth support revenue moderated lower growth rates professional services include consulting outsourcing services financing represents leasing portfolio 13 growth 1999 revenue driven primarily support services growth support revenue reflected strong performance mission critical customer service program provides support mission critical systems networking services outsourcing revenue growth strong however consulting revenue grew nominally versus 1998 financing revenue growth 1999 unfavorably impacted lower rental starts competitive unixregistered trademark environment revenue growth 1998 also attributable strong growth support revenue due primarily success mission critical nt customer service programs revenue growth professional services moderate reflecting economic weakness asia managements efforts focus profitable revenue growth increase salestype leases also resulted moderate financing revenue growth 1998 earnings operations percentage net revenue 108 1999 compared 150 1998 166 1997 decrease 1999 reflected lease portfolio recoverability costs related primarily transition new highend enterprise storage strategy reduced profitability attributable slower growth new services competitive pricing increase number consultants support future growth operating expenses also increased result investment service support technologies marketing expenses related eservices initiatives decrease earnings operations percentage net revenue 1998 due primarily higher costs sales consulting outsourcing services competitive pricing pressures within support services liquidity capital resources hps financial position remained strong throughout 1999 cash equivalents shortterm investments increasing 56 billion october 31 1999 compared 41 billion october 31 1998 longterm investments relatively low levels debt compared assets large equity base contribute hps financial flexibility 1999 cash flows operating activities net proceeds borrowings used fund repurchases hps common stock purchases property plant equipment additionally hp increased dividends per share paid 1999 1998 operating activities generated 31 billion cash 1999 compared 48 billion 1998 34 billion 1997 decrease cash generated 1999 resulted primarily higher investments receivables inventories due growth timing tax payments increase cash generated 1998 compared 1997 due primarily decrease hps inventory levels 1998 inventory percentage net revenue decreased 115 1999 119 1998 progress supply chain management continued accounts financing receivables percentage net revenue 185 1999 167 1998 higher ratio 1999 reflected primarily increase salestype lease financing receivables capital expenditures 11 billion 1999 compared 16 billion 1998 18 billion 1997 net property plant equipment percentage net revenue 102 1999 124 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited 1998 decreases fixed asset ratio related capital expenditures 1999 1998 reflect increased outsourcing certain production processes consolidation operations improve space utilization hps emphasis cost controls hp invests excess cash short longterm investments depending projected cash needs operations capital expenditures business purposes also supplement internally generated cash flow combination short longterm borrowings shortterm borrowings increased 1999 due use shortterm debt meet shortterm working capital requirements maturities longterm debt totaling 10 billion repaid scheduled 1999 1998 net receipts maturities shortterm investments used pay short longterm debt october 31 1999 hp unused committed borrowing facility place totaling 10 billion hp repurchases shares common stock systematic program manage dilution created shares issued employee stock plans separate incremental plan authorizing purchases open market private transactions 1999 31 million shares repurchased plans aggregate price 26 billion 1998 43 million shares repurchased plans 24 billion 1999 hps board directors authorized additional 20 billion future repurchases two programs aggregate october 31 1999 hp authorization remaining future repurchases two programs approximately 14 billion november 1999 board directors authorized additional 20 billion future repurchases plans resulting remaining authorized repurchases totaling 34 billion november 1 1999 hp provided initial funding approximately 11 billion agilent technologies november 23 1999 agilent technologies closed initial public offering approximately 16 common stock distributed net proceeds 21 billion hp factors could affect future results competition encounter aggressive competition areas business numerous competitors ranging worlds largest corporations many relatively small highly specialized firms compete primarily basis technology performance price quality reliability distribution customer service support product life cycles short remain competitive hp must able develop new products periodically enhance existing products particular anticipate continue lower prices many products stay competitive effectively manage financial returns resulting reduced gross margins markets may able compete successfully current future competitors competitive pressures face could harm business prospects new product introductions cannot continue rapidly develop manufacture market innovative products services meet customer requirements performance reliability may lose market share future revenue earnings may suffer process developing new high technology products services complex uncertain must accurately anticipate customers changing needs emerging technological trends consequently must make longterm investments commit significant resources knowing whether predictions eventually result products market accept hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited product developed must able manufacture sufficient volumes quickly low enough costs must accurately forecast volumes mix products configurations additionally supply timing new product service must match customers demand timing particular product service given wide variety systems products services hp offers process planning production managing inventory levels becomes increasingly difficult reliance third party distribution channels inventory management use thirdparty distributors sell products especially printers personal computers order accommodate changing customer preferences result financial soundness wholesale retail distributors continuing relationships distributors important hps success distributors may insufficient financial resources may able withstand changes business conditions revenue earnings could suffer distributors financial condition operations weaken relationship deteriorates additionally inventory management becomes increasingly complex continue sell significant mix products distributors third party distributors constantly adjust product orders us response supply competitors products available distributor timing new product introductions relative features products seasonal fluctuations enduser demand backtoschool holiday buying distributors may increase orders times product shortages cancel orders inventory high delay orders anticipation new products excess inventory may reduce prices write inventory turn could result lower gross margins short product life cycle short life cycles many products pose challenge us manage effectively transition existing products new products manage transition effectively revenue earnings could suffer among factors make smooth transition current products new products difficult delays product development manufacturing variations product costs delays customer purchases existing products anticipation new product introductions revenue earnings could also suffer due timing product service introductions suppliers competitors especially true competitor introduces new product introduction new products may replace compete certain current products intellectual property generally rely upon patent copyright trademark trade secret laws united states certain countries agreements employees customers partners establish maintain proprietary rights technology products however intellectual proprietary rights could challenged invalidated circumvented intellectual property may necessarily provide significant competitive advantages also rapid pace technological change information technology industry many products rely key technologies developed hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited third parties may able continue obtain licenses third parties third parties may claim infringing intellectual property even believe products infringing third parties intellectual property rights claims timeconsuming costly defend divert managements attention resources away business claims intellectual property infringement might also require us enter costly royalty license agreements cannot license infringed technology substitute similar technology another source business could suffer reliance suppliers manufacturing operations depend suppliers ability deliver quality components products time us meet critical manufacturing distribution schedules sometimes experience short supply certain component parts result strong demand industry parts shortages delays persist operating results could suffer sources developed order secure components production new products times make advance payments suppliers may enter noncancelable purchase commitments vendors prices component parts decrease entered binding price agreements earnings could suffer may able secure enough components reasonable prices build new products timely manner quantities configurations needed conversely temporary oversupply parts could also affect operating results international sales outside united states make half revenues portion product component manufacturing along key suppliers also located outside united states future earnings financial position could adversely affected variety international factors including changes country regions political economic conditions trade protection measures import export licensing requirements overlap different tax structures unexpected changes regulatory requirements differing technology standards problems caused conversion various european currencies euro see adoption euro section follows natural disasters market risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales assets liabilities denominated currencies us dollar also exposed interest rate risk inherent debt investment portfolios risk management strategy uses hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited derivative financial instruments including forwards swaps purchased options hedge certain foreign currency interest rate exposures intent offset gains losses occur underlying exposures gains losses derivative contracts hedging exposures enter derivatives trading purposes see also financial instrumentsoffbalancesheet foreign exchange risk borrowings notes consolidated financial statements detailed information performed sensitivity analysis assuming hypothetical 10 adverse movement foreign exchange rates applied hedging contracts underlying exposures described hypothetical 10 adverse movement interest rates applied debt investment portfolios october 31 1999 1998 analysis indicated hypothetical market movements would material effect hps consolidated financial position results operations cash flows actual gains losses future may differ materially analysis however based changes timing amount interest rate foreign currency exchange rate movements hps actual exposures hedges acquisitions strategic alliances joint ventures divestitures normal course business hp frequently engages discussions third parties relating possible acquisitions strategic alliances joint ventures divestitures although completion transaction unlikely material effect financial position results operations cash flows taken whole may contribute financial results differing investment communitys expectations given quarter divestiture part business may result cancellation orders charges earnings acquisitions strategic alliances may require us integrate different company culture management team business infrastructure may also develop manufacture market products way enhances performance combined business product line depending size complexity acquisition successful integration entity hp depends variety factors including hiring retention key employees management facilities separate geographic areas integration coordination different research development product manufacturing facilities efforts require varying levels management resources may divert attention business operations earthquake corporate headquarters portion research development activities critical business operations certain suppliers located near major earthquake faults ultimate impact hp significant suppliers general infrastructure unknown operating results could materially affected event major earthquake predominantly uninsured losses interruptions caused earthquakes hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited environmental operations use substances regulated various federal state international laws governing environment policy apply strict standards environmental protection sites inside outside us even subject local government regulations record liability environmental remediation related costs consider costs probable amount costs reasonably estimated environmental costs presently material results operations financial position profit margin profit margins vary somewhat among products customer groups geographic markets consequently overall profitability given period partially dependent product customer geographic mix reflected periods net revenue stock price hps stock price like technology companies volatile factors affect stock price competitors announcement new products services technological innovations quarterly increases decreases earnings changes revenue earnings estimates investment community speculation press investment community general market conditions domestic international macroeconomic factors unrelated performance may also affect hps stock price reasons investors rely recent trends reliably predict future stock prices financial results addition following periods volatility companys securities class action litigation company sometimes instituted type litigation could result substantial costs diversion management time resources earnings fluctuations although believe products resources needed continuing success cannot reliably predict future revenue margin trends actual trends may cause us adjust operations could cause periodtoperiod fluctuations earnings planned spinoff agilent technologies hp announced intends distribute stockholders common stock agilent technologies hp owns july 31 2000 although hp obligated distribution may occur date hp may obtain benefits expect result distribution greater strategic focus core computing imaging printing businesses addition hps consolidated financial statements reflect financial position results operations cash flows hp would agilent technologies separate standalone entity periods presented hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited year 2000 information provided constitutes year 2000 readiness disclosure purposes year 2000 information readiness disclosure act january 2000 update first week year 2000 hps operations around world fully functioning experienced significant issues associated year 2000 problem described customersupport operations continue communicate us hp customers reported consequential year 2000 incidents number year 2000related telephone calls customers hps response centers customercare centers much lower anticipated hp sites worldwide experienced significant year 2000related issue would affect ability manufacture ship sell service products encouraged success year 2000 efforts customers partners hp continue offer year 2000 support customers monitor operations year 2000 readiness overview year 2000 problem arises use twodigit field identify years computer programs eg 851985 assumption single century 1900s program created may read attempt read 00 year 1900 two related issues could also lead incorrect calculations failure systems programming assigns special meaning certain dates year 2000 leap year accordingly computer hardware software including programs embedded within machinery parts need modified prior year 2000 remain functional year 2000 initiatives focusing primarily four areas potential impact internal information technology systems internal nonit systems processes including services embedded chips controllers products services readiness significant third parties material business relationships 1997 hp established year 2000 program office coordinate programs businesses across enterprise provide single point contact information year 2000 programs year 2000 efforts areas led year 2000 general manager reports directly hps senior management costs associated internal readiness actions combination incremental external spending use existing internal resources estimate life internal readiness effort spent total approximately 160 million multiyear period based current estimates believe costs associated actions material effect results operations cash flows financial condition however costs actions may vary quarter cannot assure delay increased costs associated implementation changes addition failure achieve year 2000 readiness internal systems processes could delay ability manufacture ship products deliver services disrupt customer service technical support facilities interrupt customer access online products services inability perform functions could adverse effect future results operations cash flows financial condition hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited internal systems hp established dedicated year 2000 internal readiness program organization oversee worldwide year 2000 internal application infrastructure readiness activities businesses internal readiness program organization provided monthly progress reports hps senior management internal readiness program organization charged raising awareness throughout hp developing tools methodologies addressing year 2000 issue monitoring development implementation business infrastructure plans bring noncompliant applications compliance timely basis identifying helping resolve highrisk issues approached year 2000 internal readiness program four phases 1 assessment 2 planning 3 preparation 4 implementation assessment phase involved taking inventory internal applications prioritize risk identifying failure dates defining solution strategy estimating repair costs communicating across within business units regarding magnitude problem need address year 2000 issues planning phase consisted identifying tasks necessary ensure readiness scheduling remediation plans applications infrastructure determining resource requirements allocations third phase preparation involved readying development testing environments piloting remediation process implementation last phase consisted executing plans fix test implement critical applications associated infrastructure putting place contingency plans processes high impact businesses october 31 1999 implementation phase virtually complete internal nonit systems processes nonit systems include limited systems commonly thought systems telephonepbx systems fax machines facilities systems regulating alarms building access sprinklers manufacturing assembly distribution equipment miscellaneous systems processes year 2000 readiness internal nonit systems responsibility worldwide operating units respective functions operations eg facilities research development manufacturing distribution logistics sales customer support year 2000 program office developed comprehensive process ensure operations global business units use structured standardized methodology organize plan implement year 2000 readiness hp also established year 2000 council coordinate overall internal readiness business continuity planning efforts council composed representatives major business units within hp critical corporate infrastructure functions support council chaired year 2000 general manager initiated comprehensive program ensure timely consistent business continuity planning hps business units october 31 1999 hp finished virtually year 2000 testing internal mitigation remediation activities business contingency plans product customer readiness newly introduced products year 2000 compliant however hardware software products currently installed customer sites require upgrade remediation products used critical applications impact nonperformance customers hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited parties could significant believe customers responsible year 2000 readiness business environments taking significant steps enable customers achieve readiness goals thereby preserving customers satisfaction brand reputation 1997 hp established dedicated year 2000 product compliance program office coordinate worldwide year 2000 product compliance activities businesses product compliance program office charged developing overseeing implementation plans identify standard products delivered since january 1 1995 test products compliance identify appropriate path compliance noncompliant standard products communicate status necessary customer action noncompliant standard products hp internet web site dedicated communicating year 2000 issues broad customer base web site includes product compliance search page allows customers look status hp products installed key business groups complementary internet web sites dedicated similar communication specific customers taking additional steps identify affected customers raise customer awareness related noncompliance products help customers assess risks efforts coordinated hp year 2000 products customers board directors composed representatives hps product service business units board works conjunction product compliance program office develop implement hps year 2000 policies products services year 2000 general manager chairs board costs readiness program products primarily costs existing internal resources largely absorbed within existing engineering spending levels costs incurred primarily 1998 earlier years broken product engineering costs past year 2000 customer satisfaction costs material future product readiness costs including customer satisfaction anticipated material aware potential legal claims us companies damages arising products year 2000 compliant believe taken sufficient communication customer satisfaction steps claims would result material liability us unknown significantly year 2000 issues may affected could affect customer spending patterns customers focused attention preparing businesses year 2000 may delayed purchases new applications services systems hp result may affect future revenues revenue patterns however information date impact would materially affect revenue growth material thirdparty relationships developed year 2000 process dealing key suppliers contract manufacturers distributors vendors partners process generally involves following steps 1 initial supplier survey 2 risk assessment contingency planning 3 followup supplier reviews escalation necessary 4 relevant testing received formal responses substantially critical suppliers responded expected address significant year 2000 issues timely basis regularly reviewed monitored suppliers year 2000 readiness plans performance based risk assessment selective onsite reviews performed risk analysis completed base suppliers contingency plans developed tested critical surveys hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited testing efforts completed june 1 1999 cases meet year 2000 readiness replaced suppliers eliminated suppliers consideration new business efforts work critical suppliers successful contingency planning generally emphasizes identification substitute secondsource suppliers certain situations includes planned increase level inventory held eg case sole sources also contracted multiple transportation companies provide product delivery alternatives conducted electronic data interchange edi migration testing supply base identified analyzed reasonably likely worstcase scenarios thirdparty relationships affected year 2000 scenarios included possible infrastructure collapse failure power water supplies major transportation disruptions unforeseen product shortages due hoarding products subassemblies failures communications financial systems one scenarios could major material effect ability build products deliver services customers contingency plans place address issues control infrastructure problem outside control combination several problems could resulted delay product shipments depending nature severity problems expected utilities service providers would able restore service within days although pervasive system problems involving multiple providers could lasted two four weeks depending complexity systems effectiveness contingency plans although dedicating substantial resources towards attaining year 2000 readiness cannot assure successfully identify address year 2000 issues even though confident acted timely manner complete assessments identify develop implement remediation plans believed adequate develop contingency plans believed adequate problems may identified corrected time prevent material adverse consequences us discussion regarding estimated completion dates costs risks forwardlooking statements regarding year 2000 based best estimates given information currently available subject change conclude year 2000 initiatives remainder calendar year 2000 may discover actual results differ materially estimates adoption euro hp established dedicated task force address issues raised introduction european single currency euro euros initial implementation effective january 1 1999 transition period continue january 1 2002 january 1 1999 began converting product prices local currencies euros required appropriate point transition period product prices participating countries established stored euros converted local denominations implemented system changes give multicurrency capability internal applications yet capability ensure external partners systems processing euro conversions compliant european council regulations developed plans support display printing euro character impacted hp products currently able perform functions plans still process products hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued unaudited conversion euro material effect foreign exchange hedging activities use derivative instruments presently expect materially increased costs expect costs associated conversion euro expensed operations incurred continue evaluate impact euro conversion time based currently available information believe conversion euro currency material adverse impact consolidated financial condition cash flows results operations recent accounting pronouncements june 1998 financial accounting standards board issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities statement establishes accounting reporting standards derivative instruments requires recognition derivatives assets liabilities statement financial position measurement instruments fair value statement amended effective fiscal years beginning june 15 2000 hp adopt standard later first quarter fiscal year 2001 process determining impact adoption consolidated financial statements december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements staff accounting bulletin effective later first quarter hps fiscal year 2001 hp process determining impact adoption consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses large enterprises including customers government health education sectors offerings span •personal computing access devices •multivendor customer services including infrastructure technology business process outsourcing technology support maintenance application development support services consulting integration services •imaging printingrelated products services •enterprise information technology infrastructure including enterprise storage server technology networking products solutions management software information management solutions security intelligencerisk management solutions seven business segments financial reporting purposes personal systems group psg services imaging printing group ipg enterprise servers storage networking essn hp software hp financial services hpfs corporate investments strategy operations currently focused following initiatives strategic focus core business hardware products include pc server storage networking imaging printing products software business provides enterprise management software information management solutions security intelligencerisk management solutions delivered form traditional software licenses softwareasaservice allow us differentiate hardware products deploy manner helps customers solve problems meets customers needs manage infrastructure operations application life cycles application quality security business processes structured unstructured data converged infrastructure portfolio servers storage networking combined cloud service automation software suite enables enterprise service provider clients deliver infrastructure platform softwareasaservice private public hybrid cloud environment layered top hardware software businesses services business provides opportunities drive usage hp products solutions enables us implement manage technologies upon customers rely gives us platform solutionoriented better strategic partner customers leveraging portfolio scale offer one industrys broadest portfolios products services leverage portfolio strategic advantage example able provide servers storage networking products packaged services delivered customers manner hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued choosing inhouse outsourced service via internet via hybrid environment portfolio management software completes package allowing customers manage operations efficient costeffective manner addition working optimize supply chain eliminating complexity reducing fixed costs leveraging scale ensure availability components favorable prices even shortages also expanding use industry standard components enterprise products leverage scale investing business investing business strengthen position core markets accelerate growth adjacent markets anticipation market trends cloud computing unstructured data center consolidation automation digitization analytics security also creating innovative new products developing new channels connect customers addition making focused investments strengthen portfolio products services offer customers organic investments well acquisitions investments allow us expand higher margin higher growth industry segments strengthen portfolio hardware software services driving operational effectiveness continuing work optimize operational effectiveness across company operational effectiveness remains critical success hp implementing efficiency productivity quality initiatives throughout company example continuing execute ongoing initiatives transform supply chain leverage corporate infrastructure also adopted initiative implement better tools standardize key processes integrate critical systems minimize redundant legacy systems take actions improve productivity sales forecasting business decisions addition continuing implement multiyear restructuring plan announced june 2010 relating enterprise services business see note 8 consolidated financial statements item 8 discussion restructuring plan associated restructuring charges following provides overview key fiscal 2011 financial metrics 1includes corporate investments eliminations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued cash equivalents october 31 2011 totaled 80 billion decrease 29 billion october 31 2010 balance 109 billion decrease fiscal 2011 due primarily 105 billion net cash paid business acquisitions 101 billion cash used repurchase common stock 35 billion net investment property plant equipment effect partially offset 126 billion cash provided operations 83 billion net issuance debt intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles gaap require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions summary significant accounting policies included note 1 consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued revenue element recognize revenue delivered elements separate units accounting delivered elements standalone value uncertainties regarding customer acceptance resolved customernegotiated refund return rights delivered elements standalone value recognize revenue consistent pattern associated deliverables arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially control delivered element constitutes separate unit accounting changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract recognize revenue work progresses certain fixedprice contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue income result revisions cost estimates period facts give rise revision become known recognize revenue certain design build design development andor constructions software andor systems projects using percentageofcompletion method use costtocost method measurement towards completion determined percentage cost incurred date total estimated costs project circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience specific terms conditions incentive number customers actually redeem incentive revenue recognition policies establish selling prices used deliverable based vendorspecific objective evidence vsoe available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority thirdparty evidence selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles may modify develop new gotomarket practices future gotomarket strategies evolve may modify pricing practices future may result changes selling prices impacting vsoe esp aforementioned factors may result different allocation revenue deliverables multiple element arrangements current fiscal year may change pattern timing hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued revenue recognition elements change total revenue recognized arrangement warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates post sales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty provision averaged approximately 33 annual net product revenue actual annual warranty costs experienced favorable trends averaged approximately 32 annual net product revenue business combinations allocate fair value purchase consideration tangible assets acquired liabilities assumed intangible assets acquired including inprocess research development iprd based estimated fair values excess fair value purchase consideration fair values identifiable assets liabilities recorded goodwill engage independent thirdparty appraisal firms assist us determining fair values assets acquired liabilities assumed valuations require management make significant estimates assumptions especially respect intangible assets critical estimates valuing certain intangible assets include limited future expected cash flows customer contracts customer lists distribution agreements acquired developed technologies patents expected costs develop iprd commercially viable products estimating cash flows projects completed brand awareness market position well assumptions period time brand continue used product portfolio discount rates managements estimates fair value based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates associated accounting acquisitions may change additional information becomes available regarding assets acquired liabilities assumed fully discussed note 6 consolidated financial statements item 8 incorporated herein reference valuation goodwill purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable provisions accounting standard goodwill intangibles require perform twostep impairment test goodwill first step compare fair value hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued reporting unit carrying value general reporting units consistent reportable segments identified note 19 consolidated financial statements item 8 incorporated herein reference however webos business within corporate investments reporting unit one step segment level determine fair value reporting units based weighting income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference also compare fair value purchased intangible assets indefinite lives carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible asset less carrying value determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units annual goodwill impairment analysis performed fourth quarter fiscal 2011 resulted impairment charge webos business discussed note 7 consolidated financial statements item 8 incorporated herein reference impairment hps remaining reporting units excess fair value carrying value hps reporting units august 1 2011 annual testing date ranged approximately 04 billion approximately 256 billion order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease would result excess fair value carrying value ranging approximately 02 billion approximately 227 billion hps reporting units also performed annual impairment analysis indefinitelived intangible asset valued 14 billion impairment indefinitelived intangible result analysis excess fair value carrying value compaq trade name psg business approximately 144 million august 1 2011 annual testing date order evaluate sensitivity fair value calculation applied hypothetical 10 decrease fair value intangible resulted excess fair value carrying value approximately 13 million addition future change hps branding strategy resulted reclassification compaq trade name indefinitelived intangible definitelived intangible would significant decrease fair value asset hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued continue evaluate goodwill indefinitelived intangibles annual basis beginning fourth fiscal quarter whenever events changes circumstances changes management business strategy indicate may potential indicator impairment december 9 2011 announced determined contribute webos software open source community currently evaluating impact decision 273 million related intangible assets goodwill recorded consolidated balance sheet restructuring engaged may continue engage restructuring actions require management utilize significant estimates related timing expenses severance employee separation costs realizable values assets made redundant obsolete lease cancellation exit costs actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 8 consolidated financial statements item 8 incorporated herein reference stockbased compensation expense recognize stockbased compensation expense sharebased payment awards net estimated forfeiture rate recognize compensation cost shares expected meet service performance vesting conditions straightline basis requisite service period award compensation costs determined aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions determining appropriate fair value model calculating fair value sharebased payment awards requires subjective assumptions including expected life sharebased payment awards stock price volatility utilize blackscholes option pricing model value servicebased stock options granted principal option plans implement model examined historical pattern option exercises determine discernable activity patterns based certain employee populations analysis identified three employee populations apply blackscholes model determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility issued performancebased restricted units prus representing hypothetical shares hp common stock pru award reflected target number shares may issued award recipient determine actual number shares recipient receives end threeyear performance period based results achieved versus goals based annual cash flow operations percentage revenue total shareholder return tsr relative sp 500 performance period use historic volatility pru awards implied volatility cannot used simulating multivariate prices companies sp 500 estimate fair value prus using monte carlo simulation model tsr modifier contains market condition update estimated expense net forfeitures cash flow performance goal year end reporting period assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued management judgment result factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected meet service performance vesting conditions actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period see note 2 consolidated financial statements item 8 discussion stockbased compensation taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third fourth quarters subsequent year us federal state provisions respectively recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would increase valuation allowance make corresponding charge earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2024 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states approximately 80 foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges determining income tax expense potential assessments recording related assets liabilities requires management judgments estimates evaluate uncertain tax positions accordance guidance hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued accounting uncertainty income taxes believe reserve uncertain tax positions including related interest adequate amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations see note 14 consolidated financial statements item 8 discussion taxes earnings allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience also record specific provisions individual accounts become aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position circumstances related customer change would adjust estimates recoverability receivables either upward downward annual provision doubtful accounts averaged approximately 016 net revenue last three fiscal years using thirdparty credit risk model october 31 2011 50basispoint deterioration weightedaverage default probabilities significant customers would resulted approximately 62 million increase trade allowance end fiscal year 2011 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates fair value financial instruments measure certain financial assets liabilities fair value based valuation techniques using best information available may include quoted market prices market comparables discounted cash flow projections financial instruments primarily comprised time deposits money market funds commercial paper corporate debt securities equity securities investments common stock common stock equivalents derivative instruments hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued cash equivalents investments hold time deposits money market funds commercial paper debt securities primarily consisting corporate foreign government notes bonds common stock equivalents general applicable use quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value use quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available use internally developed valuation models whose inputs include bid prices third party valuations utilizing underlying asset assumptions derivative instruments discussed note 10 consolidated financial statements item 8 mainly hold nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures active market quotes available use industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases use management judgment develop assumptions used determine fair value retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates salary growth longterm return plan assets base discount rate assumption current investment yields high quality fixedincome investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectations related future economic environment well target asset allocations major assumptions vary plan weightedaverage rates used set forth note 16 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved direction last several years fiscal 2011 changes weightedaverage rates hp benefit plans would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 56 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 82 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 18 million loss contingencies involved various lawsuits claims investigations proceedings arise ordinary course business record provision liability believe probable liability incurred amount reasonably estimated significant judgment required determine probability estimated amount review provisions least quarterly adjust provisions reflect impact negotiations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued settlements rulings advice legal counsel updated information litigation inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows see note 18 consolidated financial statements item 8 discussion litigation contingencies accounting pronouncements june 2011 financial accounting standards board fasb issued amendments fasb accounting standards codification relating presentation comprehensive income financial statements amendments require presentation total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements adopt amendments fourth quarter fiscal 2012 constant currency presentation revenue international operations historically represented expect continue represent majority overall net revenue result revenue growth impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing business segments performed excluding impact foreign currency fluctuations present yearoveryear percentage change revenue performance constant currency basis assumes change exchange rate prioryear period constant currency disclosure provided addition substitute yearoveryear percentage change revenue asreported basis results operations following discussion compares historical results operations gaap basis fiscal years ended october 31 2011 2010 2009 unless otherwise noted comparative performance data included reflect yearoveryear comparisons hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued results operations dollars percentage net revenue follows following fiscal years ended october 31 1in august 2011 announced would wind webos device business table sets forth impact webosrelated actions specific line items table 2in connection organizational realignments implemented first quarter fiscal 2011 certain costs previously reported cost sales reclassified selling general administrative expenses better align costs functional areas benefit expenditures 3cost products cost services financing interest 4for fiscal 2011 interest net includes 276 million charges connection acquisition autonomy corporation plc autonomy primarily comprised 265 million net cost british pound options bought limit foreign exchange rate risk hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued net revenue components weighted net revenue change follows following fiscal years ended october 31 1reflects certain reclassifications made historical results conform current year presentation noted note 19 consolidated financial statements item 8 fiscal 2011 fiscal 2011 total hp net revenue increased 10 decreased 09 constant currency basis us net revenue decreased 10 441 billion net revenue outside united states increased 20 831 billion reflected table essn segment largest contributor hp net revenue growth result balanced growth across regions essn segment net revenue growth helped strong performance products related 3par inc 3par 3com corporation 3com acquisitions analysis change net revenue business segment included segment information fiscal 2010 fiscal 2010 total hp net revenue increased 100 83 constant currency basis us net revenue increased 78 445 billion net revenue outside united states increased 113 815 billion fiscal 2010 psg segment largest contributor hp net revenue growth result balanced growth across regions analysis change net revenue business segment included segment information gross margin fiscal 2011 fiscal 2011 total hp gross margin decreased 05 percentage points decline driven lower gross margin services ipg corporate investments segments effect partially offset favorable commodity pricing environment psg essn segments favorable mix higher hp software hp networking revenue psg gross margin increased fiscal 2011 primarily result favorable commodity pricing environment combined lower warranty costs hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services gross margin decreased fiscal 2011 due primarily lower expected revenue rate concessions arising recent contract renewals lower expected resource utilization rate higher mix lowermargin infrastructure technology outsourcing revenue decrease partially offset continued focus operating improvements cost initiatives favorably impacted cost structure enterprise services technology services businesses ipg gross margin declined fiscal 2011 due primarily increased logistics costs supply chain constraints laserjet printer engines toner result earthquake tsunami japan unfavorable currency impact driven primarily strength yen addition ipg gross margin declined due continuing mix shift consumer hardware commercial hardware toward lower price point products coupled lower mix supplies revenue effects partially offset reductions ipgs cost structure result continued efforts optimize supply chain essn gross margin increased fiscal 2011 primarily result lower product costs higher mix networking products effect partially offset price declines result competitive pressure hp software gross margin decreased fiscal 2011 due primarily rate declines licenses services hpfs gross margin decreased fiscal 2011 due primarily lower portfolio margins higher mix operating leases effect partially offset lower bad debt expense percentage revenue higher margins lease extensions buyouts corporate investments gross margin decreased fiscal 2011 primarily result impact wind webos device business resulted expenses supplierrelated obligations sales incentive programs inventory write downs fiscal 2010 fiscal 2010 total hp gross margin increased 03 percentage points increase result increased mix networking products rate increase services effect partially offset strong revenue growth personal computers printer hardware lower gross margins psg gross margin declined fiscal 2010 primarily result higher component costs effect partially offset lower warranty logistics expenses services gross margin increased fiscal 2010 due primarily continued focus operating improvements including delivery efficiencies cost controls technology services business acquisition synergies related acquisition electronic data systems corporation eds ipg gross margin declined fiscal 2010 due primarily higher mix hardware correspondingly lower mix supplies effect partially offset cost savings associated ongoing efforts optimize supply chain essn gross margin increased fiscal 2010 due primarily lower product costs strong volume effect partially offset product mix shift resulting strength industry standard servers iss lower gross margins hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hp software gross margin increased fiscal 2010 primarily result higher license support mix effect partially offset reduced services gross margin rate hpfs gross margin increased fiscal 2010 primarily result higher portfolio margins due favorable financing conditions higher remarketing margin effect partially offset higher bad debt lower buyout margin corporate investments gross margin increased fiscal 2010 primarily result impact acquisition palm inc palm operating expenses research development total research development rd expense increased fiscal 2011 due primarily additional expenses acquired companies fiscal 2011 rd expense increased essn corporate investments hp software decreased services psg increase essn driven acquisition investments innovationfocused spend networking storage products increase corporate investments due investments development webos devices first three quarters fiscal 2011 total rd expense increased fiscal 2010 due primarily additional expenses acquired companies fiscal 2010 rd expense increased essn ipg corporate investments hp software services decreased psg selling general administrative selling general administrative sga expense increased fiscal 2011 due primarily higher field selling costs result investments sales resources grow revenue increase fiscal 2011 partially offset 334 million net gains sale real estate 77 million net gain divestiture halo video collaboration products business fiscal 2011 sga expense percentage net revenue increased segments except hpfs services ipg experienced decrease total sga expense increased fiscal 2010 due primarily higher field selling marketing costs result investments sales resources grow revenue fiscal 2010 sga expense percentage net revenue decreased segments except ipg experienced increase amortization purchased intangible assets increase amortization expense fiscal 2011 due primarily increased amortization purchased intangible assets acquisitions completed fiscal 2010 increase partially offset decreased amortization expenses related certain intangible assets associated prior acquisitions reaching end amortization periods decrease amortization expense fiscal 2010 due primarily certain intangible assets associated prior acquisitions reaching end amortization periods effect partially offset increased amortization purchased intangible assets acquisitions completed fiscal 2010 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued information amortization purchased intangibles assets see note 7 consolidated financial statements item 8 incorporated herein reference impairment goodwill purchased intangible assets result decision wind webos device business fourth quarter fiscal 2011 hp recorded impairment charge goodwill certain purchased intangible assets associated palm acquisition information impairment charges see note 7 consolidated financial statements item 8 incorporated herein reference restructuring charges restructuring charges fiscal 2011 645 million charges included 326 million severance facility costs related fiscal 2008 restructuring plan 266 million severance facility costs related fiscal 2010 enterprise services restructuring plan 33 million related decision wind webos device business restructuring charges fiscal 2010 11 billion charges included 650 million severance facility costs related fiscal 2010 enterprise services restructuring plan 429 million severance facility costs related fiscal 2008 restructuring plan 46 million 18 million associated palm 3com restructuring plans respectively increase 1 million related adjustments restructuring plans restructuring charges fiscal 2009 640 million charges included 346 million severance facility costs related fiscal 2008 restructuring plan 297 million severance costs associated fiscal 2009 restructuring plan reduction 3 million related adjustments restructuring plans information restructuring charges see note 8 consolidated financial statements item 8 incorporated herein reference part ongoing business operations incurred workforce rebalancing charges severance related costs within certain business segments fiscal 2011 workforce rebalancing activities considered part normal operations continue optimize cost structure workforce rebalancing costs included business segment results expect incur additional workforce rebalancing costs future acquisitionrelated charges fiscal 2011 recorded acquisitionrelated charges 182 million primarily consulting integration costs associated autonomy acquisition well retention bonuses acquisitions completed fiscal 2010 fiscal 2010 recorded acquisitionrelated charges 293 million primarily consulting integration costs acquisition costs retention bonuses associated eds 3com palm 3par arcsight inc acquisitions interest net interest net expense increased 190 million fiscal 2011 increase driven 276 million charges incurred connection acquisition autonomy primarily hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued comprised 265 million net cost british pound options bought limit foreign exchange rate risk increase also result higher interest expenses due higher average debt balances effect partially offset lower litigation costs lower currency transaction losses interest net improved 216 million fiscal 2010 improvement driven primarily lower currency losses balance sheet remeasurement items lower interest expenses debt balances due lower interest rates valueadded tax refund effect partially offset increase litigation accruals provision taxes effective tax rates 212 202 186 fiscal 2011 2010 2009 respectively effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lowertax jurisdictions throughout world jurisdictions favorable tax rates significant effective tax rate impact periods presented include singapore netherlands china ireland puerto rico plan reinvest earnings jurisdictions indefinitely outside united states therefore provided us taxes indefinitely reinvested earnings increase overall tax rate fiscal 2011 due primarily nondeductible goodwill increases valuation allowances increase overall tax rate fiscal 2010 due primarily decrease income tax benefits related foreign earnings full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 14 consolidated financial statements item 8 incorporated herein reference segment information description products services well financial data segment found note 19 consolidated financial statements item 8 incorporated herein reference realigned segment financial data fiscal years ended october 31 2010 2009 reflect changes hps organizational structure occurred beginning first quarter fiscal 2011 describe changes fully note 19 presented business segments annual report form 10k based distinct nature various businesses customer base homogeneity products technology discussions include results segments personal systems group hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued components weighted net revenue change psg business unit follows following fiscal years ended october 31 psg revenue decreased 29 decreased 47 adjusted currency fiscal 2011 due primarily softness consumer pc markets effect partially offset strength commercial businesses unit volume 23 due primarily continued commercial refresh cycle effect partially offset decline volume consumer business fiscal 2011 workstations revenue increased 241 due ongoing corporate refresh cycle strength commercial pc market net revenue desktop pcs decreased 17 notebook pcs revenue decreased 57 result consumer market softness fiscal 2011 net revenue consumer clients decreased 154 commercial client revenue increased 92 net revenue decreased 66 due primarily wind handheld business decreased sales consumer warranty extensions fiscal 2011 favorable impact psg net revenue unit increases offset 5 decrease average selling prices asps due primarily competitive pricing environment psg earnings operations percentage net revenue increased 09 percentage points fiscal 2011 increase driven improvements gross margin resulting primarily favorable component pricing environment lower warranty costs partially offsetting increase gross margin increase operating expenses percentage net revenue due primarily unfavorable currency impact increased selling costs psg revenue increased 154 128 adjusted currency fiscal 2010 revenue increase resulted balanced growth across regions psg unit volume net revenue increased across business units except fiscal 2010 unit volume 14 commercial refresh cycle continued demand consumer notebooks drove increase shipments fiscal 2010 net revenue notebook pcs increased 12 desktop pcs revenue increased 20 workstations revenue increased 42 fiscal 2010 net revenue consumer clients increased 12 commercial client revenue increased 20 net revenue decreased 10 due primarily lower handheld volumes offset slightly increased sales calculators home servers warranty extensions fiscal 2010 favorable impact psg net revenue unit increases accompanied 1 increase asps psg earnings operations percentage net revenue increased 03 percentage points fiscal 2010 increase driven improvements operating expenses percentage net revenue effect offset partially slight decline gross margins decrease operating expenses percentage net revenue due effective cost controls operating leverage benefits increased volume decrease gross margins result higher component costs effect partially offset lower warranty logistics expenses hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services components weighted net revenue change services business unit follows following fiscal years ended october 31 services net revenue increased 12 decreased 13 adjusted currency fiscal 2011 due revenue increases infrastructure technology outsourcing technology services infrastructure technology outsourcing net revenue increased 2 fiscal 2011 increase productrelated revenue favorable currency impact partially offset shortfall shortterm project contracts existing clients technology services net revenue increased 2 fiscal 2011 due primarily growth consulting business favorable currency impact effect partially offset reduced sales thirdparty hardware application services net revenue increased 1 fiscal 2011 increase driven favorable currency impact effect partially offset declines shortterm project work weakness public sector spending business process outsourcing net revenue decreased 7 fiscal 2011 due primarily excelleratehro divestiture completed end third quarter fiscal 2010 services earnings operations percentage net revenue decreased 16 percentage points fiscal 2011 operating margin decreased due primarily lower expected revenue rate concessions arising recent contract renewals lower expected resource utilization rate higher mix lowermargin infrastructure technology outsourcing revenue decrease operating margin partially offset reduction bad debt expense continued focus operating improvements cost initiatives favorably impacted cost structure enterprise services technology services businesses services net revenue increased 04 decreased 20 adjusted currency fiscal 2010 net revenue infrastructure technology outsourcing increased 3 fiscal 2010 revenue increase due favorable currency impact growth data center services networking services net revenue technology services flat fiscal 2010 due primarily lower contract revenue tied reduced levels enterprise hardware sales prioryear period market conditions currentyear period effect partially offset favorable currency impact net revenue application services decreased 2 fiscal 2010 revenue decrease driven primarily market conditions existing contract completion effect partially hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued offset new business favorable currency impact net revenue business process outsourcing decreased 4 fiscal 2010 revenue decrease due primarily divestiture completed end third quarter fiscal 2010 challenging economic conditions certain industries effect partially offset favorable currency impact services earnings operations percentage net revenue increased 15 percentage points fiscal 2010 operating margin increased primarily due continued focus operating improvements cost initiatives favorably impacted cost structure enterprise services business delivery efficiencies cost controls technology services business well edsrelated acquisition synergies imaging printing group components weighted net revenue change ipg business unit follows following fiscal years ended october 31 ipg net revenue increased 01 decreased 09 adjusted currency fiscal 2011 due primarily net revenue increase commercial hardware net revenue commercial hardware increased 4 fiscal 2011 due primarily doubledigit net revenue growth graphics business coupled strong performance transactional laser products emerging geographies effects partially offset supply chain constraints laserjet printers result earthquake tsunami japan net revenue supplies decreased 1 fiscal 2011 driven reductions channel inventory slower demand particularly emea effects partially offset growth large format printing supplies net revenue consumer hardware decreased 4 fiscal 2011 driven primarily overall reductions consumer electronics spending competitive pricing pressures reflected mix shift towards lowerpriced products decline average revenue per unit 6 ipg earnings operations percentage net revenue decreased 17 percentage points fiscal 2011 due primarily decline gross margin effect partially offset lower operating expenses percentage net revenue gross margin decline fiscal 2011 due primarily increased logistics costs supply chain constraints laserjet printers result japan earthquake tsunami unfavorable currency impact driven primarily strength yen continued mix shift consumer hardware commercial hardware lower price point products coupled lower mix supplies effects partially offset reductions ipgs hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued cost structure result continued efforts optimize supply chain decrease operating expenses percentage net revenue fiscal 2011 due primarily reduced marketing administrative expenses effect partially offset higher field selling cost expenses ipg net revenue increased 73 84 adjusted currency fiscal 2010 reflecting continued improvement market conditions net revenue commercial hardware increased 17 fiscal 2010 due primarily unit volume growth 19 driven improved product availability supplies net revenue increased 4 fiscal 2010 due primarily increased printing resulted stronger supply usage net revenue consumer hardware increased 9 fiscal 2010 driven primarily unit volume growth 11 ipg earnings operations percentage net revenue decreased 09 percentage points fiscal 2010 due primarily decline gross margin increases operating expenses percentage net revenue gross margin decline fiscal 2010 due primarily higher mix hardware correspondingly lower mix supplies effect partially offset cost savings associated ongoing efforts optimize supply chain increase operating expenses percentage net revenue fiscal 2010 due primarily increased marketing activities effect partially offset reduced administrative expenses enterprise servers storage networking components weighted net revenue change essn business unit follows following fiscal years ended october 31 essn net revenue increased 93 73 adjusted currency fiscal 2011 due growth hp networking iss total revenue server storage blades increased 10 fiscal 2011 iss net revenue increased 8 fiscal 2011 driven primarily unit volume growth coupled increased average unit prices due favorable demand latest generation iss products revenue increase also driven expansion converged infrastructure solutions strong demand public private cloud customers hp networking net revenue increased 51 due largely acquisition 3com april 2010 strong market demand core data center products impact continued investments sales coverage storage net revenue increased 7 fiscal 2011 driven primarily strong performance products related acquisition 3par september 2010 growth scale storage arrays entrylevel arrays storeonce data hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued deduplication products bcs net revenue decreased 9 fiscal 2011 mainly result orders delayed cancelled following announcement alliance partner intends cease software development itaniumbased servers impact reduced sales itaniumbased servers partially offset higher demand latest generation bcs scaleup x86 products growth nonstop servers essn earnings operations percentage net revenue decreased 03 percentage points fiscal 2011 driven increase operating expenses percentage net revenue effect partially offset increase gross margin increase operating expenses percentage net revenue due primarily additional expenses associated acquisitions investments rd sales coverage gross margin increase driven lower product costs higher mix networking products effect partially offset price declines result competitive pressure essn net revenue increased 263 238 adjusted currency fiscal 2010 essn blades revenue increased 37 fiscal 2010 iss net revenue increased 35 fiscal 2010 driven primarily unit volume growth coupled increased average unit prices due improving market conditions demand latest generation iss products storage net revenue increased 9 fiscal 2010 driven primarily strong performance products related acquisition lefthand networks growth highend disk products storage networking products bcs net revenue decreased 12 due primarily market conditions competitive pressures effect partially offset new product introductions fourth quarter fiscal 2010 hp networking net revenue increased 124 due acquisition 3com improved market demand continued investment sales coverage essn earnings operations percentage net revenue increased 36 percentage points fiscal 2010 driven decrease operating expenses percentage net revenue increase gross margin operating expenses percentage net revenue decreased result operating leverage benefits increased volume cost controls partially offset acquisitions gross margin increase fiscal 2010 due primarily lower product costs strong volume effect partially offset product mix shift resulting strength iss hp software hp software net revenue increased 179 163 adjusted currency fiscal 2011 due revenues acquired companies well growth organic business revenue growth driven good performance security management suite offerings fiscal 2011 net revenue services licenses support increased 25 24 11 respectively hp software earnings operations percentage net revenue decreased 70 percentage points fiscal 2011 operating margin decline due primarily impact deferred revenue writedowns integration costs associated acquisitions investments sales coverage hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued rd effect partially offset capitalization certain software development costs hp software net revenue increased 28 06 adjusted currency fiscal 2010 mainly due growth support license renewals fiscal 2010 net revenue support licenses increased 4 net revenue services decreased 4 hp software earnings operations percentage net revenue increased 12 percentage points fiscal 2010 operating margin improvement fiscal 2010 due primarily increase gross margin decrease operating expenses percentage net revenue increase gross margin fiscal 2010 primarily result higher license support mix effect partially offset reduced services gross margin rate decrease operating expenses percentage net revenue fiscal 2010 due primarily lower field selling administrative acquisition integration costs hp financial services hpfs net revenue increased 180 fiscal 2011 net revenue increase due primarily portfolio growth result higher customer demand higher operating lease mix due higher serviceled financing volume higher endoflease revenue residual expirations line portfolio growth higher early buyout revenue favorable currency movements hpfs earnings operations percentage net revenue increased 05 percentage points fiscal 2011 due primarily decrease operating expenses percentage revenue effect partially offset decrease gross margin decrease operating expenses due primarily continued improvement cost efficiencies decrease gross margin result lower portfolio margins higher mix operating leases effect partially offset lower bad debt expense percentage revenue higher margins lease extensions buyouts hpfs net revenue increased 140 fiscal 2010 net revenue increase due portfolio growth result higher customer demand higher operating lease mix due higher serviceled financing volume higher endoflease rental buyout remarketing activity favorable currency movements hpfs earnings operations percentage net revenue increased 15 percentage points fiscal 2010 due primarily increase gross margin decrease operating expenses percentage revenue increase gross margin result higher portfolio margins due favorable financing conditions higher remarketing margins effect partially offset higher bad debt lower buyout margins decrease operating expenses percentage revenue driven primarily improved cost efficiencies hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued financing originations new financing originations represent amount financing provided customers equipment related software services including intercompany activity increased 130 149 fiscal 2011 fiscal 2010 respectively increases reflect higher financing associated hp product sales services offerings resulting improved integration engagement hps sales efforts favorable currency impact portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model assetintensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include gross financing receivables approximately 73 billion 67 billion october 31 2011 october 31 2010 respectively net equipment operating leases 27 billion 25 billion october 31 2011 october 31 2010 respectively disclosed note 11 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 10 billion 08 billion october 31 2011 october 31 2010 respectively intercompany leases approximately 17 billion 13 billion october 31 2011 october 31 2010 respectively eliminated consolidation 2allowance doubtful accounts includes shortterm longterm portions allowance financing receivables 3hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued net portfolio assets october 31 2011 increased 115 october 31 2010 increase resulted higher levels financing originations fiscal 2011 favorable currency impact overall reserve coverage ratio decreased percentage portfolio assets hpfs funds operations mainly combination intercompany debt equity hpfs recorded net bad debt expenses 60 million 75 million fiscal 2011 fiscal 2010 respectively corporate investments net revenue corporate investments fiscal 2011 relates primarily mobile devices associated palm acquisition business intelligence solutions licensing hp technology third parties fiscal 2011 revenue decrease due primarily lower business intelligence solutions revenue effect partially offset revenue webos devices business intelligence solutions revenue declined mainly due lower revenue consulting services corporate investments reported higher loss operations fiscal 2011 due primarily 755 million expenses supplierrelated obligations sales incentive programs related winding webos device business loss operations corporate investments also due expenses carried segment associated corporate development global alliances hp labs expenses increased fiscal 2010 partially offset gain divestiture hps halo video collaboration products business net revenue corporate investments fiscal 2010 relates primarily business intelligence solutions licensing hp technology third parties revenue increase corporate investments also due revenue resulting acquisition palm hp completed july 2010 corporate investments reported loss operations fiscal 2010 due primarily impact investments research product development earnings operations corporate investments also impacted expenses carried segment associated corporate development global alliances hp labs declined fiscal 2009 liquidity capital resources cash balances held numerous locations throughout world substantially amounts held outside united states majority amounts held outside united states generally utilized support nonus liquidity needs amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws provided us federal tax liability amounts financial statement purposes except foreign earnings considered indefinitely reinvested outside united states repatriation could result additional us federal income tax payments hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside united states would meet us liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed expect restrictions potential taxes repatriation amounts held outside united states material effect hps overall liquidity financial condition results operations liquidity use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support business operations capital expenditures payment stockholder dividends addition discretionary investments share repurchases able supplement nearterm liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions liquidity subject various risks including market risks identified section entitled qualitative quantitative disclosures market risk item 7aitem 7 managements discussion analysis financial condition results operations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations following discussion read conjunction consolidated financial statements related notes appear elsewhere document overview leading global provider products technologies software solutions services individual consumers small mediumsized businesses large enterprises including customers government health education sectors offerings span •personal computing access devices •multivendor customer services including infrastructure technology business process outsourcing technology support maintenance application development support services consulting integration services •imaging printingrelated products services •enterprise information technology infrastructure including enterprise server storage technology networking products solutions management software information management solutions security intelligencerisk management solutions seven business segments financial reporting purposes personal systems formerly known personal systems group psg printing formerly known imaging printing group ipg services enterprise servers storage networking essn software hp financial services hpfs corporate investments strategy operations currently focused following initiatives strategic focus core business hardware infrastructure products include pc server storage networking imaging printing products software business provides enterprise management software information management solutions security intelligencerisk management solutions delivered form traditional software licenses softwareasaservice allow us differentiate hardware products deploy manner helps customers solve problems meets customers needs manage infrastructure operations application life cycles application quality security business processes structured unstructured data converged infrastructure portfolio servers storage networking combined cloud service automation software suite enables enterprise service provider clients deliver infrastructure platform softwareasaservice private public hybrid cloud environment layered top hardware software businesses services business provides opportunities drive usage hp products solutions enables us implement manage technologies upon customers rely gives us platform solutionoriented particularly focus areas cloud security analytics better strategic partner customers leveraging portfolio scale offer one industrys broadest portfolios products services leveraging portfolio strategic advantage example able provide servers storage networking products packaged services delivered customers hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued manner choosing inhouse outsourced service via internet via hybrid environment portfolio management software completes package allowing customers manage operations efficient costeffective manner addition working optimize supply chain eliminating complexity reducing fixed costs leveraging scale ensure availability components favorable prices even shortages also expanding use industry standard components enterprise products leverage scale addressing challenges facing business experienced multiquarter decline revenue operating margins decline financial performance reflects series challenges facing business many challenges relate structural execution issues including following need align costs revenue trajectory need address underinvestment rd internal systems recent years made us less competitive effective efficient need implement data gathering reporting tools systems needed track report key business performance metrics effectively manage company size scale diversity need rebuild business relationships channel partners also facing dynamic market trends growth mobility increasing demand hyperscale computing infrastructure shift softwareasaservice transition towards cloud computing need develop products services position us win competitive marketplace furthermore face series significant macroeconomic challenges including broadbased weakness consumer spending weak demand smb enterprise sectors europe declining growth emerging markets particularly china addressing challenges consistency leadership focus execution importantly superior products services solutions fiscal 2012 implemented leadership organizational changes including consolidating personal computer printing businesses senior executive leadership merging global accounts sales organization essn centralizing marketing communications activities also began implementing costreduction initiatives including companywide restructuring plan expect implemented end fiscal 2014 addition began making significant changes sales force improve gotomarket selling activities reduce cost renewed focus developing new products services solutions also began working optimize supply chain reduce number stock keeping units skus platforms refine real estate strategy improve business processes implement consistent pricing promotions fiscal 2013 focused working anticipated disruptions expected accompany changes made fiscal 2012 continuing implement costreduction operational initiatives investing business costreduction operational efficiency initiatives discussed also intended facilitate increased investment business efforts include optimizing supply chain reducing number stock keeping units skus platforms continuing refine real estate strategy simplifying gotomarket improving business processes implementing consistent pricing promotions expect invest savings efforts across businesses including investing respond market trends customer expectations strengthen position core markets accelerate growth adjacent markets drive leadership three strategic areas cloud computing security information management time expect investments allow us expand higher margin higher growth industry segments strengthen hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued portfolio hardware software services solve customer problems however rate able invest business returns able achieve investments affected many factors including efforts address execution industry macroeconomic challenges facing business discussed result may experience delays anticipated timing activities related efforts anticipated benefits efforts may materialize following provides overview key fiscal 2012 financial metrics 1hp consolidated net revenue includes reduction approximately 32 billion primarily related elimination intersegment net revenue corporate investments segment hp consolidated loss earnings operations includes amounts related impairment goodwill purchased intangible assets restructuring charges amortization purchased intangible assets corporate unallocated costs eliminations unallocated costs related certain stockbased compensation expenses acquisitionrelated charges loss corporate investments segment cash equivalents october 31 2012 totaled 113 billion increase 33 billion october 31 2011 balance 80 billion increase fiscal 2012 due primarily 106 billion cash provided operations effect partially offset 31 billion net investment property plant equipment 26 billion cash used repurchase common stock pay dividends 20 billion net repayment debt intend discussion financial condition results operations follows provide information assist understanding consolidated financial statements changes certain key items financial statements year primary factors accounted changes well certain accounting principles policies estimates affect consolidated financial statements discussion results operations consolidated level followed detailed discussion results operations segment discussion trends uncertainties factors could impact operating results see section entitled risk factors item 1a incorporated herein reference hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued critical accounting policies estimates general consolidated financial statements hp prepared accordance us generally accepted accounting principles gaap require management make estimates judgments assumptions affect reported amounts assets liabilities net revenue expenses disclosure contingent assets liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee hps board directors management believes accounting estimates employed resulting balances reasonable however actual results may differ estimates different assumptions conditions summary significant accounting policies included note 1 consolidated financial statements item 8 incorporated herein reference accounting policy deemed critical requires accounting estimate made based assumptions matters highly uncertain time estimate made different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements revenue recognition enter contracts sell products services majority sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation sometimes required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element recognize revenue delivered elements separate units accounting delivered elements standalone value uncertainties regarding customer acceptance resolved customernegotiated refund return rights delivered elements standalone value recognize revenue consistent pattern associated deliverables arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially control delivered element constitutes separate unit accounting changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract recognize revenue work progresses certain fixedprice contracts consulting arrangements using proportional performance method estimate total expected labor costs order determine amount revenue earned date follow basis reasonably dependable estimates labor costs applicable various stages contract made total contract profit subject revisions throughout life contract record changes revenue income result revisions cost estimates overall contract losses applicable period facts give rise revision become known hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued recognize revenue certain design build design development andor constructions software andor systems projects using percentageofcompletion method use costtocost method measurement towards completion determined percentage cost incurred date total estimated costs project circumstances reasonable reliable cost estimates project cannot made recognize revenue using completed contract method record estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require us estimate based historical experience specific terms conditions incentive number customers actually redeem incentive revenue recognition policies establish selling prices used deliverable based vendorspecific objective evidence vsoe available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available establish vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority thirdparty evidence selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles may modify develop new gotomarket practices future gotomarket strategies evolve may modify pricing practices future may result changes selling prices impacting vsoe esp aforementioned factors may result different allocation revenue deliverables multiple element arrangements current fiscal year may change pattern timing revenue recognition elements change total revenue recognized arrangement warranty provision provide estimated cost product warranties time recognize revenue evaluate warranty obligations product group basis standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers base estimated warranty obligation upon warranty terms ongoing product failure rates repair costs product call rates average cost per call current period product shipments actual product failure rates repair rates post sales support costs differ estimates would required make revisions estimated warranty liability warranty terms generally range 90 days three years parts labor depending upon product last three fiscal years annual warranty provision actual warranty costs averaged approximately 31 annual net product revenue hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued business combinations allocate fair value purchase consideration tangible assets acquired liabilities assumed intangible assets acquired including inprocess research development iprd based estimated fair values excess fair value purchase consideration fair values identifiable assets liabilities recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing certain intangible assets include limited future expected cash flows customer contracts customer lists distribution agreements acquired developed technologies patents expected costs develop iprd commercially viable products estimating cash flows projects completed brand awareness market position well assumptions period time brand continue used product portfolio discount rates managements estimates fair value based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates associated accounting acquisitions may change additional information becomes available regarding assets acquired liabilities assumed fully discussed note 6 consolidated financial statements item 8 incorporated herein reference valuation goodwill purchased intangible assets review goodwill purchased intangible assets indefinite lives impairment annually whenever events changes circumstances indicate carrying value asset may recoverable provisions accounting standard goodwill intangibles allows us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2012 performed quantitative test reporting units due recent trading values stock price believed appropriate recent fair values reporting units order assess reasonableness sum fair values compared market capitalization first step compare fair value reporting unit carrying value determine fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach calculate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weighting fair value derived market approach ranges 0 50 depending level comparability publiclytraded companies reporting unit market comparables meaningful available may estimate fair value reporting unit using income approach fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing required fair value reporting unit less hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued carrying value must perform second step impairment test measure amount impairment loss second step reporting units fair value allocated assets liabilities reporting unit including unrecognized intangible assets hypothetical analysis calculates implied fair value goodwill manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying value difference recorded impairment loss also compare fair value purchased intangible assets indefinite lives carrying value estimate fair value intangible assets using income approach recognize impairment loss estimated fair value intangible assets indefinite lives less carrying value review purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable recoverability intangible assets assessed based estimated undiscounted future cash flows expected result use asset undiscounted future cash flows less carrying amount purchased intangible assets finite lives considered impaired amount impairment measured difference carrying amount assets fair value order assess reasonableness calculated fair values reporting units also compare sum reporting units fair values market capitalization calculate implied control premium excess sum reporting units fair values market capitalization evaluate control premium comparing control premiums recent comparable transactions implied control premium reasonable light recent transactions reevaluate fair value estimates reporting units adjusting discount rates andor assumptions result significant decline stock price occurred fiscal 2012 reevaluation could correlate lower estimated fair values certain reporting units except services software corporate investments reporting units consistent reportable segments identified note 19 consolidated financial statements item 8 incorporated herein reference enterprise services es technology services ts businesses reporting units within services segment es includes infrastructure technology outsourcing ito application business services abs business units software segment includes two reporting units autonomy corporation plc autonomy legacy hp software business webos business also separate reporting unit within corporate investments segment determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units fiscal 2012 determined sufficient indicators potential impairment existed require interim goodwill impairment analysis es reporting unit result recorded hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued impairment charge within services segment discussed note 7 consolidated financial statements item 8 incorporated herein reference annual goodwill impairment analysis performed fourth quarter fiscal 2012 resulted impairment charge goodwill intangible assets related autonomy reporting unit within software segment discussed note 7 consolidated financial statements item 8 incorporated herein reference impairment charges discussed es autonomy reporting units fiscal 2012 impairment hps remaining reporting units excess fair value carrying value reporting units august 1 2012 annual testing date ranged approximately 9 approximately 330 carrying value autonomy legacy hp software reporting units lowest excess fair value carrying value 10 9 respectively order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 10 decrease fair values reporting unit hypothetical 10 decrease resulted autonomy legacy hp software reporting units fair values carrying values 1 2 respectively remaining reporting units excess fair values carrying values range approximately 25 approximately 290 carrying values continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances significant adverse changes business climate operating results changes managements business strategy significant declines stock price indicate may potential indicator impairment third quarter fiscal 2012 approved change branding strategy personal computers triggered interim impairment review compaq trade name indefinitelived intangible asset result recorded impairment charge within personal systems group discussed note 7 consolidated financial statements item 8 incorporated herein reference conjunction change branding strategy also revised assumption useful life compaq trade name resulted reclassification asset indefinitelived intangible finitelived intangible remaining useful life approximately five years restructuring engaged may continue engage restructuring actions require management utilize significant estimates related timing expenses severance employee separation costs including enhanced early retirement programs realizable values assets made redundant obsolete lease cancellation exit costs accrue severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based upon existing plans historical experiences negotiated settlements actual amounts differ estimates amount restructuring charges could materially impacted full description restructuring actions refer discussions restructuring results operations section note 8 consolidated financial statements item 8 incorporated herein reference stockbased compensation expense recognize stockbased compensation expense sharebased payment awards net estimated forfeiture rate recognize compensation cost shares expected meet hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued service performance vesting conditions straightline basis requisite service period award compensation costs determined aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions determining appropriate fair value model calculating fair value sharebased payment awards requires subjective assumptions including expected life sharebased payment awards stock price volatility utilize blackscholes option pricing model value servicebased stock options granted principal option plans implement model examined historical pattern option exercises determine discernable activity patterns based certain employee populations analysis identified three employee populations apply blackscholes model determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility issued performancebased restricted units prus representing hypothetical shares hp common stock pru award reflected target number shares may issued award recipient determine actual number shares recipient receives end threeyear performance period based results achieved versus goals performance goals prus granted fiscal year 2012 based annual cash flow operations percentage revenue annual revenue growth performance goals prus granted prior fiscal year 2012 based annual cash flow operations percentage revenue market condition based total shareholder return tsr relative sp 500 performance period use closing stock price measurement date estimate fair value pru awards granted fiscal year 2012 use historic volatility pru awards granted prior fiscal year 2012 implied volatility cannot used simulating multivariate prices companies sp 500 estimate fair value prus granted prior fiscal year 2012 using monte carlo simulation model tsr modifier contains market condition update estimated expense net forfeitures cash flow revenue growth performance goal year end reporting period assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application management judgment result factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected meet service performance vesting conditions actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period see note 2 consolidated financial statements item 8 discussion stockbased compensation taxes earnings calculate current deferred tax provisions based estimates assumptions could differ final positions reflected income tax returns filed subsequent year record adjustments based filed returns identified finalized generally third fourth quarters subsequent year us federal state provisions respectively hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued recognize deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year expect differences reverse record valuation allowance reduce deferred tax assets amount likely realize considered future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies determining need valuation allowance event determine would able realize part net deferred tax assets future would increase valuation allowance make corresponding charge earnings period make determination likewise later determine likely realize net deferred tax assets would reverse applicable portion previously provided valuation allowance order us realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located effective tax rate includes impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts result certain employment actions capital investments undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal years 2024 material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate subject income taxes united states approximately 80 foreign countries subject routine corporate income tax audits many jurisdictions believe tax return positions fully supported tax authorities likely challenge certain positions may fully sustained however income tax expense includes amounts intended satisfy income tax assessments result challenges determining income tax expense potential assessments recording related assets liabilities requires management judgments estimates evaluate uncertain tax positions accordance guidance accounting uncertainty income taxes believe reserve uncertain tax positions including related interest adequate amounts ultimately paid upon resolution audits could materially different amounts previously included income tax expense therefore could material impact tax provision net income cash flows reserve uncertain tax positions attributable primarily uncertainties concerning tax treatment international operations including allocation income among different jurisdictions related interest review reserves quarterly may adjust reserves proposed assessments tax authorities changes facts circumstances issuance new regulations new case law previously unavailable information obtained course examination negotiations tax authorities different countries concerning transfer prices execution advanced pricing agreements resolution respect individual audit issues resolution entire audits expiration statutes limitations hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued see note 14 consolidated financial statements item 8 discussion taxes earnings allowance doubtful accounts determine allowance doubtful accounts using combination factors ensure overstated trade financing receivables balances due uncollectibility maintain allowance doubtful accounts customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience also record specific provisions individual accounts become aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position circumstances related customer change would adjust estimates recoverability receivables either upward downward annual provision doubtful accounts averaged approximately 010 net revenue last three fiscal years using thirdparty credit risk model october 31 2012 50basispoint deterioration weightedaverage default probabilities significant customers would resulted approximately 23 million increase trade allowance end fiscal year 2012 inventory state inventory lower cost market make adjustments reduce cost inventory net realizable value required product group level estimated excess obsolescence impaired balances factors influencing adjustments include changes demand rapid technological changes product life cycle development plans component cost trends product pricing physical deterioration quality issues revisions adjustments would required factors differ estimates fair value financial instruments measure certain financial assets liabilities fair value based valuation techniques using best information available may include quoted market prices market comparables discounted cash flow projections financial instruments primarily comprised time deposits money market funds corporate debt securities equity securities investments common stock common stock equivalents derivative instruments cash equivalents investments hold time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents general applicable use quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value use quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available use internally developed valuation models whose inputs include bid prices third party valuations utilizing underlying asset assumptions derivative instruments discussed note 10 consolidated financial statements item 8 mainly hold nonspeculative forwards swaps options hedge certain foreign currency hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued interest rate exposures active market quotes available use industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases use management judgment develop assumptions used determine fair value retirement benefits pension postretirement benefit costs obligations dependent various assumptions major assumptions relate primarily discount rates salary growth longterm return plan assets base discount rate assumption current investment yields highquality fixedincome investments retirement benefits maturity period salary growth assumptions reflect longterm actual experience future nearterm outlook longterm return plan assets determined based historical portfolio results managements expectations related future economic environment well target asset allocations actual results given year often differ actuarial assumptions economic factors major assumptions vary plan weightedaverage rates used set forth note 16 consolidated financial statements item 8 incorporated herein reference assumption different sensitivity characteristics general changes moved direction last several years fiscal 2012 changes weightedaverage rates hp benefit plans would following impact net periodic benefit cost •a decrease 25 basis points longterm rate return would increased net benefit cost approximately 61 million •a decrease 25 basis points discount rate would increased net benefit cost approximately 78 million •an increase 25 basis points future compensation rate would increased net benefit cost approximately 23 million loss contingencies involved various lawsuits claims investigations proceedings arise ordinary course business record provision liability believe probable liability incurred amount reasonably estimated significant judgment required determine probability estimated amount review provisions least quarterly adjust provisions reflect impact negotiations settlements rulings advice legal counsel updated information litigation inherently unpredictable subject significant uncertainties beyond control estimates assumptions change prove incorrect could material impact results operations financial position cash flows see note 18 consolidated financial statements item 8 discussion litigation contingencies constant currency presentation revenue international operations historically represented expect continue represent majority overall net revenue result revenue growth hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued impacted expect continue impacted fluctuations foreign currency exchange rates order provide framework assessing business segments performed excluding impact foreign currency fluctuations present yearoveryear percentage change revenue performance constant currency basis assumes change exchange rate prioryear period constant currency disclosure provided addition substitute yearoveryear percentage change revenue asreported basis results operations following discussion compares historical results operations fiscal years ended october 31 2012 2011 2010 unless otherwise noted comparative performance data included reflect yearoveryear comparisons results operations dollars percentage net revenue follows following fiscal years ended october 31 1in connection organizational realignments implemented first quarter fiscal 2012 certain costs previously reported cost sales reclassified selling general administrative expenses better align costs functional areas benefit expenditures 2cost products cost services financing interest 3for period ended october 31 2012 represents goodwill intangible asset impairment charge 88 billion associated autonomy reporting unit within software segment goodwill impairment charge 80 billion associated es reporting unit within services segment intangible asset impairment charge 12 billion associated compaq trade name within personal systems segment period ended october 31 2011 includes impairment charges goodwill purchased intangible assets associated hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued acquisition palm inc july 1 2010 recorded result decision announced august 18 2011 wind webos device business 4for fiscal 2011 includes 276 million charges connection acquisition autonomy primarily comprised 265 million net cost british pound options bought limit foreign exchange rate risk net revenue components weighted net revenue change follows following fiscal years ended october 31 1reflects certain reclassifications made historical results conform current year presentation noted note 19 consolidated financial statements item 8 fiscal 2012 fiscal 2012 total hp net revenue decreased 54 decreased 44 constant currency basis us net revenue decreased 45 421 billion net revenue outside united states decreased 59 782 billion hps revenue decreased due primarily weak customer demand environment resulting volume declines hardware businesses printing supplies coupled contractual rate declines ongoing contracts services software segment contributed favorably total hp net revenue change result acquisition autonomy october 2011 analysis change net revenue business segment included segment information fiscal 2011 fiscal 2011 total hp net revenue increased 10 decreased 09 constant currency basis us net revenue decreased 10 441 billion net revenue outside united states increased 20 831 billion reflected table essn segment largest contributor hp net revenue growth result balanced growth across regions essn segment net revenue growth helped strong performance products related 3par inc 3par 3com corporation 3com acquisitions analysis change net revenue business segment included segment information hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued gross margin fiscal 2012 fiscal 2012 total hp gross margin decreased 02 percentage points gross margins impacted continued margin pressure services competitive pricing hardware businesses along unfavorable mix lowermargin revenue essn unfavorable currency impacts personal systems gross margin decreased fiscal 2012 decrease driven higher component costs combined unfavorable currency impact negative impacts gross margin partially offset lower warranty logistics costs benefits insurance proceeds related flooding thailand july 2011 increased level component vendor rebates printing gross margin declined fiscal 2012 due unfavorable currency impact driven strength japanese yen lower ink supplies volumes result demand declines regions effects partially offset focus higherend inkjet printers combined higher mix supplies services gross margin decreased fiscal 2012 due primarily lower expected revenue contractual rate declines ongoing contracts lower expected resource utilization rate additional costs associated certain contract deliverable delays effects partially offset continued focus operating improvements cost initiatives favorably impacted cost structure business units essn gross margin decreased fiscal 2012 due primarily competitive pricing pressures particularly industry standard servers iss lesser extent networking software gross margin decreased fiscal 2012 due primarily lower mix license revenue effect partially offset highly profitable software deal entered fourth quarter fiscal 2012 hpfs gross margin increased fiscal 2012 due primarily lower bad debt expense effect partially offset lower margins endofterm activities including buyouts lease extensions fiscal 2011 fiscal 2011 total hp gross margin decreased 05 percentage points decline driven lower gross margin services printing corporate investments segments effect partially offset favorable commodity pricing environment personal systems essn segments favorable mix higher software networking revenue personal systems gross margin increased fiscal 2011 primarily result favorable commodity pricing environment combined lower warranty costs printing gross margin declined fiscal 2011 due primarily increased logistics costs supply chain constraints laserjet printer engines toner result earthquake tsunami japan unfavorable currency impact driven primarily strength yen addition printing gross margin declined due continuing mix shift consumer hardware commercial hardware toward lower price point products coupled lower mix supplies revenue effects partially offset reductions printings cost structure result continued efforts optimize supply chain hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services gross margin decreased fiscal 2011 due primarily lower expected revenue rate concessions arising recent contract renewals lower expected resource utilization rate higher mix lowermargin infrastructure technology outsourcing revenue effects partially offset continued focus operating improvements cost initiatives favorably impacted cost structure enterprise services technology services businesses essn gross margin increased fiscal 2011 primarily result lower product costs higher mix networking products effect partially offset price declines result competitive pressure software gross margin decreased fiscal 2011 due primarily rate declines licenses services hpfs gross margin decreased fiscal 2011 due primarily lower portfolio margins higher mix operating leases effect partially offset lower bad debt expense percentage revenue higher margins lease extensions buyouts corporate investments gross margin decreased fiscal 2011 primarily result impact wind webos device business resulted expenses supplierrelated obligations sales incentive programs inventory write downs operating expenses research development total research development rd expense increased fiscal 2012 due primarily additional expense acquisition autonomy innovationfocused spending storage networking hp converged cloud effects partially offset elimination rd expense associated former webos device business fiscal 2012 rd expense increased essn software personal systems printing services decreased corporate investments total rd expense increased fiscal 2011 due primarily additional expenses acquired companies fiscal 2011 rd expense increased essn corporate investments software decreased services personal systems increase essn driven acquisition investments innovationfocused spend networking storage products increase corporate investments due investments development webos devices first three quarters fiscal 2011 selling general administrative total selling general administrative sga expense decreased fiscal 2012 due primarily lower marketing costs included sga 103 million net gains sale real estate fiscal 2012 sga expense percentage net revenue mostly flat segments except corporate investments experienced decrease total sga expense increased fiscal 2011 due primarily higher field selling costs result investments sales resources grow revenue increase fiscal 2011 partially offset 334 million net gains sale real estate 77 million net gain divestiture halo video collaboration products business fiscal 2011 sga expense percentage net revenue increased segments except hpfs services printing experienced decrease hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued impairment goodwill purchased intangible assets fiscal 2012 recorded goodwill impairment charges 80 billion 57 billion associated services segment acquisition autonomy respectively addition recorded intangible asset impairment charges 31 billion 12 billion associated acquisition autonomy compaq trade name respectively fiscal 2011 recorded 885 million impairment charges goodwill purchased intangible assets associated acquisition palm inc july 1 2010 result decision announced august 18 2011 wind webos device business information impairment charges see note 7 consolidated financial statements item 8 incorporated herein reference restructuring charges increase restructuring costs fiscal 2012 due primarily charges 21 billion restructuring plan announced may 2012 plan effect partially offset lower charges fiscal 2008 fiscal 2010 es restructuring plans restructuring charges fiscal 2012 23 billion charges included 21 billion costs related 2012 plan 106 million costs related fiscal 2008 restructuring plan 75 million costs related fiscal 2010 es restructuring plan decrease restructuring costs fiscal 2011 due primarily lower charges fiscal 2008 fiscal 2010 es restructuring plans restructuring charges fiscal 2011 645 million charges included 326 million severance facility costs related fiscal 2008 restructuring plan 266 million severance facility costs related fiscal 2010 es restructuring plan 33 million related decision wind webos device business restructuring charges fiscal 2010 11 billion charges included 650 million severance facility costs related fiscal 2010 es restructuring plan 429 million severance facility costs related fiscal 2008 restructuring plan 46 million 18 million associated palm 3com restructuring plans respectively increase 1 million related adjustments restructuring plans information restructuring charges see note 8 consolidated financial statements item 8 incorporated herein reference part ongoing business operations incurred workforce rebalancing charges severance related costs within certain business segments workforce rebalancing activities considered part normal operations continue optimize cost structure workforce rebalancing costs included business segment results expect incur additional workforce rebalancing costs future amortization purchased intangible assets increase amortization expense fiscal 2012 due primarily amortization expenses related intangible assets purchased part autonomy acquisition increase partially offset decreased amortization expenses related certain intangible assets associated prior acquisitions reaching end amortization periods hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued increase amortization expense fiscal 2011 due primarily increased amortization purchased intangible assets acquisitions completed fiscal 2010 increase partially offset decreased amortization expenses related certain intangible assets associated prior acquisitions reaching end amortization periods information amortization purchased intangibles assets see note 7 consolidated financial statements item 8 incorporated herein reference acquisitionrelated charges fiscal 2012 recorded acquisitionrelated charges 45 million decrease acquisitionrelated charges due primarily lower consulting integration costs associated autonomy acquisition fewer acquisitions lower retention bonuses associated acquisitions completed fiscal 2011 2010 fiscal 2011 recorded acquisitionrelated charges 182 million decrease acquisitionrelated charges due primarily lower consulting integration acquisition costs associated electronic data systems corporation 3com acquisitions effect partially offset consulting integration costs associated autonomy acquisition interest net interest net expense increased 181 million fiscal 2012 increase driven primarily higher interest expense due higher average debt balances higher currency transaction losses interest net expense increased 190 million fiscal 2011 increase driven 276 million charges incurred connection acquisition autonomy primarily comprised 265 million net cost british pound options bought limit foreign exchange rate risk increase also result higher interest expenses due higher average debt balances effect partially offset lower litigation costs lower currency transaction losses provision taxes effective tax rates 60 212 202 fiscal 2012 2011 2010 respectively effective tax rate generally differs us federal statutory rate 35 due favorable tax rates associated certain earnings operations lowertax jurisdictions throughout world jurisdictions favorable tax rates significant effective tax rate impact periods presented include singapore netherlands china ireland puerto rico plan reinvest earnings jurisdictions indefinitely outside united states therefore provided us taxes indefinitely reinvested earnings addition factors overall tax rates fiscal 2012 2011 impacted nondeductible goodwill impairments increases valuation allowances certain deferred tax assets full reconciliation effective tax rate us federal statutory rate 35 explanation provision taxes see note 14 consolidated financial statements item 8 incorporated herein reference hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued segment information description products services well financial data segment found note 19 consolidated financial statements item 8 incorporated herein reference realigned segment financial data fiscal years ended october 31 2011 2010 reflect changes hps organizational structure occurred beginning first quarter fiscal 2012 describe changes fully note 19 presented business segments annual report form 10k based distinct nature various businesses customer base homogeneity products technology discussions include results segments effective november 1 2012 created enterprise group segment consisting business units within essn segment ts business unit part existing services segment remaining business units services segment ito abs comprise new enterprise services segment printing personal systems group printing personal systems segments realigned beneath newly formed printing personal systems group fiscal 2012 describe results business segments within printing personal systems group detail personal systems components weighted net revenue change personal systems business units follows following fiscal years ended october 31 personal systems net revenue decreased 99 decreased 88 adjusted currency fiscal 2012 revenue decline due primarily decline unit volumes effect partially offset nominal increase average selling prices asps increased due primarily mix shift toward higherend models effect partially offset unfavorable currency impacts unit volume 11 due primarily continued demand weakness consumer commercial markets fiscal 2012 net revenue notebook pcs decreased 12 net revenue desktop pcs decreased 9 result overall market decline hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued workstations revenue decreased 3 due weak demand commercial pc market fiscal 2012 net revenue consumer clients decreased 15 commercial client revenue decreased 6 personal systems earnings operations percentage net revenue decreased 11 percentage points fiscal 2012 decrease due primarily gross margin decline resulting higher component costs combined unfavorable currency impact negative impacts gross margin partially offset lower warranty logistics costs benefits insurance proceeds related flooding thailand july 2011 increased level component vendor rebates addition operating expenses percentage net revenue increased due primarily decline revenue coupled increased investments research development effects partially offset decrease administrative expenses personal systems net revenue decreased 29 decreased 47 adjusted currency fiscal 2011 due primarily softness consumer pc markets effect partially offset strength commercial businesses unit volume 2 due primarily continued commercial refresh cycle effect partially offset decline volume consumer business fiscal 2011 workstations revenue increased 24 due ongoing corporate refresh cycle strength commercial pc market net revenue desktop pcs decreased 2 notebook pcs revenue decreased 6 result consumer market softness fiscal 2011 net revenue consumer clients decreased 15 commercial client revenue increased 9 net revenue decreased 7 due primarily wind handheld business decreased sales consumer warranty extensions fiscal 2011 favorable impact personal systems net revenue unit increases offset 5 decrease asps due primarily competitive pricing environment personal systems earnings operations percentage net revenue increased 09 percentage points fiscal 2011 increase driven improvements gross margin resulting primarily favorable component pricing environment lower warranty costs partially offsetting increase gross margin increase operating expenses percentage net revenue due primarily unfavorable currency impact increased selling costs printing components weighted net revenue change printing business units follows following fiscal years ended october 31 hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued printing net revenue decreased 65 decreased 63 adjusted currency fiscal 2012 driven broadbased consumer demand weakness regions printer unit volume declined 15 average revenue per unit increased 8 net revenue supplies decreased 6 fiscal 2012 driven demand declines regions effects partially offset growth large format printing supplies net revenue consumer hardware decreased 14 fiscal 2012 due primarily decline consumer demand inkjet unit volume reductions 18 partially offset higher mix high value inkjet units reflecting increase average revenue per unit 6 net revenue commercial hardware decreased 5 fiscal 2012 net revenue decline driven volume declines 8 due primarily weak worldwide demand environment impacting laserjet printer business negative impacts offset higher average revenue per unit 2 net revenue growth large format printers managed print services business printing earnings operations percentage net revenue decreased 04 percentage points fiscal 2012 gross margin declined fiscal 2012 due unfavorable currency impact driven strength japanese yen lower ink supplies volumes result demand declines regions effects partially offset focus higherend inkjet printers combined higher mix supplies operating expenses percentage net revenue increased due decline revenue investments research development effects partially offset declines marketing administrative expenses printing net revenue remained flat decreased 10 adjusted currency fiscal 2011 net revenue commercial hardware increased 3 fiscal 2011 due primarily doubledigit net revenue growth graphics business coupled strong performance transactional laser products emerging geographies effects partially offset supply chain constraints laserjet printers result earthquake tsunami japan net revenue supplies decreased 1 fiscal 2011 driven slower demand particularly europe effects partially offset growth large format printing supplies net revenue consumer hardware decreased 4 fiscal 2011 driven primarily overall reductions consumer electronics spending competitive pricing pressures reflected mix shift towards lowerpriced products decline average revenue per unit 6 printing earnings operations percentage net revenue decreased 16 percentage points fiscal 2011 due primarily decline gross margin effect partially offset lower operating expenses percentage net revenue gross margin decline fiscal 2011 due primarily increased logistics costs supply chain constraints laserjet printers result japan earthquake tsunami unfavorable currency impact driven primarily strength yen continued mix shift consumer hardware commercial hardware lower price point products coupled lower mix supplies effects partially offset reductions printings cost structure result continued efforts optimize supply chain decrease operating expenses percentage net revenue fiscal 2011 due primarily reduced marketing administrative expenses effect partially offset higher field selling cost expenses hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services components weighted net revenue change services business units follows following fiscal years ended october 31 services net revenue decreased 22 decreased 05 adjusted currency fiscal 2012 due revenue decreases business units ito net revenue decreased 3 fiscal 2012 contractual rate declines ongoing contracts increased deal selectivity designed meet threshold margins strategic fit unfavorable currency impact contributed decrease revenues effects partially offset increase productrelated revenue increased revenue cloud security offerings deal selectivity contractual rate declines mentioned expected adversely affect revenue future periods abs net revenue decreased 2 fiscal 2012 decrease driven declines shortterm project work combined unfavorable currency impact effect partially offset increases sales cloud information management analytics offerings ts net revenue decreased 1 fiscal 2012 due primarily revenue declines support business driven unfavorable currency impact support contract renewals remained steady declines thirdparty hardware support offset growth project services earnings operations percentage net revenue decreased 29 percentage points fiscal 2012 decrease due primarily gross margin decline driven lower expected revenue contractual rate declines ongoing contracts lower expected resource utilization rate additional costs associated certain contract deliverable delays effects partially offset continued focus operating improvements cost initiatives favorably impacted cost structure business units services net revenue increased 12 decreased 13 adjusted currency fiscal 2011 due revenue increases ito ts business units ito net revenue increased 2 fiscal 2011 increase productrelated revenue favorable currency impact partially offset shortfall shortterm project contracts existing clients ts net revenue increased 3 fiscal 2011 due primarily growth consulting business favorable currency impact effect partially offset reduced sales thirdparty hardware abs net revenue decreased 1 fiscal 2011 decrease driven excelleratehro divestiture completed end third quarter fiscal 2010 declines shortterm project work weakness public sector spending effects partially offset favorable currency impact hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued services earnings operations percentage net revenue decreased 16 percentage points fiscal 2011 operating margin decreased due primarily lower expected revenue rate concessions arising recent contract renewals lower expected resource utilization rate higher mix lowermargin infrastructure technology outsourcing revenue decrease operating margin partially offset reduction bad debt expense continued focus operating improvements cost initiatives favorably impacted cost structure enterprise services technology services businesses enterprise servers storage networking components weighted net revenue change essn business units follows following fiscal years ended october 31 essn net revenue decreased 71 64 adjusted currency fiscal 2012 due primarily revenue decreases iss bcs storage fiscal 2012 iss net revenue decreased 7 driven declines unit volume average unit prices declines due primarily competitive pricing pressures macroeconomic challenges emea effects partially offset increased demand public private cloud offerings bcs net revenue decreased 23 fiscal 2012 mainly result lower demand itaniumbased servers impact slightly offset growth nonstop servers storage net revenue decreased 6 fiscal 2012 due primarily revenue declines storage tape networking products effect partially offset strong growth 3par products storeonce data deduplication solutions networking net revenue increased 4 fiscal 2012 due higher market demand core data center products effect partially offset competitive pricing pressures divestiture video surveillance business essn earnings operations percentage net revenue decreased 32 percentage points fiscal 2012 driven decrease gross margin coupled increase operating expenses percentage net revenue decrease gross margin due primarily competitive pricing pressures particularly iss lesser extent networking increase operating expenses percentage net revenue driven increase research development costs field selling costs effect partially offset lower administrative marketing expenses hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued essn net revenue increased 90 70 adjusted currency fiscal 2011 due growth networking iss total revenue server storage blades increased 11 fiscal 2011 iss net revenue increased 8 fiscal 2011 driven primarily unit volume growth coupled increased average unit prices due favorable demand latest generation iss products revenue increase also driven expansion converged infrastructure solutions strong demand public private cloud customers networking net revenue increased 50 due largely acquisition 3com april 2010 strong market demand core data center products impact continued investments sales coverage storage net revenue increased 7 fiscal 2011 driven primarily strong performance products related acquisition 3par september 2010 growth scale storage arrays entrylevel arrays storeonce data deduplication products bcs net revenue decreased 9 fiscal 2011 mainly result orders delayed cancelled following announcement alliance partner intends cease software development itaniumbased servers impact reduced sales itaniumbased servers partially offset higher demand latest generation bcs scaleup x86 products growth nonstop servers essn earnings operations percentage net revenue decreased 03 percentage points fiscal 2011 driven increase operating expenses percentage net revenue effect partially offset increase gross margin increase operating expenses percentage net revenue due primarily additional expenses associated acquisitions investments rd sales coverage gross margin increase driven lower product costs higher mix networking products effect partially offset price declines result competitive pressure software net revenue increased 206 213 adjusted currency fiscal 2012 due revenues acquired companies primarily autonomy acquired october 2011 fiscal 2012 net revenue services support licenses increased 71 16 8 respectively software earnings operations percentage net revenue decreased 10 percentage points fiscal 2012 due primarily decrease gross margin slight increase operating expenses percentage net revenue gross margin decline due primarily lower mix license revenue effect partially offset highly profitable software deal entered fourth quarter fiscal 2012 software net revenue increased 197 181 adjusted currency fiscal 2011 due revenues acquired companies well growth organic business revenue growth driven good performance security management suite offerings fiscal 2011 net revenue services licenses support increased 26 23 16 respectively hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued software earnings operations percentage net revenue decreased 66 percentage points fiscal 2011 operating margin decline due primarily impact deferred revenue writedowns integration costs associated acquisitions investments sales coverage rd effect partially offset capitalization certain software development costs hp financial services hpfs net revenue increased 62 fiscal 2012 net revenue increase due primarily portfolio growth along higher buyout activity higher endoflease revenue residual expirations line portfolio growth effects changes partially offset unfavorable currency movements hpfs earnings operations percentage net revenue increased 05 percentage points fiscal 2012 increase due primarily increase gross margin increase gross margin due primarily lower bad debt expense effect partially offset lower margins endofterm activities including buyouts lease extensions operating expenses percentage net revenue flat due continued focus cost efficiencies hpfs net revenue increased 180 fiscal 2011 net revenue increase due primarily portfolio growth result higher customer demand higher operating lease mix due higher serviceled financing volume higher endoflease revenue residual expirations line portfolio growth higher early buyout revenue favorable currency movements hpfs earnings operations percentage net revenue increased 05 percentage points fiscal 2011 due primarily decrease operating expenses percentage revenue effect partially offset decrease gross margin decrease operating expenses due primarily continued improvement cost efficiencies decrease gross margin result lower portfolio margins higher mix operating leases effect partially offset lower bad debt expense percentage revenue higher margins lease extensions buyouts financing originations new financing originations represent amount financing provided customers equipment related software services including intercompany activity decreased 26 increased 130 fiscal 2012 fiscal 2011 respectively decrease driven lower financing associated hp product sales services offerings along unfavorable currency impact hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued portfolio assets ratios hpfs maintains strategy generate competitive return equity effectively leveraging portfolio risks associated interest rates credit hpfs business model asset intensive uses certain internal metrics measure performance financial services companies including segment balance sheet derived internal management reporting system accounting policies used derive amounts substantially used consolidated company however certain intercompany loans accounts reflected segment balances eliminated consolidated financial statements portfolio assets ratios derived segment balance sheet hpfs follows following fiscal years ended october 31 1portfolio assets include gross financing receivables approximately 77 billion 73 billion october 31 2012 october 31 2011 respectively net equipment operating leases 24 billion 27 billion october 31 2012 october 31 2011 respectively disclosed note 11 consolidated financial statements item 8 incorporated herein reference portfolio assets also include capitalized profit intercompany equipment transactions approximately 09 billion 10 billion october 31 2012 october 31 2011 respectively intercompany leases approximately 21 billion 17 billion october 31 2012 october 31 2011 respectively eliminated consolidation 2allowance doubtful accounts includes shortterm longterm portions allowance financing receivables 3hpfs debt consists intercompany equity treated debt segment reporting purposes intercompany debt issued directly hpfs october 31 2012 2011 debt allocated hpfs totalled 113 billion 108 billion respectively allocated intercompany debt equity ratio comparable similar financing companies october 31 2012 2011 hpfs cash balances approximately 700 million 500 million respectively net portfolio assets october 31 2012 increased 27 october 31 2011 increase resulted higher levels new financing originations fiscal 2012 effect partially offset unfavorable currency impact overall percentage portfolio asset reserves increased percentage portfolio assets hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued hpfs recorded net bad debt expenses 54 million 60 million fiscal 2012 fiscal 2011 respectively corporate investments net revenue corporate investments fiscal 2012 relates primarily business intelligence solutions former webos device business fiscal 2012 revenue decrease result lower sales due wind webos device business announced august 2011 corporate investments reported smaller loss operations fiscal 2012 due primarily absence current period charges recognized prior period related wind webos device business loss operations corporate investments also due expenses carried segment associated corporate strategy global alliances hp labs net revenue corporate investments fiscal 2011 relates primarily mobile devices associated palm acquisition business intelligence solutions licensing hp technology third parties fiscal 2011 revenue decrease due primarily lower business intelligence solutions revenue effect partially offset revenue webos devices business intelligence solutions revenue declined mainly due lower revenue consulting services corporate investments reported higher loss operations fiscal 2011 due 755 million expenses primarily supplierrelated obligations sales incentive programs related winding webos device business loss operations corporate investments also due expenses carried segment associated corporate development global alliances hp labs expenses increased fiscal 2010 partially offset gain divestiture hps halo video collaboration products business liquidity capital resources cash balances held numerous locations throughout world substantially amounts held outside united states amounts held outside united states generally utilized support nonus liquidity needs although portion amounts may time subject shortterm intercompany loans united states amounts held outside united states could repatriated united states current law would subject united states federal income taxes less applicable foreign tax credits repatriation foreign balances restricted local laws except foreign earnings considered indefinitely reinvested outside united states provided us federal tax liability earnings financial statement purposes repatriation could result additional income tax payments future years local restrictions prevent efficient intercompany transfer funds intent cash balances would remain outside united states would meet liquidity needs ongoing cash flows external borrowings utilize variety tax planning financing strategies effort ensure worldwide cash available locations needed expect restrictions potential taxes repatriation amounts held hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued outside united states material effect hps overall liquidity financial condition results operations liquidity use cash generated operations primary source liquidity believe internally generated cash flows generally sufficient support business operations capital expenditures payment stockholder dividends addition discretionary investments share repurchases able supplement nearterm liquidity necessary broad access capital markets credit line facilities made available various foreign domestic financial institutions liquidity subject various risks including market risks identified section entitled qualitative quantitative disclosures market risk item 7a nannannanitem 7a quantitative qualitative disclosures market risk discussion companys exposure management market risk appears financial review page 38 companys 1997 annual report shareholders page incorporated herein reference item 8nanitem 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity market price risks could impact results operations risk management strategy includes use derivative financial instruments including forwards swaps purchased options hedge certain exposures objective offset gains losses resulting exposures gains losses derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities enter trading speculative positions regard derivative instruments foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 30 currencies worldwide significant operations euro japanese yen british pound currencies net receiver foreign currencies therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currencies transact significant amounts business japanese yen however net payer therefore tend benefit stronger us dollar yen performed sensitivity analysis october 31 2001 2000 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analysis covers foreign exchange forward contracts offset underlying exposures options excluded analysis foreign hewlettpackard company subsidiaries managements discussion analysis financial condition results operations continued currency exchange rates used based spot rates effect october 31 2001 2000 sensitivity analysis indicated hypothetical 10 adverse movement foreign currency exchange rates would result loss fair values foreign exchange derivative financial instruments net exposures 52 million october 31 2001 45 million october 31 2000 interest rate risk also exposed interest rate risk related fixed rate debt investment portfolios financing receivables performed sensitivity analysis october 31 2001 2000 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates variables held constant analysis covers fixed rate unhedged debt unhedged investment instruments financing receivables based assumed overall maturities three months shortterm debt investments three years longterm debt investments actual maturities financing receivables discount rates used based market interest rates effect october 31 2001 2000 sensitivity analysis indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables 14 million october 31 2001 36 million october 31 2000 equity price risk also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 148 million october 31 2001 328 million october 31 2000 monitor equity investments periodic basis event carrying value equity investment exceeds fair value decline value determined otherthan temporary carrying value reduced current fair value generally attempt reduce eliminate market exposure equity securities hold equity securities trading speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 44 million october 31 2001 98 million october 31 2000 actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact results operations risk management strategy respect three market risks includes use derivative financial instruments including forwards swaps purchased options hedge certain exposures objective offset gains losses resulting exposures gains losses derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities derivative positions used manage existing underlying exposures hp accordingly enter trading speculative positions regard derivative instruments foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 30 currencies worldwide significant operations euro japanese yen british pound currencies net receiver foreign currencies therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currencies transact significant amounts business performed sensitivity analysis october 31 2002 2001 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analysis covers foreign exchange forward contracts offset underlying exposures options excluded analysis foreign currency exchange rates used based market rates effect october 31 2002 2001 sensitivity analysis indicated hypothetical 10 adverse movement foreign currency exchange rates would result loss fair values foreign exchange derivative financial instruments net exposures 95 million october 31 2002 52 million october 31 2001 interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables performed sensitivity analysis october 31 2002 2001 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analysis covers debt investment instruments financing receivables based actual maturities debt investments approximate maturities financing receivables discount rates used based market interest rates effect october 31 2002 2001 sensitivity analysis indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables 40 million october 31 2002 14 million october 31 2001 equity price risk also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 52 million october 31 2002 148 million october 31 2001 monitor equity investments periodic basis event carrying value equity investment exceeds fair value decline value determined otherthan temporary carrying value reduced current fair value generally attempt reduce eliminate market exposure equity securities hold equity securities trading speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 16 million october 31 2002 44 million october 31 2001 actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact results operations risk management strategy respect three market risks includes use derivative financial instruments including forwards swaps options hedge certain exposures objective offset gains losses resulting exposures gains losses derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities derivative positions used manage existing underlying exposures hp accordingly use derivative contracts speculative purposes foreign currency exchange rate risk preceding fiscal year exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 40 currencies worldwide significant operations euro japanese yen british pound preceding fiscal year currencies net receiver foreign currencies therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currencies performed sensitivity analysis october 31 2003 2002 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analysis covers foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2003 2002 sensitivity analysis indicated hypothetical 10 adverse movement foreign currency exchange rates would result loss fair values foreign exchange derivative financial instruments net exposures 96 million october 31 2003 95 million october 31 2002 interest rate risk preceding fiscal year also exposed interest rate risk related debt investment portfolios financing receivables employ interest rate swaps hedge fair values cash flows associated debt investment instruments performed sensitivity analysis october 31 2003 2002 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analysis covers debt investment instruments financing receivables interest rate swaps analysis uses actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2003 2002 sensitivity analysis indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 7 million october 31 2003 40 million october 31 2002 equity price risk preceding fiscal year also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 97 million october 31 2003 52 million october 31 2002 monitor equity investments periodic basis event carrying value equity investment exceeds fair value decline value determined otherthan temporary carrying value reduced current fair value generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time hold equity securities trading speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 29 million october 31 2003 16 million october 31 2002 actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks includes use derivative financial instruments use derivatives manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined foreign currency exchange rate risk preceding fiscal year exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 40 currencies worldwide significant operations preceding fiscal year euro japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even hp net receiver certain expense figures taken alone may adversely affected weaker us dollar use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar addition debt denominated foreign currency hp may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates hp also uses derivatives designated hedging instruments sfas 133 consisting primarily forward contracts hedge foreign currency balance sheet exposures hp recognizes gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively hp may choose hedge foreign currency risk associated foreign currency exposures exposure acts natural foreign currency hedge offsetting amounts denominated currency performed sensitivity analysis october 31 2004 2003 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analysis covers foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2004 2003 sensitivity analysis indicated hypothetical 10 adverse movement foreign currency exchange rates would result loss fair values foreign exchange derivative financial instruments net exposures 71 million october 31 2004 96 million october 31 2003 interest rate risk preceding fiscal year also exposed interest rate risk related debt investment portfolios financing receivables hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp typically uses interest rate swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest swap transactions generally involve exchange fixed floating interest payments however hp may choose swap fixed floating interest payments may terminate previously executed swap fixed rate positions provide beneficial relationship assets liabilities order hedge fair value certain fixedrate investments hp periodically may enter interest rate swaps convert fixed interest returns variable interest returns hp uses cash flow hedges hedge variability liborbased interest income received certain variablerate investments hp also enters interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analysis october 31 2004 2003 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analysis covers debt investment instruments financing receivables interest rate swaps analysis uses actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2004 2003 sensitivity analysis indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 2 million october 31 2004 7 million october 31 2003 equity price risk preceding fiscal year also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 70 million october 31 2004 97 million october 31 2003 monitor equity investments periodic basis event carrying value equity investment exceeds fair value decline value determined otherthan temporary carrying value reduced current fair value generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use trading speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 21 million october 31 2004 29 million october 31 2003 aggregate cost privatelyheld companies investments 388 million october 31 2004 577 million october 31 2003 actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 40 currencies worldwide significant operations fiscal 2005 euro japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even hp net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar addition debt denominated foreign currency hp may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates hp also uses derivatives designated hedging instruments sfas 133 accounting derivative instruments hedging activities consisting primarily forward contracts hedge foreign currency balance sheet exposures hp recognizes gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively hp may choose hedge foreign currency risk associated foreign currency exposures exposure acts natural foreign currency hedge offsetting amounts denominated currency performed sensitivity analyses october 31 2005 2004 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2005 2004 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 90 million october 31 2005 71 million october 31 2004 interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp typically uses interest rate swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payments however hp may choose swap fixed floating interest payments may terminate previously executed swap fixed rate liability offset fixed rate assets order hedge fair value certain fixedrate investments hp may enter interest rate swaps convert fixed interest returns variable interest returns hp may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments hp may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2005 2004 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2005 2004 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 4 million october 31 2005 2 million october 31 2004 equity price risk also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 64 million october 31 2005 70 million october 31 2004 monitor equity investments impairment periodic basis event carrying value equity investment exceeds fair value determine decline value temporary reduce carrying value current fair value generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use trading speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 19 million october 31 2005 21 million october 31 2004 aggregate cost privatelyheld companies investments 353 million october 31 2005 388 million october 31 2004 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 40 currencies worldwide significant operations fiscal 2006 euro japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments sfas 133 accounting derivative instruments hedging activities consisting primarily forward contracts hedge foreign currency balance sheet exposures recognize gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2006 2005 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2006 2005 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 104 million october 31 2006 90 million october 31 2005 interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing typically use interest rate swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2006 2005 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2006 2005 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 19 million october 31 2006 4 million october 31 2005 equity price risk also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 36 million october 31 2006 64 million october 31 2005 monitor equity investments impairment periodic basis event carrying value equity investment exceeds fair value determine decline value temporary reduce carrying value current fair value generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use trading speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 11 million october 31 2006 19 million october 31 2005 aggregate cost privatelyheld companies investments 362 million october 31 2006 353 million october 31 2005 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 40 currencies worldwide significant operations fiscal 2007 euro japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments sfas 133 accounting derivative instruments hedging activities consisting primarily forward contracts hedge foreign currency balance sheet exposures recognize gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2007 2006 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2007 2006 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 104 million october 31 2007 october 31 2006 interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing typically use interest rate andor currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2007 2006 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2007 2006 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 17 million october 31 2007 19 million october 31 2006 equity price risk also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 9 million october 31 2007 36 million october 31 2006 monitor equity investments impairment periodic basis event carrying value equity investment exceeds fair value determine decline value temporary reduce carrying value current fair value generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 3 million october 31 2007 11 million october 31 2006 aggregate cost privatelyheld companies investments 533 million october 31 2007 362 million october 31 2006 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 40 currencies worldwide significant operations fiscal 2008 euro japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany lease loan denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments sfas 133 accounting derivative instruments hedging activities consisting primarily forward contracts hedge foreign currency balance sheet exposures recognize gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures primarily exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2008 2007 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2008 2007 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 141 million 104 million october 31 2008 october 31 2007 respectively interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing typically use interest rate andor currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2008 2007 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2008 2007 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 9 million october 31 2008 17 million october 31 2007 equity price risk also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 5 million october 31 2008 9 million october 31 2007 monitor equity investments impairment periodic basis event carrying value equity investment exceeds fair value determine decline value temporary reduce carrying value current fair value generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 2 million october 31 2008 3 million october 31 2007 aggregate cost privatelyheld companies marketable trading securities investments 425 million october 31 2008 533 million october 31 2007 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 40 currencies worldwide significant operations fiscal 2009 euro japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany lease loan denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures types derivatives hedges recognize gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures primarily exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2009 2008 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2009 2008 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 106 million 141 million october 31 2009 october 31 2008 respectively interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing typically use interest rate andor currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2009 2008 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2009 2008 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 33 million october 31 2009 9 million october 31 2008 equity price risk also exposed equity price risk inherent portfolio publiclytraded equity securities estimated fair value 5 million october 31 2009 5 million october 31 2008 monitor equity investments impairment periodic basis generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use speculative purposes hypothetical 30 adverse change stock prices publiclytraded equity securities would result loss fair values marketable equity securities 1 million october 31 2009 2 million october 31 2008 aggregate cost privatelyheld companies marketable trading securities investments 142 million october 31 2009 425 million october 31 2008 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 75 currencies worldwide significant foreign currencies operations fiscal 2013 euro japanese yen chinese yuan renminbi british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany loans denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures primarily exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2013 2012 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2013 2012 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 80 million 71 million october 31 2013 october 31 2012 respectively interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2013 2012 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments financing receivables interest rate swaps analyses use actual approximate maturities debt investments financing receivables interest rate swaps discount rates used based market interest rates effect october 31 2013 2012 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investments financing receivables net interest rate swaps 95 million october 31 2013 121 million october 31 2012 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair value exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount foreign currency exchange rate interest rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 75 currencies worldwide significant foreign currencies operations fiscal 2014 euro british pound chinese yuan renminbi japanese yen currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany loans denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge risk associated foreign currency exposures primarily exposure acts natural hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2014 2013 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency derivative contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2014 2013 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 62 million 80 million october 31 2014 october 31 2013 respectively interest rate risk also exposed interest rate risk related debt issued investment portfolio financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2014 2013 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments financing receivables interest rate swaps analyses use actual approximate maturities debt investments financing receivables interest rate swaps discount rates used based market interest rates effect october 31 2014 2013 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investments financing receivables net interest rate swaps 80 million october 31 2014 95 million october 31 2013 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair value exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount foreign currency exchange rate interest rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 79 currencies worldwide significant foreign currencies operations fiscal 2015 euro british pound chinese yuan renminbi japanese yen currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts times options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany loans denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge risk associated foreign currency exposures primarily exposure acts natural hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2015 2014 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency derivative contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2015 2014 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 72 million 62 million october 31 2015 october 31 2014 respectively interest rate risk also exposed interest rate risk related debt issued investment portfolio financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2015 2014 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments financing receivables interest rate swaps analyses use actual approximate maturities debt investments financing receivables interest rate swaps discount rates used based market interest rates effect october 31 2015 2014 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investments financing receivables net interest rate swaps 119 million october 31 2015 80 million october 31 2014 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair value exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount foreign currency exchange rate interest rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 44 currencies worldwide significant foreign currencies operations fiscal year 2016 euro chinese yuan renminbi british pound indian rupee currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts times options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany loans denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge risk associated foreign currency exposures primarily exposure acts natural hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses continuing operations october 31 2016 2015 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency derivative contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2016 2015 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 41 million 54 million continuing operations october 31 2016 october 31 2015 respectively interest rate risk also exposed interest rate risk related debt issued investment portfolio issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses continuing operations october 31 2016 2015 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments interest rate swaps analyses use actual approximate maturities debt investments interest rate swaps discount rates used based market interest rates effect october 31 2016 2015 sensitivity analyses continuing operations indicated hypothetical 10 adverse movement interest rates would resulted loss fair values debt investments net interest rate swaps 51 million october 31 2016 67 million october 31 2015 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative instruments use derivative contracts manage existing underlying exposures accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair value exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount foreign currency exchange rate interest rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 44 currencies worldwide significant foreign currencies operations fiscal year 2017 euro chinese yuan renminbi british pound indian rupee currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts times options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge risk associated foreign currency exposures primarily exposure acts natural hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses continuing operations october 31 2017 2016 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency derivative contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2017 2016 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 64 million 41 million october 31 2017 october 31 2016 respectively interest rate risk also exposed interest rate risk related debt issued investment portfolio issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2017 2016 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments interest rate swaps analyses use actual approximate maturities debt investments interest rate swaps discount rates used based market interest rates effect october 31 2017 2016 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would resulted loss fair values debt investments net interest rate swaps 61 million october 31 2017 51 million october 31 2016 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative instruments use derivative contracts manage existing underlying exposures accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair value exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount foreign currency exchange rate interest rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business approximately 44 currencies worldwide significant foreign currencies operations fiscal year 2018 euro chinese yuan renminbi british pound indian rupee currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts times options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge risk associated foreign currency exposures primarily exposure acts natural hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses continuing operations october 31 2018 2017 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency derivative contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2018 2017 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 75 million 64 million october 31 2018 october 31 2017 respectively interest rate risk also exposed interest rate risk related debt issued investment portfolio issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2018 2017 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments interest rate swaps analyses use actual approximate maturities debt investments interest rate swaps discount rates used based market interest rates effect october 31 2018 2017 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would resulted loss fair values debt investments net interest rate swaps 69 million october 31 2018 61 million october 31 2017 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative instruments use derivative contracts manage existing underlying exposures accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair value exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount foreign currency exchange rate interest rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business 40 currencies worldwide significant foreign currencies operations fiscal year 2019 euro chinese yuan renminbi japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts times options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge risk associated foreign currency exposures primarily exposure acts natural hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses continuing operations october 31 2019 2018 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency derivative contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2019 2018 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 81 million 75 million october 31 2019 october 31 2018 respectively interest rate risk also exposed interest rate risk related debt issued investment portfolio issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2019 2018 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments interest rate swaps analyses use actual approximate maturities debt investments interest rate swaps discount rates used based market interest rates effect october 31 2019 2018 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would resulted loss fair values debt investments net interest rate swaps 49 million october 31 2019 69 million october 31 2018 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate risks could impact financial position results operations risk management strategy respect market risks may include use derivative instruments use derivative contracts manage existing underlying exposures accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair value exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount foreign currency exchange rate interest rate movements actual exposures derivatives place time change well effectiveness derivative hedge related exposure foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business 40 currencies worldwide significant foreign currencies operations fiscal year 2020 euro chinese yuan renminbi japanese yen british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver foreign currency weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts times options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures alternatively may choose hedge risk associated foreign currency exposures primarily exposure acts natural hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses continuing operations october 31 2020 2019 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency derivative contracts offset underlying exposures foreign currency exchange rates used performing sensitivity analysis based market rates effect october 31 2020 2019 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange fair value loss 77 million 81 million october 31 2020 october 31 2019 respectively interest rate risk also exposed interest rate risk related debt issued investment portfolio issue longterm debt either us dollars foreign currencies based market conditions time financing may use interest rate andor currency swaps modify market risk exposures connection debt achieve floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2020 2019 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investments interest rate swaps analyses use actual approximate maturities debt investments interest rate swaps discount rates used based market interest rates effect october 31 2020 2019 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would resulted loss fair values debt investments net interest rate swaps 36 million october 31 2020 49 million october 31 2019 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 40 currencies worldwide significant foreign currency operations fiscal 2010 euro japanese yen chinese yuan renminbi british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany lease loan denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures types derivatives hedges recognize gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures primarily exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2010 2009 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2010 2009 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 122 million 106 million october 31 2010 october 31 2009 respectively interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing typically use interest rate andor currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2010 2009 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual maturities debt investments interest rate swaps approximate maturities financing receivables discount rates used based market interest rates effect october 31 2010 2009 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 28 million october 31 2010 33 million october 31 2009 equity price risk also exposed equity price risk inherent portfolio publicly traded equity securities estimated fair value 9 million october 31 2010 5 million october 31 2009 monitor equity investments impairment periodic basis generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use speculative purposes hypothetical 30 adverse change stock prices publicly traded equity securities would result loss fair values marketable equity securities approximately 3 million 1 million october 31 2010 2009 respectively aggregate cost privatelyheld companies investments 163 million october 31 2010 142 million october 31 2009 item 8nanitem 7a quantitative qualitative disclosures market risk discussion companys exposure management market risk appears financial review found page 38 companys 1998 annual report stockholders page incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk quantitative qualitative disclosures market risk affecting hp see managements discussion analysis financial conditions results operations item 7 incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 76 currencies worldwide significant foreign currencies operations fiscal 2011 euro japanese yen chinese yuan renminbi british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany lease loan denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures types derivatives hedges recognize gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures primarily exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2011 2010 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2011 2010 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 96 million 122 million october 31 2011 october 31 2010 respectively interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing typically use interest rate andor currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2011 2010 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual approximate maturities debt investments interest rate swaps financing receivables discount rates used based market interest rates effect october 31 2011 2010 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 145 million october 31 2011 28 million october 31 2010 equity price risk also exposed equity price risk inherent portfolio publicly traded equity securities estimated fair value 117 million october 31 2011 9 million october 31 2010 monitor equity investments impairment periodic basis generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use speculative purposes hypothetical 30 adverse change stock prices publicly traded equity securities would result loss fair values marketable equity securities approximately 35 million 3 million october 31 2011 2010 respectively aggregate cost investments privatelyheld companies investments 57 million october 31 2011 163 million october 31 2010 item 8item 7a quantitative qualitative disclosures market risk normal course business exposed foreign currency exchange rate interest rate equity price risks could impact financial position results operations risk management strategy respect three market risks may include use derivative financial instruments use derivative contracts manage existing underlying exposures hp accordingly use derivative contracts speculative purposes risks risk management strategy sensitivity analysis estimating effects changes fair values exposures outlined actual gains losses future may differ materially sensitivity analyses based changes timing amount interest rate foreign currency exchange rate equity price movements actual exposures hedges foreign currency exchange rate risk exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities debt denominated currencies us dollar transact business approximately 75 currencies worldwide significant foreign currencies operations fiscal 2012 euro japanese yen chinese yuan renminbi british pound currencies net receiver foreign currency therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currency even net receiver weaker us dollar may adversely affect certain expense figures taken alone use combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany lease loans denominated currencies us dollar addition debt denominated foreign currency may use swaps exchange foreign currency principal interest obligations us dollardenominated amounts manage exposure changes foreign currency exchange rates also use derivatives designated hedging instruments consisting primarily forward contracts hedge foreign currency balance sheet exposures types derivatives hedges recognize gains losses foreign currency forward contracts period remeasurement losses gains related foreign currencydenominated exposures alternatively may choose hedge foreign currency risk associated foreign currency exposures primarily exposure acts natural foreign currency hedge offsetting amounts denominated currency difficult expensive hedge performed sensitivity analyses october 31 2012 2011 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels foreign currency exchange rates relative us dollar variables held constant analyses cover foreign currency contracts offset underlying exposures foreign currency exchange rates used based market rates effect october 31 2012 2011 sensitivity analyses indicated hypothetical 10 adverse movement foreign currency exchange rates would result foreign exchange loss 71 million 96 million october 31 2012 october 31 2011 respectively interest rate risk also exposed interest rate risk related debt investment portfolios financing receivables issue longterm debt either us dollars foreign currencies based market conditions time financing often use interest rate andor currency swaps modify market risk exposures connection debt achieve us dollar liborbased floating interest expense swap transactions generally involve exchange fixed floating interest payments however may choose swap fixed floating interest payments may terminate previously executed swap believe larger proportion fixedrate debt would beneficial order hedge fair value certain fixedrate investments may enter interest rate swaps convert fixed interest returns variable interest returns may use cash flow hedges hedge variability liborbased interest income received certain variablerate investments may also enter interest rate swaps convert variable rate interest returns fixedrate interest returns performed sensitivity analyses october 31 2012 2011 using modeling technique measures change fair values arising hypothetical 10 adverse movement levels interest rates across entire yield curve variables held constant analyses cover debt investment instruments financing receivables interest rate swaps analyses use actual approximate maturities debt investments interest rate swaps financing receivables discount rates used based market interest rates effect october 31 2012 2011 sensitivity analyses indicated hypothetical 10 adverse movement interest rates would result loss fair values debt investment instruments financing receivables net interest rate swap positions 121 million october 31 2012 145 million october 31 2011 equity price risk also exposed equity price risk inherent portfolio publicly traded equity securities estimated fair value 59 million october 31 2012 118 million october 31 2011 monitor equity investments impairment periodic basis generally attempt reduce eliminate market exposure equity securities however may use derivative transactions hedge certain positions time purchase equity securities intent use speculative purposes hypothetical 30 adverse change stock prices publicly traded equity securities would result loss fair values marketable equity securities approximately 18 million 35 million october 31 2012 2011 respectively aggregate cost investments privatelyheld companies investments 59 million october 31 2012 57 million october 31 2011 item 8 item 8 financial statements supplementary data consolidated financial statements company together report thereon price waterhouse independent accountants unaudited quarterly summary set forth pages 24 28 3043 45 companys 1993 annual report shareholders pages excluding order data incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company together report thereon price waterhouse llp independent accountants unaudited quarterly summary set forth pages 24 28 3043 45 companys 1994 annual report shareholders pages excluding order data statement management responsibility incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company together report thereon price waterhouse llp independent accountants unaudited quarterly summary set forth pages 26 30 3245 47 companys 1995 annual report shareholders pages excluding order data statement management responsibility incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company together report thereon price waterhouse llp independent accountants unaudited quarterly summary set forth pages 32 36 4054 56 companys 1997 annual report shareholders pages excluding order data statement management responsibility incorporated herein reference item 9nanitem 8 financial statements supplementary data report independent auditors board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2001 2000 related consolidated statements earnings stockholders equity cash flows two years period ended october 31 2001 audits also included financial statement schedule listed index item 14a2 years ended october 31 2001 2000 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2001 2000 consolidated results operations cash flows two years period ended october 31 2001 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2001 company changed method accounting revenue recognition ernst young llp san jose california november 13 2001 except note 19 date december 6 2001 report independent accountants board directors stockholders hewlettpackard company opinion consolidated financial statements listed index appearing item 14a1 present fairly material respects results operations cash flows hewlettpackard company subsidiaries year ended october 31 1999 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 14a2 presents fairly material respects information set forth therein year ended october 31 1999 read conjunction related consolidated financial statements consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion audited consolidated financial statements financial statement schedules hewlettpackard company period subsequent october 31 1999 pricewaterhousecoopers llp san jose california november 23 1999 except stock split disclosed note 12 consolidated financial statements date october 27 2000 statement management responsibility hps management responsible preparation integrity objectivity consolidated financial statements financial information included hps 2001 annual report form 10k consolidated financial statements prepared conformity accounting principles generally accepted united states reflect effects certain estimates judgments made management hps management maintains effective system internal control designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization system regularly monitored direct management review internal auditors conduct extensive program audits throughout hp selects trains qualified people provided expected adhere hps standards business conduct standards set forth highest principles business ethics conduct key element hps control system hps consolidated financial statements two years period ended october 31 2001 audited ernst young llp independent auditors hps consolidated financial statements year ended october 31 1999 audited pricewaterhousecoopers llp independent accountants respective audits conducted accordance auditing standards generally accepted united states included review financial controls tests accounting records procedures respectively considered necessary circumstances audit committee board directors consists outside directors meets regularly management internal auditors independent auditors review accounting reporting auditing internal control matters audit committee direct private access internal external auditors carleton fiorina robert p wayman carleton fiorina robert p wayman president chief executive officer executive vice president finance administration chief financial officer hewlettpackard company subsidiaries consolidated statement earnings accompanying notes integral part financial statements hewlettpackard company subsidiaries consolidated balance sheet accompanying notes integral part financial statements hewlettpackard company subsidiaries consolidated statement cash flows accompanying notes integral part financial statements hewlettpackard company subsidiaries consolidated statement stockholders equity accompanying notes integral part financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company hp whollyowned controlled majorityowned subsidiaries significant intercompany accounts transactions eliminated use estimates preparation financial statements accordance accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported hps financial statements accompanying notes actual results could differ estimates revenue recognition accounting changes hp adopted securities exchange commission sec staff accounting bulletin 101 sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 2000 sab 101 summarizes certain secs views applying accounting principles generally accepted united states revenue recognition financial statements primary impact hps adoption sab 101 delay recognition product revenue date shipment date delivery title risk loss transfer customer provided significant obligations exist upon delivery hp restated consolidated results operations first three quarters fiscal 2001 including cumulative effect change accounting principle 272 million net income taxes 108 million recorded reduction net income beginning first quarter fiscal 2001 conjunction cumulative effect adjustment increase deferred revenue 10 billion increase inventory 631 million recorded november 1 2000 amount consisted equipment shipped prior october 31 2000 yet received customer date 10 billion recognized revenue 2001 along associated 631 million cost sales included cumulative effect adjustment resulted aftertax earnings 272 million sab 101 effective prior fiscal years presented pro forma results earnings per share would materially different previously reported results hp early adopted emerging issues task force eitf issue 0025 vendor income statement characterization consideration paid reseller vendors products fourth quarter fiscal 2001 april 2001 eitf reached consensus issue 0025 concluding consideration vendor reseller vendors products generally presumed adjustment selling prices vendors products therefore classified reduction revenue hp previously classified consideration paid distributors resellers products selling general administrative expense hp reclassified 281 million 2000 297 million 1999 selling general administrative expense reduction revenue conform current year presentation general revenue recognized persuasive evidence arrangement exists products delivered services rendered sales price fixed determinable collectibility reasonably assured following policies applicable hps major categories revenue transactions products revenue product sales including sales distributors resellers recognized title risk loss transfer customer generally time product delivered customer revenue deferred hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued customer acceptance uncertain significant obligations remain undelivered products services essential functionality delivered products revenue reduced estimated customer returns price protection rebates offerings occur sales programs established hps distributors resellers estimated cost postsale obligations including basic product warranties accrued based historical experience time revenue recognized services revenue support maintenance contracts including extended warranty programs recognized ratably contractual period amounts invoiced customers excess revenue recognized support maintenance contracts recorded deferred revenue recognition criteria met revenue time material contracts recognized services rendered revenue longterm fixedprice service contracts certain outsourcing consulting arrangements recognized contractual period percentageofcompletion basis revenue excess amounts invoiced longterm fixedprice contracts recorded unbilled receivables included trade accounts receivable losses fixedprice contracts recognized period loss becomes evident software revenue software comprised software licensing postcontract customer support software revenue allocated license support elements using vendor specific objective evidence fair value vsoe absence vsoe residual method revenue allocated software licenses recognized persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility probable four basic criteria revenue allocated postcontract support recognized ratably term support contract assuming four basic criteria met financing revenue sale equipment salestype leases directfinancing leases recognized product revenue inception lease associated financing income earned accrual basis effective annual yield method prior 2001 hp recorded financing income component interest net along interest cost associated monies borrowed fund financing activity hp reclassified financing income revenue financing interest expense related cost sales conform current year presentation revenue rentals operating leases recognized fees accrue revenue arrangements include multiple elements revenue transactions include multiple elements hardware software consulting training support agreements allocated element based relative fair value absence fair value residual method recognized revenue recognition criteria met element hp recognizes revenue delivered elements following criteria satisfied 1 undelivered elements essential functionality delivered elements 2 uncertainties regarding customer acceptance resolved 3 fair value undelivered elements known shipping handling costs related shipping handling included cost sales periods presented hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued advertising costs expensed incurred amounted 10 billion 2001 11 billion 2000 13 billion 1999 taxes earnings deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely recognized cash equivalents hp classifies investments cash equivalents original maturity investment three months less purchase date inventory valued lower cost market cost computed firstin firstout basis property plant equipment property plant equipment stated cost less accumulated depreciation additions improvements major renewals capitalized maintenance repairs minor renewals expensed incurred depreciation provided using accelerated methods estimated useful lives assets estimated useful lives 15 40 years buildings improvements 3 10 years machinery equipment leasehold improvements depreciated using straightline method life lease asset whichever shorter leased equipment depreciated using straightline method initial term operating lease estimated residual value goodwill purchased intangible assets goodwill related acquisitions prior july 1 2001 purchased intangible assets amortized using straightline method estimated economic lives assets ranging two ten years goodwill related acquisitions june 30 2001 amortized impairment longlived assets longlived assets property plant equipment goodwill purchased intangibles evaluated impairment whenever events changes circumstances indicate carrying value asset may recoverable impairment loss recognized estimated undiscounted future cash flows expected result use asset plus net proceeds expected disposition asset less carrying value asset impairment identified carrying amount asset reduced fair value capitalized software hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software capitalized costs amortized three years hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued derivative financial instruments hp enters derivative financial instrument contracts hedge certain foreign exchange interest rate exposures november 1 2000 hp adopted statement financial accounting standards sfas 133 accounting derivative instruments hedging activities cumulative effect adopting sfas 133 material hps consolidated financial statements see note 8 consolidated financial statements full description hps hedging activities related accounting policies investments hps investments principally consist time deposits municipal securities repurchase agreements debt securities well equity securities public privatelyheld companies investments maturities less one year classified shortterm investments debt securities hp ability intent hold maturity accounted heldtomaturity securities carried amortized cost remainder hps debt securities equity investments public companies classified availableforsale securities carried fair value majority availableforsale securities unrealized gains losses net taxes recorded accumulated comprehensive income remainder availableforsale securities hedged changes fair value securities recognized earnings offset gains losses related derivative instruments equity investments privatelyheld companies generally carried cost equity investments companies hp ability exercise significant influence hold controlling interest accounted equity method hps proportionate share income losses recorded interest net concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash investments accounts receivable financing receivables derivatives certain financial instruments hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions company policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively represented 28 total accounts receivable october 31 2001 31 october 31 2000 credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations thirdparty distributors resellers customers financial condition requires collateral letters credit bank guarantees certain circumstances hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued foreign currency translation hp uses us dollar functional currency foreign currency assets liabilities remeasured us dollars endofperiod exchange rates except inventory property plant equipment assets deferred revenue remeasured historical exchange rates revenue expenses remeasured average exchange rates effect period except expenses related previously noted balance sheet amounts remeasured historical exchange rates gains losses foreign currency remeasurement included net earnings comprehensive income comprehensive income includes net earnings well comprehensive income hps comprehensive income consists unrealized gains losses availableforsale securities effective fiscal 2001 unrealized gains losses derivative instruments recorded net tax reclassifications certain reclassifications made prior year balances order conform current year presentation recent pronouncements july 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires business combinations accounted purchase method accounting changes criteria recognition intangible assets acquired business combination provisions sfas 141 apply business combinations initiated june 30 2001 hp expect adoption sfas 141 material effect consolidated financial position results operations sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized however assets must reviewed least annually impairment intangible assets finite useful lives continue amortized respective useful lives standard also establishes specific guidance testing impairment goodwill intangible assets indefinite useful lives provisions sfas 142 effective hps fiscal year 2003 early adoption permitted beginning hps fiscal year 2002 however goodwill intangible assets acquired june 30 2001 subject immediately nonamortization provisions sfas 142 hp currently process evaluating potential impact adoption sfas 142 consolidated financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 amends existing accounting guidance asset impairment provides single accounting model longlived assets disposed among provisions new rules change criteria classifying asset heldforsale standard also broadens scope businesses disposed qualify reporting discontinued operations changes timing recognizing losses operations provisions sfas 144 effective hps fiscal year 2003 applied prospectively hp currently process evaluating potential impact adoption sfas 144 consolidated financial position results operations hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 net earnings per share hps basic earnings per share eps calculated based net earnings weightedaverage number shares outstanding reporting period diluted eps includes additional dilution potential issuance common stock issuable pursuant exercise stock options outstanding conversion debt share pershare amounts reflect retroactive effects twoforone stock split form stock dividend effective october 27 2000 following table presents reconciliation numerators denominators basic diluted eps calculations hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 net earnings per share continued shares issuable upon exercise certain hps stock options excluded calculation diluted net earnings per share exercise price options greater average market price common shares respective fiscal years therefore effect would antidilutive shares issuable upon exercise options excluded 147583000 2001 37666000 2000 1817000 1999 note 3 restructuring charges fiscal 2001 hps management approved restructuring actions respond global economic downturn improve hps cost structure streamlining operations prioritizing resources strategic areas hps business company recorded restructuring charge 384 million reflect actions charge consisted severance employee benefits related planned termination approximately 7500 employees worldwide across many regions business functions job classes well costs related consolidation excess facilities included offset charge 38 million related net pension postretirement settlement curtailment gains october 31 2001 5700 employees terminated hp paid 238 million accrued costs hp also made additional payments 26 million fiscal 2001 related restructuring charges accrued fiscal 2000 hp expects pay remainder accrual fiscal 2002 fiscal 2000 hps management approved enhanced early retirement eer program designed balance workforce based hps longterm business strategy hp offered approximately 2500 us employees opportunity retire early receive enhanced payout approximately 1300 employees accepted offer accordingly hp recorded restructuring charge 71 million consisting 100 million severance employee benefits offset 29 million related pension postretirement settlement curtailment gains addition eer program hp incurred 31 million restructuring charges fiscal 2000 related various site shutdowns resulting strategic management decisions fiscal 2000 hp made payments 98 million related restructuring charges accrued year 95 million paid hps pension plan based amendment plan october 31 2001 balance accrued restructuring charges recorded fiscal 2001 fiscal 2000 consisted following hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 restructuring charges continued noncash gains net related employee severance related benefits include net pension postretirement settlement curtailment gains offset charges related stockbased compensation note 4 net investment losses gains hps investment portfolio includes equity debt investments public privatelyheld emerging technology companies many emerging technology companies still startup development stage hps investments companies inherently risky markets technologies products development typically early stages may never develop hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined otherthantemporary impairment charge recorded new cost basis investment established fair values investments public companies determined using quoted market prices fair values investments privatelyheld companies estimated based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies order determine whether decline value otherthantemporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value due economic downturn decline value certain investments emerging technology companies determined otherthantemporary accordingly hp recorded impairment losses 471 million investments public private emerging technology companies fiscal 2001 amount offset 16 million realized gains sale equity securities resulting net investment losses 455 fiscal 2001 october 31 2001 carrying value portion hps remaining investment portfolio related emerging technology companies 243 million depending market conditions hp may incur additional charges investment portfolio future fiscal 2000 hp recorded 41 million net gains investments representing gains sales equity investments 104 million net impairment losses 63 million fiscal 1999 hp recorded 31 million realized gains sales equity investments note 5 discontinued operations march 2 1999 hp announced intention launch new company subsequently named agilent technologies distribution agilent technologies common stock hps stockholders form taxfree spinoff agilent technologies composed hps former measurement organization included testandmeasurement semiconductor products chemical analysis healthcare solutions businesses effective july 31 1999 hps management board directors completed plan disposition agilent technologies hps consolidated financial statements periods present agilent technologies discontinued business segment spinoff date june 2 2000 november 1999 agilent technologies completed initial public offering approximately 16 common stock distributed net proceeds approximately 21 billion hp distributed substantially remaining interest agilent technologies stock dividend hp stockholders june 2 2000 resulting 42 billion reduction retained earnings hewlettpackard company subsidiaries notes consolidated financial statements continued note 5 discontinued operations continued net earnings discontinued operations fiscal 2000 136 million second quarter fiscal 2000 cumulative net earnings agilent technologies since july 31 1999 measurement date began exceed total estimated net costs effect spinoff 136 million net earnings agilent technologies period july 31 1999 measurement date june 2 2000 spinoff date totaled 287 million net related tax expense 174 million net costs effect spinoff 151 million net related tax benefit 23 million net earnings discontinued operations fiscal year 1999 consisted net earnings agilent technologies note 6 acquisitions divestitures completed acquisitions january 2001 hp acquired outstanding stock bluestone software inc bluestone exchange hp common stock options total consideration 531 million included fair value hp common stock issued options assumed well direct transaction costs acquisition hp expanded internet software offering adding bluestones xmlbased web application server tools portfolio forming core hps middleware offering acquisition recorded purchase method accounting accordingly purchase price allocated tangible assets liabilities intangible assets acquired including inprocess research development based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuation prepared independent third party appraisal firm hp recorded approximately 338 million goodwill identified intangibles conjunction transaction amortization goodwill represents majority intangible assets cease upon hps adoption sfas 142 addition hp recorded pretax charge approximately 19 million inprocess research development time acquisition first quarter fiscal 2001 technological feasibility established future alternative uses existed september 2001 hp acquired outstanding stock storageapps inc exchange hp common stock options total consideration 319 million included fair value hp common stock issued options assumed well direct transaction costs acquisition strengthens hps storage offering adding virtualization technology key component hps federated storage area management fsam strategy fsam designed give customers ability expand storage capacity without increasing number employees storage virtualization technology designed allow customers easily mix match storage needs different vendors acquisition recorded purchase method accounting accordingly purchase price allocated tangible assets liabilities intangible assets acquired including inprocess research development based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuation prepared independent third party appraisal firm hp recorded approximately 296 million goodwill identified intangibles conjunction transaction goodwill recorded result transaction expected deductible tax purposes accordance sfas 142 goodwill represents majority intangible assets amortized reviewed periodically impairment addition hp recorded pretax charge approximately 15 million inprocess research development time acquisition fourth quarter fiscal 2001 technological feasibility established future alternative uses existed results operations acquired companies included prospectively date acquisition pro forma results operations reflecting acquisitions presented hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions divestitures continued results operations acquired companies either individually collectively material hps results operations hp also acquired companies fiscal 2001 2000 1999 significant financial position results operations acquisitions recorded purchase method accounting net book value goodwill purchased intangible assets 756 million october 31 2001 297 million subject amortization accordance sfas 142 net book value goodwill purchased intangible assets 224 million october 31 2000 189 million october 31 1999 subject amortization adoption sfas 142 accumulated amortization related assets 1171 million october 31 2001 997 million october 31 2000 911 million october 31 1999 amortization expense goodwill purchased intangible assets 174 million 2001 86 million 2000 59 million 1999 pending acquisitions september 2001 hp signed definitive agreement compaq computer corporation compaq acquire outstanding stock compaq exchange 06325 shares hp common stock outstanding share compaq stock assumption options based exchange ratio estimated purchase price 24 billion includes estimated fair value hp common stock issued options assumed well estimated direct transaction costs estimate derived using average market price per share hp common stock 2092 based average closing prices range trading days august 30 august 31 september 4 september 5 2001 around announcement date september 3 2001 proposed merger final purchase price determined based upon number compaq shares options outstanding closing date compaq leading global provider enterprise technology solutions completion compaq merger subject customary closing conditions include among others receipt required approvals hps shareowners compaq shareowners receipt required regulatory approvals transaction expected close first half calendar year 2002 may completed conditions satisfied certain terms specified merger agreement hp compaq may terminate agreement result either hp compaq may required pay 675 million termination fee party certain circumstances unless otherwise indicated discussions document relate hp standalone entity reflect impact pending business combination transaction compaq september 2001 hp signed definitive agreement indigo nv indigo commence exchange offer acquire outstanding shares indigo already owned hp shares exchange combination shares hps common stock nontransferable contingent value rights cvr entitling holder onetime contingent cash payment 450 per cvr based achievement indigo business cumulative revenue milestone threeyear postclosing period based terms agreement current assumptions quantity consideration alternative hps average closing share price 20day period ended december 31 2001 estimated consideration acquire shares approximately 720 million plus approximately 56 million cvrs 720 million consideration amount includes estimated fair value hp common stock issued options warrants assumed well estimated direct transaction costs future cash payout cvrs determined payable threeyear period commencing shortly closing exchange offer indigo leading provider high performance digital color printing completion transaction subject tender exchange number indigo shares added indigo shares currently hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions divestitures continued owned hp constitute least 95 indigos outstanding shares receipt required regulatory approvals customary closing conditions transaction expected close first half calendar year 2002 may completed conditions satisfied completed divestitures fiscal 2001 net loss divestitures 53 million consisting 131 million loss sale verifone inc subsidiary primarily offset gain 78 million sale hps remaining interest joint venture joint owner fiscal 2000 net gain divestitures 203 million consisting gains sale nonstrategic businesses well gain sale part hps interest joint venture joint owner note 7 balance sheet details accounts receivable inventory property plant equipment depreciation expense 1195 million 2001 1155 million 2000 1087 million 1999 hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued longterm investments assets note 8 financial instruments investments debt equity securities investments heldtomaturity availableforsale debt equity securities follows october 31 fair values estimated based quoted market prices pricing models using current market rates estimated fair values may representative actual values financial instruments could realized yearend realized future debt securities consist primarily collateralized notes banks corporate debt securities connection adoption sfas 133 november 1 2000 hp elected reclassify investments debt securities net book value 967 million heldtomaturity availableforsale unrealized hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 financial instruments continued loss securities net taxes 5 million time reclassification recorded accumulated comprehensive income part cumulative effect adopting sfas 133 contractual maturities heldtomaturity availableforsale debt securities october 31 2001 follows proceeds sales availableforsale securities 17 million 2001 100 million 2000 31 million 1999 gross realized gains totaled 16 million 2001 94 million 2000 31 million 1999 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity securities including heldtomaturity availableforsale securities disclosed follows october 31 derivative financial instruments november 1 2000 hp adopted sfas 133 accounting derivative instruments hedging activities amended sfas 138 accounting certain derivative instruments certain hedging activities sfas 133 amended requires derivative instruments recognized balance sheet fair value addition standard specifies criteria designation effectiveness hedging relationships establishes accounting rules reporting changes fair value derivative depending designated type hedge cumulative effect adoption sfas 133 november 1 2000 material hps consolidated financial statements hp exposed foreign currency exchange rate fluctuations interest rate changes normal course business part hps risk management strategy company uses derivative instruments including forwards swaps purchased options hedge certain foreign currency interest rate exposures hps hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 financial instruments continued objective offset gains losses resulting exposures gains losses derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp enter trading speculative positions regard derivative instruments based upon criteria established sfas 133 hp designates derivatives either fair value hedges cash flow hedges hp enters fair value hedges reduce exposure debt investment portfolios interest rate risk foreign currency exchange rate risk company issues longterm debt either us dollars foreign currencies based market conditions time financing interest rate foreign currency swaps used modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense neutralize exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payment obligations underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts order hedge fair value certain fixedrate investments hp periodically enters interest rate swaps convert fixed interest returns variable interest returns hp uses combination forwards purchased options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted revenues cost sales denominated currencies us dollar hps cash flow hedges generally mature within six months derivatives designated hedging instruments sfas 133 consist primarily forwards used hedge foreign currency balance sheet exposures warrants companies acquired part strategic relationships foreign currency forward contracts designated hedges sfas 133 represent natural hedging instruments related gains losses naturally offset foreign currency changes fair values underlying assets liabilities derivative instruments designated qualify fair value hedges gain loss derivative instrument well offsetting gain loss hedged item recognized earnings current period ineffective portion hedge reflected interest income expense hedges interest rate risk income expense hedges foreign currency risk derivative instruments designated qualify cash flow hedges effective portion gain loss derivative instrument initially recorded accumulated comprehensive income separate component stockholders equity subsequently reclassified earnings period hedged transaction recognized earnings ineffective portion gain loss reported income expense immediately effective portion derivatives designated hedges reported financial statement line item changes fair value hedged item derivative instruments designated hedging instruments sfas 133 changes fair values recognized earnings period change gains losses foreign currency forward contracts used hedge balance sheet exposures recognized income expense period remeasurement gain loss related foreign currency denominated assets liabilities thus naturally offset gains losses warrants contain net settlement provisions readily convertible cash recorded fair value changes fair value recognized income expense period change foreign currency option forward contracts designated cash flow fair value hedges hedge effectiveness measured comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates interest rate swaps designated fair value hedges critical terms interest rate swap hedged item designed match possible enabling shortcut method accounting defined sfas 133 october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 financial instruments continued 2001 amounts excluded assessment hedge effectiveness hedge ineffectiveness material year ended october 31 2001 addition fiscal 2001 hp discontinue cash flow hedges probable forecasted transaction would occur hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value october 31 2001 net fair value interestraterelated derivatives designated fair value hedges debt investment instruments 250 million 255 million recorded longterm investments assets 5 million accrued liabilities net fair value foreign currencyrelated derivatives designated cash flow hedges fair value hedges 174 million amount 99 million recorded current assets 142 million longterm investments assets 64 million accrued liabilities 3 million liabilities october 31 2001 hp also 31 million net fair value derivatives designated hedges 44 million recorded current assets 69 million accrued liabilities 6 million liabilities october 31 2000 estimated net fair value interestrate foreign currencyrelated derivatives amounted 337 million prior adoption sfas 133 november 1 2000 significant portion derivative financial instruments recorded balance sheet october 31 2001 hp approximately 22 million net unrealized gains derivative instruments taxes classified accumulated comprehensive income hp estimates 17 million net unrealized gains taxes reclassified earnings within one year fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps longterm debt 35 billion october 31 2001 compared carrying value 37 billion estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 9 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting marketing hps complementary thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets components net financing receivables included financing receivables longterm investments assets follows october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financing receivables operating leases continued scheduled maturities hps minimum lease payments receivable october 31 2001 2427 million 2002 1396 million 2003 531 million 2004 121 million 2005 47 million 2006 52 million thereafter actual cash collections may differ due primarily customer early buyouts refinancings hp also leases products customers operating leases equipment lease 1410 million october 31 2001 1477 million october 31 2000 included machinery equipment accumulated depreciation equipment lease 752 million october 31 2001 687 million october 31 2000 minimum future rentals noncancelable operating leases 667 million 2002 205 million 2003 66 million 2004 13 million 2005 3 million 2006 6 million thereafter note 10 borrowings notes payable shortterm borrowings related average interest rates follows years ended october 31 hp committed borrowing facility place borrowing capacity totaling 10 billion facility expires april 2002 bears interest libor plus 015 borrowings outstanding facility october 31 2001 october 31 2000 longterm debt related maturities interest rates follows october 31 february 2000 hp filed shelf registration statement sec register 30 billion debt securities common stock preferred stock depositary shares warrants registration statement declared effective march 2000 june 2000 hp offered shelf registration statement 15 billion unsecured 715 global notes mature june 15 2005 unless previously redeemed may 2001 hp filed prospectus supplement registration statement allowed hp offer time 15 billion mediumterm notes series due nine months date issue addition types securities described fiscal 2001 hp issued aggregate 210 million hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 borrowings continued mediumterm notes weighted average interest rate 367 maturing 2003 2004 registration statement october 31 2001 hp remaining capacity issue approximately 13 billion securities shelf registration statement see note 19 consolidated financial statements discussion debt issuance registration statement subsequent october 31 2001 hp hewlettpackard finance company whollyowned subsidiary hp hpfc ability offer time 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange notes denominated currency including euro however notes registered united states july 2001 750 million euro 636 million us dollars based exchange rate date issuance 525 mediumterm notes maturing july 5 2006 issued program october 31 2001 hp hpfc remaining capacity issue approximately 23 billion mediumterm notes program october 1997 hp issued 18 billion face value zerocoupon subordinated convertible notes proceeds 968 million november 1997 issued additional 200 million face value notes proceeds 108 million notes due 2017 notes convertible holders rate 1509 shares hps common stock 1000 face value notes payable either cash common stock hps election time hp may redeem notes book value payable cash notes subordinated existing future senior indebtedness hp december 2000 board directors authorized repurchase program notes repurchase program hp may repurchase notes time varying prices fiscal 2001 hp repurchased 12 billion face value notes book value 729 million resulting extraordinary gain early extinguishment debt 56 million net related taxes 33 million october 31 2001 notes remaining book value 465 million aggregate future maturities face value longterm debt outstanding october 31 2001 excluding fair value adjustment related sfas 133 255 million discounts debt issuances totaling 300 million 104 million 2002 261 million 2003 264 million 2004 1750 million 2005 737 million 2006 762 million thereafter hp occasionally repurchases debt prior maturity based assessment current market conditions financing alternatives note 11 taxes earnings provision income taxes earnings continuing operations extraordinary item cumulative effect change accounting principle taxes composed following years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 taxes earnings continued significant components deferred tax assets deferred tax liabilities follows october 31 current portion deferred tax asset included current assets 3073 million october 31 2001 2607 million october 31 2000 approximately 25 million valuation allowance deferred tax assets october 31 2001 attributable preacquisition tax attributes acquired companies hp determines realize tax attributes future related reduction valuation allowance reduce goodwill instead provision taxes october 31 2001 hp federal net operating tax loss carryforwards approximately 15 billion federal tax credit carryforwards approximately 636 million net operating loss approximately 406 million credit carryforwards expire beginning 2007 2022 utilized alternative minimum tax credit carryforwards approximately 230 million unlimited carryforward period tax benefits 16 million 2001 495 million 2000 289 million 1999 associated exercise employee stock options employee stock programs allocated stockholders equity differences us federal statutory income tax rate hps effective tax rate follows years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 taxes earnings continued domestic foreign components earnings losses continuing operations extraordinary item cumulative effect change accounting principle taxes follows years ended october 31 hp provided us federal income foreign withholding taxes 132 billion undistributed earnings nonus puerto rican operations october 31 2001 earnings intended reinvested indefinitely earnings distributed foreign tax credits may become available current law reduce eliminate resulting us income tax liability excess cash accumulated hps nonus subsidiaries advantageous tax foreign exchange reasons subsidiary earnings remitted result certain employment actions capital investments undertaken hp income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes years 2013 income tax benefits attributable tax status subsidiaries estimated 457 million 024 per share 2001 969 million 049 per share 2000 690 million 034 per share 1999 internal revenue service irs completed examination hps income tax returns years 1995 october 31 2001 irs process examining hps income tax returns years 1996 1998 november 2001 irs commenced examination returns years 1999 2000 hp believes adequate accruals provided years note 12 stockholders equity stock split august 16 2000 hps board directors approved twoforone stock split form stock dividend october 27 2000 hp distributed one additional share hp common stock every share common stock outstanding stockholders record close business september 27 2000 par value hps common stock split remained 001 per share additional paidin capital reduced par value additional common shares issued rights holders securities otherwise modified shares pershare market price data related hps common shares outstanding employee stock plans reflect retroactive effects stock split authorized common stock annual meeting shareowners held february 27 2001 hp stockholders approved amendment hps certificate incorporation increase number authorized shares common stock 96 billion shares october 31 2000 hp 48 billion shares authorized common stock authorized preferred stock preferred share purchase rights plan hp 300000000 authorized shares preferred stock august 31 2001 hp classified 4500000 shares series participating preferred stock conjunction hps adoption stockholder rights hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 stockholders equity continued plan date stockholder rights plan provides issuance one preferred share purchase right share hp common stock held record close business september 17 2001 preferred share purchase right confers right purchase one onethousandth share hps series participating preferred stock purchase price 18000 subject adjustment certain circumstances rights currently exercisable certain conditions involving acquisition proposed acquisition person group 15 hps common stock purchase rights become exercisable upon exercise holder purchase right also right receive hp common stock value equal two times purchase price time person group acquired 15 hps common stock less 50 common stock hps board directors may exchange purchase rights whole part exchange ratio one common share per purchase right adjusted reflect stock split stock dividend similar transaction board directors certain conditions also may redeem purchase rights whole part price 0001 per purchase right purchase rights voting privileges attached automatically trade hp common stock occurrence specified triggering events rights expire earlier september 17 2011 date redemption exchange dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per share fiscal 2001 2000 1999 agilent technologies spinoff june 2 2000 distribution date hp distributed substantially remaining interest agilent technologies stock dividend hp stockholders record close business may 2 2000 distribution made amount 03814 share agilent technologies common stock outstanding share hp common stock decrease intrinsic value hps employee stock plans attributable distribution agilent technologies restored accordance methodology set forth fasb eitf issue 909 changes fixed employee stock option plans result equity restructuring accordingly number hp employee options shares restricted stock yet released including unvested matching shares employee stock purchase plan espp outstanding may 2 2000 increased case options exercise prices correspondingly decreased reflect decline intrinsic value distribution date holders options exercised shares restricted stock released prior may 2 2000 received shares agilent technologies connection spinoff employee stock purchase plan effective november 1 2000 hp adopted new employee stock purchase plan referred share ownership plan approved hps board directors stockholders noncompensatory plan qualifies section 423 internal revenue code 1986 amended plan regular fulltime parttime employee may contribute 10 base compensation subject certain income limits semiannual purchase shares hps common stock purchase price 85 fair market value certain plandefined dates october 31 2001 approximately 87000 employees eligible participate approximately 54000 employees participants plan fiscal 2001 employee participants purchased 5868000 shares hp common stock plan weightedaverage price 24 per share hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 stockholders equity continued october 31 2000 employees longer may make contributions hps prior espp prior espp eligible company employees could generally contribute 10 base compensation quarterly purchase shares hps common stock employee contributions purchase shares partially matched shares contributed hp generally vested two years unvested matching shares stock purchased including october 31 2000 continue vest twoyear vesting period consistent terms plan hp contributed employees 615000 matching shares weightedaverage price 47 2001 related shares purchased employees last quarterly purchase period fiscal 2000 hp contributed employees including persons became employees agilent technologies 2534000 matching shares weightedaverage price 50 2000 3622000 matching shares weightedaverage price 39 1999 distribution date 569000 shares hp stock held agilent technologies employees forfeited agilent technologies replaced forfeited hp shares agilent technologies stock equivalent value compensation expense recognized plan related continuing operations 74 million 2001 89 million 2000 99 million 1999 incentive compensation plans hp four principal stock option plans adopted 1985 1990 1995 2000 stock options outstanding plans permit options granted qualify incentive stock options internal revenue code exercise price stock option generally equal fair market value hps common stock date option granted term generally ten years 1990 1995 incentive stock plans 2000 stock plan compensation committee board directors certain cases may choose establish discounted exercise price less 75 fair market value grant date hp granted 4177000 shares discounted options 2001 5151000 shares 2000 2754000 shares 1999 options generally vest rate 25 per year period four years date grant exception discounted options discounted options generally may exercised third fifth anniversary option grant date time options become fully vested cost discounted options determined difference exercise price option fair market value hps common stock date option grant expensed ratably option vesting period following table summarizes option activity years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 stockholders equity continued following table summarizes information options outstanding october 31 2001 1985 incentive compensation plan 1990 1995 incentive stock plans 2000 stock plan certain employees granted cash restricted stock awards cash restricted stock awards independent option grants subject restrictions considered appropriate compensation committee majority shares restricted stock outstanding october 31 2001 subject forfeiture employment terminates prior three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding cost awards determined fair market value shares date grant expensed ratably period restrictions lapse hp 2501000 shares restricted stock outstanding october 31 2001 6079000 shares outstanding october 31 2000 10054000 shares outstanding october 31 1999 shares available option restricted stock grants 169906000 october 31 2001 234071000 october 31 2000 54035000 october 31 1999 regular employees considered eligible receive stock options fiscal 2001 approximately 84000 employees holding options one option plans october 31 2001 compensation expense recognized incentive compensation plans related continuing operations 90 million 2001 149 million 2000 77 million 1999 information presented regarding incentive compensation plans includes activity related agilent technologies employees distribution date except noted existing terms stock option plans substantially stock options held agilent technologies employees cancelled replaced agilent technologies stock options became fully vested distribution date fully vested options exercised expired within three months distribution date total 25543000 options held agilent technologies employees cancelled replaced agilent technologies stock options distribution date 812000 options became fully vested amount 91000 options expired three months date total 1177000 shares hp restricted stock held agilent technologies employees forfeited cancelled distribution date replaced shares agilent technologies stock equivalent value pro forma information hp applies intrinsicvaluebased method prescribed apb opinion 25 accounting stock issued employees accounting employee stock options accordingly compensation expense recognized options granted discounted exercise price resulting compensation expense recognized ratably associated service period generally option vesting term hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 stockholders equity continued hp determined pro forma net earnings per share information required sfas 123 accounting stockbased compensation hp accounted employee stock options sfas 123s fair value method fair value options estimated using blackscholes option pricing model following weightedaverage assumptions purposes pro forma disclosures estimated fair value options amortized expense fouryear average vesting period options weightedaverage fair value options granted year 1230 2001 2440 2000 1546 1999 hps pro forma net earnings loss continuing operations extraordinary item cumulative effect change accounting principle 65 million 2001 32 billion 2000 30 billion 1999 pro forma diluted net earnings loss per share continuing operations extraordinary item cumulative effect change accounting principle 003 2001 154 2000 143 1999 shares reserved hp 500036000 shares common stock reserved october 31 2001 511845000 shares reserved october 31 2000 future issuance employee benefit plans employee stock plans additionally hp 21495000 shares reserved october 31 2001 21503000 shares reserved october 31 2000 future issuances related conversions zerocoupon subordinated notes stock repurchase programs hp repurchases shares common stock systematic program manage dilution created shares issued employee stock plans separate incremental plan plans authorize purchases open market private transactions october 31 2000 hp authorization future repurchases 868 million common stock two programs november 2000 board directors authorized additional 20 billion future repurchases two programs aggregate fiscal 2001 45036000 shares repurchased aggregate price 12 billion october 31 2001 hp authorization remaining future repurchases two programs approximately 16 billion fiscal 2000 96978000 shares repurchased 56 billion 62084000 shares repurchased 26 billion fiscal 1999 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 comprehensive income changes components comprehensive income net taxes follows years ended october 31 components accumulated comprehensive income net taxes follows october 31 note 14 supplemental cash flow information note 15 retirement postretirement benefit plans general substantially hps employees covered various pension deferred profitsharing retirement plans addition hp sponsors health care life insurance plans provide benefits retired us employees hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued agilent technologies spinoff june 2 2000 spinoff date agilent technologies agilent technologies assumed responsibility pension deferred profitsharing postretirement benefits current former employees whose last work assignment prior distribution date businesses spunoff agilent technologies united states hewlettpackard company retirement plan deferred profitsharing plan master trust converted group trust hewlettpackard company deferred profitsharing plan retirement plan agilent technologies inc deferred profitsharing plan retirement plan group trust hp agilent technologies retirement plans include postretirement medical accounts prorata share assets group trust assigned hp retirement plan deferred profitsharing trusts respective agilent technologies trusts outside united states generally prorata share hp pension assets transferred otherwise assigned agilent technologies entity accordance local law practice prorata shares proportion projected benefit obligations hp employees total projected benefit obligations hp agilent technologies april 30 2000 periods presented assets liabilities related retirement postretirement benefit plans agilent technologies included net assets discontinued operations hps accompanying consolidated balance sheet spinoff date june 2 2000 related costs included net earnings discontinued operations hps accompanying consolidated statement earnings june 2 2000 information note periods relates hp plans excludes agilent technologies restructuring actions 2001 hp realized net pension settlement curtailment gains related fiscal 2001 restructuring actions see note 3 consolidated financial statements approximately 7 million pension obligations affected employees settled hp also realized additional curtailment gain approximately 31 million related postemployment retirement benefits 2000 connection enhanced early retirement program see note 3 consolidated financial statements hp recognized special termination charges 95 million realized related net pension settlement curtailment gains approximately 28 million pension obligations employees accepted offer settled realized additional 1 million curtailment gain related postemployment retirement benefits retirement plans worldwide pension deferred profitsharing costs 318 million 2001 343 million 2000 301 million 1999 us employees meet certain minimum eligibility criteria provided pension benefits hewlettpackard company pension plans defined benefits based upon employees highest average pay rate length service eligible service october 31 1993 benefit payable retirement plan reduced amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp since closed new participants combined status us pension plans dpsp follows october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued employees outside united states generally receive retirement benefits various defined benefit defined contribution plans based upon factors years service employee compensation levels eligibility generally determined accordance local statutory requirements postretirement benefit plans addition providing pension benefits hp sponsors postretirement benefit plans providing medical life insurance benefits us retired employees substantially hps current us employees could become eligible benefits existing benefit obligation relates primarily employees participating medical plan retirees may choose managedcare indemnity options contributions dependent options chosen length service components net pension postretirement benefit costs hps net pension postretirement benefit costs composed following hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued funded status defined benefit postretirement benefit plans follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued defined benefit plans benefit obligations exceeding fair value plan assets follows plan assets consist primarily listed stocks bonds hps practice fund plans extent contributions taxdeductible assumptions used measure benefit obligations compute expected longterm return assets hps defined benefit postretirement benefit plans follows years ended october 31 rate increase medical costs assumed decrease gradually 2007 remain level thereafter assumed health care cost trend rates could significant effect amounts reported health care plans 10 percentage point increase assumed health care cost trend rates would increased total service interest cost components reported 2001 12 million would increased postretirement benefit obligation reported 2001 83 million 10 percentage point decrease assumed health care cost trend rates would decreased total service interest cost components reported 2001 9 million would decreased postretirement obligation reported 2001 65 million 401k plan us employees may participate tax saving capital accumulation plan taxcap established supplemental retirement program beginning february 1 1998 enrollment taxcap automatic employees meet eligibility requirements unless decline participation taxcap program hp matches contributions employees maximum 4 employees annual compensation portion matching contribution may made form hp common stock extent employee elects hp stock investment option plan beginning november 1 2000 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued maximum contribution taxcap 20 employees annual eligible compensation subject certain irs limitations hps expense related taxcap 119 million 2001 110 million 2000 98 million 1999 october 31 2000 maximum combined contribution espp taxcap 25 employees annual eligible compensation subject certain regulatory plan limitations note 16 commitments hp leases certain real personal property noncancelable operating leases future annual minimum lease payments october 31 2001 204 million 2002 172 million 2003 137 million 2004 112 million 2005 87 million 2006 217 million thereafter payments partially offset sublease rental income commitments future minimum sublease rental income commitments october 31 2001 6 million 2002 5 million 2003 2 million per year years 2004 2006 certain leases require hp pay property taxes insurance routine maintenance include escalation clauses rent expense 374 million 2001 344 million 2000 352 million 1999 sublease rental income 20 million 2001 19 million 2000 12 million 1999 note 17 litigation contingencies litigation settlement june 4 2001 hp pitney bowes inc pitney bowes announced entered agreements resolved pending patent litigation parties without admission infringement connection therewith hp paid pitney bowes 400 million cash june 7 2001 addition companies entered technology licensing agreement expect pursue business commercial relationships pitney bowes filed patent infringement case hp august 23 1995 us district court district connecticut alleging hps laserjet printers infringed pitney bowes character edge smoothing patent hp filed one case pitney bowes august 23 1995 us district court district idaho invalidate pitney bowes patent four cases march 21 2001 us district court northern district california san francisco division march 28 2001 us district court district idaho april 4 2001 us district court western district texas may 11 2001 us district court northern district california san jose division alleging pitney bowes copiers fax machines document management software postal metering machine infringed hps patents may 29 1996 hp answered complaint filed pitney bowes counterclaimed declaratory judgment pitney bowes patent invalid unenforceable infringed following 15 months parties engaged extensive discovery august 11 1997 hp moved summary judgment noninfringement february 9 1998 connecticut district court denied hps motion november 7 1997 hp moved summary judgment invalidity pitney bowes patent summary judgment noninfringement march 23 1998 connecticut district court denied motion summary judgment invalidity granted motion summary judgment noninfringement entered judgment favor hp pitney bowes appealed judgment june 23 1999 court appeals federal circuit reversed judgment favor hp remanded case trial court july 7 1999 hp petitioned patent trademark office pto reexamine validity pitney bowes patent petition granted august 27 1999 litigation connecticut district court thereafter stayed pending reexamination patent june 14 2000 pto issued office action initially rejecting claims pitney bowes patent asserted hp invalid september 9 2000 pto issued statement reasons patentability affirming claims pitney bowes patent stay litigation thereafter lifted november 13 2000 connecticut district court set hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued june 4 2001 trial date case pitney bowes filed markman hearing held april 24 2001 determine scope pitney bowes patent claims would affect outcome litigation issues patent infringement well patent validity suits hp pending hp pitney bowes settlement discussions trial date approached resulting settlement agreement described pending litigation individual filed lawsuit hp federal court california claiming hps laserjet printers infringe us patent 5424780 asserts covers portions resolution enhancement technology employed printers hp believes based opinion outside counsel infringe patent hp held discussions plaintiff resolved matter hp filed lawsuit obtain ruling infringe thereafter us patent office agreed reexamine patent based prior art identified hp litigation stayed pending outcome patent office reexamination hp sued unfair business practices consumer class action filed three residents san bernardino california federal court california three claim purchased different models hp inkjet printers past three years action alleges hp printers sold halffull economy ink cartridges instead full cartridges hps advertising packaging marketing representations printers led plaintiffs believe would receive full cartridges basic contention action hps advertising failure advise specifically economy cartridges included constitute false misleading conduct violation california consumer legal remedies act section 17200 california business professions code action seeks injunctive relief disgorgement profits compensatory damages punitive damages attorney fees hp failed enter early settlement action consumer class actions filed coordination original plaintiffs 30 states nationwide defective product consumer class action filed hp texas state district court resident eastern texas action one five similar suits filed several computer manufacturers day basic allegation action hp knowingly sold computers containing floppy disk controller chips fail detect overruns underruns either occurs last byte readwrite operation failure alleged result data loss data corruption system failure suit seeks injunctive relief declaratory relief rescission attorney fees filing action plaintiffs counsel initiated related action state illinois state california united states america cornell university cornell research foundation inc filed action hp federal court new york alleging hps parisc 8000 family microprocessors infringes cornell patent describes way executing microprocessor instructions action seeks declaratory injunctive relief reviewing pertinent materials hp believes infringe patent furthermore hp believes cornells patent invalid hp involved lawsuits claims investigations proceedings including identified consisting patent commercial environmental matters arise ordinary course business possible adverse outcome arising matters expected material adverse impact results operations financial position hp either individually aggregate however hps evaluation likely impact pending disputes could change future hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information description segments hp leading global provider computing printing imaging solutions services business home focused making technology benefits accessible october 31 2001 hp organized operations three major businesses imaging printing systems computing systems services segments determined accordance management views evaluates hps businesses factors management uses identify hps separate businesses include customer base homogeneity products technology delivery channels description types products services provided reportable segment follows imaging printing systems provides printer hardware supplies imaging products related professional consulting services printer hardware consists laser inkjet printing devices include color monochrome printers business home multifunction laser devices wide largeformat inkjet printers supplies offer laser inkjet printer cartridges related printing media imaging products include allinone inkjet devices scanners digital photography products personal color copiers faxes professional consulting services provided customers optimal use printing imaging assets computing systems provides commercial personal computers pcs home pcs workstations unixr servers pc servers storage software solutions commercial pcs include vectra desktop series well omnibook pavilion notebook pcs home pcs include pavilion series multimedia consumer desktop pcs workstations provide unixr windows linuxbased systems unixr server offering ranges lowend servers highend scalable systems superdome line run hps parisc architecture hpux operating system pc servers offer primarily lowend midrange products run windows linux operating systems storage provides midrange highend array offerings storage area networks storage area management virtualization software well tape optical libraries tape drive mechanisms tape media software category offers openview solutions designed manage largescale systems networks addition software includes telecommunications infrastructure solutions middleware services provides customer support consulting outsourcing technology financing complementary thirdparty products delivered sales hp solutions customer support offers range highvalue solutions missioncritical networking services span entire environment lowcost high volume product support consulting provides industryspecific business consulting system integration services areas financial services telecommunications manufacturing well crossindustry solution expertise customer relationship management crm ecommerce infrastructure outsourcing offers range management services comprehensive selective including transformational infrastructure services client computing managed services managed web services application services medium large companies technology financing capabilities include leasing solution financing computing printing utility offerings hps immaterial operating segments aggregated form category primarily includes embedded personal systems prior divestiture included verifone business embedded personal systems provides range handheld computing devices cd writers dvdrw drives calculators related accessories services commercial consumer markets first quarter 2001 hp made certain strategic changes organizational structure changes included movement verifone business computing systems segment separate operating hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued segment verifone operating segment divested third quarter 2001 included meet materiality threshold reportable segment financial data fiscal years ended october 31 2000 1999 restated reflect organizational changes segment revenue profit accounting policies used derive reportable segment results generally described note 1 consolidated financial statements intersegment net revenue earnings operations include transactions segments intended reflect arms length transfer best price available comparable external customers significant portion segments expenses arises shared services infrastructure hp historically provided segments order realize economies scale use resources efficiently expenses include costs centralized research development legal accounting employee benefits real estate insurance services information technology services treasury corporate infrastructure costs first quarter fiscal 2001 hp implemented new management reporting system change reporting system included revised allocation methodology shared services infrastructure hp believes allocation changes resulted better reflection utilization services provided benefits received segments segment financial data fiscal years ended october 31 2000 1999 restated reflect changes segment data results reportable segments derived directly hps management reporting system results based hps method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including earnings operations results used part evaluate performance allocate resources segments certain operating expenses separately managed corporate level allocated segments unallocated costs include corporate infrastructure costs restructuring charges amortization goodwill purchased intangibles charges purchased inprocess research development amount profitdependent bonus expenses certain employeerelated benefit program costs differ targeted level recorded segments asset data reviewed management segment level exception inventory allocated directly managed segment hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued following table presents financial information reportable segment years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued following reconciliation segment information hp consolidated totals years ended october 31 major customers single customer represented 10 hps total net revenue period presented hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued geographic information net revenue net property plant equipment classified major geographic areas hp operates follows net revenue geographic area based upon customers location single country outside united states represented 10 hps total net revenue period presented single country outside united states represented 10 hps total net property plant equipment period presented exception ireland held 11 assets october 31 2001 singapore held 10 hps longlived assets composed principally net property plant equipment note 19 subsequent event december 6 2001 hp offered existing shelf registration statement 10 billion unsecured 575 global notes mature december 15 2006 unless previously redeemed issuance hp remaining capacity issue 290 million securities shelf registration statement hewlettpackard company subsidiaries quarterly summary1 unaudited amounts previously reported hps quarterly reports form 10q fiscal 2001 adjusted following items discussed fully notes consolidated financial statements notes 1 hps consolidated financial statements notes periods present businesses agilent technologies discontinued operation spinoff date june 2 2000 pershare amounts reflect retroactive effects twoforone stock split form stock dividend effective october 27 2000 2 hp adopted sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 2000 accordingly hp restated consolidated results operations first three quarters fiscal 2001 including cumulative effect change accounting principle recorded reduction net income beginning first quarter fiscal 2001 3 eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year 4 hp early adopted eitf issue 0025 vendor income statement characterization consideration paid reseller vendors products fourth quarter fiscal 2001 reclassifications made prior periods order conform current year presentation 5 fourth quarter fiscal 2001 hp changed classification financing interest income expense previously hp recorded financing interest income expense component interest net financing interest income classified revenue financing interest expense classified cost sales reclassifications made prior periods order conform current year presentation item 9item 8 financial statements supplementary data report independent auditors board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2002 2001 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2002 audits also included financial statement schedule listed index item 14a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2002 2001 consolidated results operations cash flows three years period ended october 31 2002 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements 2002 company changed method depreciation assets placed service may 1 2002 2001 company changed method accounting revenue recognition ernst young llp san jose california november 20 2002 except note 19 date december 17 2002 statement management responsibility hps management responsible preparation integrity objectivity consolidated financial statements financial information included hps 2002 annual report form 10k consolidated financial statements prepared conformity accounting principles generally accepted united states reflect effects certain estimates judgments made management hps management maintains effective system internal control designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization system regularly monitored direct management review internal auditors conduct extensive program audits throughout hp selects trains qualified people provided expected adhere hps standards business conduct standards set forth highest principles business ethics conduct key element hps control system hps consolidated financial statements three years period ended october 31 2002 audited ernst young llp independent auditors audits conducted accordance auditing standards generally accepted united states included review financial controls tests accounting records procedures respectively considered necessary circumstances audit committee board directors consists outside directors meets regularly management internal auditors independent auditors review accounting reporting auditing internal control matters audit committee direct private access internal external auditors carleton fiorina robert p wayman carleton fiorina robert p wayman chairman chief executive officer executive vice president chief financial officer hewlettpackard company subsidiaries consolidated statement earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheet accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statement cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statement stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies acquisition compaq may 3 2002 hewlettpackard company hp acquired outstanding stock compaq computer corporation compaq leading global provider information technology products services solutions enterprise customers accordingly hp included results compaq may 3 2002 acquisition date consolidated results operations see note 3 discussion hp acquisition activities principles consolidation consolidated financial statements include accounts hp whollyowned controlled majorityowned subsidiaries significant intercompany accounts transactions eliminated use estimates preparation financial statements accordance accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported hps financial statements accompanying notes actual results could differ estimates revenue recognition general hp adopted securities exchange commission staff accounting bulletin 101 sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 2000 accordingly hp restated consolidated results operations first three quarters fiscal 2001 including cumulative effect change accounting principle 272 million net related taxes 108 million recorded reduction net income beginning first quarter fiscal 2001 revenue recognized persuasive evidence arrangement exists delivery occurs services rendered sales price fixed determinable collectibility reasonably assured following policies apply hps major categories revenue transactions products product considered delivered revenue recognized title risk loss transferred customer terms conditions sale may occur either time shipment product delivered customer preacquisition compaq businesses generally recognize revenue upon shipment preacquisition hp businesses generally recognize revenue product delivered hp currently conforming terms conditions sales contracts recognize revenue generally product delivered revenue deferred undelivered products services essential functionality delivered products customer acceptance uncertain significant obligations remain fair value undelivered elements unknown revenue reduced estimated customer returns price protection rebates offerings occur sales programs established hp directly hps distributors resellers estimated cost postsale obligations including basic product warranties accrued based historical experience time revenue recognized product revenue consists mainly revenue imaging printing personal systems enterprise systems businesses excluding revenue generated servicerelated solutions businesses included services revenue discussed product revenue also includes revenue sales hardware products expiration lease terms rental revenue operating leases services revenue longterm fixedprice service contracts support maintenance contracts including extended warranty outsourcing contracts recognized ratably contractual period revenue time material contracts recognized services rendered revenue longterm fixedprice production contracts consulting arrangements recognized contractual period percentageofcompletion basis amounts invoiced customers excess revenue recognized recorded deferred revenue recognition criteria met revenue excess amounts invoiced longterm fixedprice contracts recorded unbilled receivables included trade accounts receivable losses fixedprice contracts recognized period loss becomes evident services revenue consists mainly revenue services financing businesses excluding revenue generated sales hardware products expiration lease terms included product revenue discussed addition services revenue also includes revenue generated servicerelated solutions imaging printing personal systems enterprise systems businesses software revenue software consists software licensing postcontract customer support software revenue allocated license support elements using vendor specific objective evidence fair value vsoe absence vsoe residual method vsoe generally determined based price charged element sold separately absence vsoe delivered element revenue allocated first fair value undelivered elements residual revenue delivered elements revenue allocated software licenses recognized following four basic criteria met persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility probable revenue allocated postcontract support recognized ratably term support contract assuming four basic criteria met financing revenue sale equipment salestype leases directfinancing leases recognized product revenue inception lease associated financing interest income earned accrual basis effective interest method revenue operating leases recognized rental payments become due revenue arrangements include multiple elements revenue transactions include multiple elements hardware software consulting training support agreements allocated element based relative fair value recognized element revenue recognition criteria met element fair value generally determined based price charged element sold separately absence fair value delivered element revenue allocated first fair value undelivered elements residual revenue delivered elements hp recognizes revenue delivered elements following criteria satisfied undelivered elements essential functionality delivered elements uncertainties regarding customer acceptance resolved fair value undelivered elements known shipping handling costs related shipping handling included cost sales periods presented advertising costs expensed incurred amounted 14 billion fiscal 2002 11 billion fiscal 2001 11 billion fiscal 2000 taxes earnings deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents original maturity investment three months less purchase date inventory valued lower cost market cost computed firstin firstout basis property plant equipment property plant equipment stated cost less accumulated depreciation additions improvements major renewals capitalized maintenance repairs minor renewals expensed incurred depreciation provided using straightline accelerated methods estimated useful lives assets estimated useful lives 15 40 years buildings improvements 3 10 years machinery equipment leasehold improvements depreciated life lease asset whichever shorter leased equipment depreciated initial term lease equipments estimated residual value effective may 1 2002 hp adopted straightline method depreciation property plant equipment placed service beginning may 1 2002 property plant equipment placed service prior may 1 2002 continues depreciated using accelerated methods buildings improvements machinery equipment straightline method leasehold improvements leased equipment hp believes change allocates costs new property appropriately financial results better allocating costs new property useful lives assets addition new method closely conforms prevalent practices industries hp operates effect change material hps earnings financial position year ended october 31 2002 goodwill purchased intangible assets goodwill related acquisitions prior july 1 2001 purchased intangible assets finite lives amortized using straightline method estimated economic lives assets ranging two ten years goodwill purchased intangible assets determined indefinite useful lives related acquisitions june 30 2001 amortized see recent pronouncements discussion expected effect adopting statement financial accounting standards sfas 142 goodwill intangible assets goodwill purchased intangible assets impairment longlived assets longlived assets property plant equipment goodwill purchased intangible assets evaluated impairment whenever events changes circumstances indicate carrying value asset may recoverable impairment loss recognized estimated undiscounted future cash flows expected result use asset plus net proceeds expected disposition asset less carrying value asset impairment identified carrying amount asset reduced estimated fair value effective november 1 2002 conjunction implementation sfas 142 goodwill including goodwill related acquisitions prior july 1 2001 longer amortized potential impairment goodwill purchased intangible assets indefinite useful lives evaluated using specific guidance provided sfas 142 impairment analysis performed least annually also effective november 1 2002 potential impairment longlived assets goodwill purchased intangible assets indefinite useful lives evaluated using guidance provided sfas 144 accounting impairment disposal longlived assets guidance provided sfas 144 substantially hps current policy see recent pronouncements discussion expected effect hps adoption sfas 144 capitalized software hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software capitalized costs amortized three years derivative financial instruments hp enters derivative financial instrument contracts hedge certain foreign exchange interest rate exposures november 1 2000 hp adopted sfas 133 accounting derivative instruments hedging activities cumulative effect adopting sfas 133 material hps consolidated financial statements see note 8 consolidated financial statements full description hps hedging activities related accounting policies investments hps investments principally consist time deposits municipal securities repurchase agreements debt securities well equity securities public privatelyheld companies investments maturities less one year classified shortterm investments debt securities hp ability intent hold maturity accounted heldtomaturity securities carried amortized cost remainder hps debt securities equity investments public companies classified availableforsale securities carried fair value majority availableforsale securities unrealized gains losses net taxes recorded accumulated comprehensive income remainder availableforsale securities hedged changes fair value securities recognized earnings offset gains losses related derivative instruments equity investments privatelyheld companies generally carried cost equity investments companies hp ability exercise significant influence hold controlling interest accounted equity method hps proportionate share income losses recorded interest net concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash investments accounts receivable financing receivables derivatives certain financial instruments hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hp policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively represented 22 total accounts receivable october 31 2002 28 october 31 2001 credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances hp generally experienced longer accounts receivable cycles emerging markets particular asiapacific latin america compared united states european markets event accounts receivable cycles developing markets significantly deteriorate one hps larger resellers regions fail hps operating results could adversely affected hp frequently utilizes forward exchange contracts protect effects foreign currency event failure honor one foreign currency forward exchange contracts one banks hp contracted management believes loss could material would limited exchange rate differential time contract made time consummated foreign currency translation hp uses us dollar predominately functional currency foreign currency assets liabilities remeasured us dollars endofperiod exchange rates except inventory property plant equipment assets deferred revenue remeasured historical exchange rates revenue expenses remeasured average exchange rates effect period except expenses related previously noted balance sheet amounts remeasured historical exchange rates gains losses foreign currency remeasurement included net earnings certain foreign subsidiaries designate local currency functional currency related cumulative translation adjustments included component accumulated comprehensive income comprehensive income comprehensive income includes net earnings well additional comprehensive income hps comprehensive income consists unrealized gains losses availableforsale securities unrealized gains losses derivative instruments minimum pension liability cumulative translation adjustments recorded net tax reclassifications certain reclassifications made prior year balances order conform current year presentation significant reclassifications include amortization purchased intangible assets goodwill included cost sales selling general administration expense prior fiscal years reclassified separate line item accompanying consolidated statement earnings acquisitionrelated charges included selling general administrative expenses prior fiscal years reclassified separate line item accompanying consolidated statement earnings net assets related goodwill purchased intangible assets reflected separate lines accompanying consolidated balance sheet recent pronouncements july 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires business combinations accounted purchase method accounting changes criteria recognition intangible assets acquired business combination provisions sfas 141 apply business combinations initiated june 30 2001 sfas 142 requires goodwill intangible assets indefinite useful lives longer amortized however assets must reviewed least annually impairment intangible assets finite useful lives continue amortized respective useful lives standard also establishes specific guidance testing impairment goodwill intangible assets indefinite useful lives nonamortization provisions sfas 142 effective immediately goodwill intangible assets acquired june 30 2001 hp adopted remaining provisions sfas 142 effective november 1 2002 adoption sfas 142 material impact hps amortization goodwill intangible assets majority hps goodwill intangible assets affected adoption sfas 142 written restructuring charge recorded third quarter fiscal 2002 upon adoption sfas 142 hp required perform transitional impairment test recorded goodwill within six months necessary determine amount impairment loss october 31 2003 management currently process evaluating effect required impairment testing hps recorded goodwill addition hp required perform transitional impairment test intangible assets indefinite lives within three months adoption hp process completing impairment test intangible asset indefinite life compaq trade name expect record impairment charge first quarter fiscal 2003 october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 amends existing accounting guidance asset impairment provides single accounting model longlived assets disposed among provisions new rules change criteria classifying asset heldforsale standard also broadens scope businesses disposed qualify reporting discontinued operations changes timing recognizing losses operations hp adopted sfas 144 effective november 1 2002 expect adoption material effect results operations financial condition april 2002 fasb issued sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections among provisions sfas 145 rescinds sfas 4 reporting gains losses extinguishment debt accordingly gains losses extinguishment debt shall reported extraordinary items unless extinguishment qualifies extraordinary item criteria accounting principles board apb opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions gains losses extinguishment debt meet criteria apb 30 reclassified income continuing operations prior periods presented hp adopted sfas 145 effective november 1 2002 reclassify gains early extinguishment debt related taxes previously recorded extraordinary item interest net provision taxes respectively june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 provides guidance related accounting costs associated disposal activities covered sfas 144 exit restructuring activities previously covered emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 supercedes eitf issue 943 entirety sfas 146 requires costs related exiting activity restructuring recognized liability incurred sfas 146 applied prospectively exit disposal activities initiated december 31 2002 november 2002 fasb issued fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities hp apply recognition provisions fin 45 prospectively guarantees issued december 31 2002 disclosure provisions fin 45 effective financial statements first quarter hps fiscal year 2003 hp currently process evaluating potential impact adoption fin 45 consolidated financial position results operations november 2002 eitf reached consensus issue 0021 revenue arrangements multiple deliverables eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 hp currently evaluating effect adoption eitf issue 0021 results operations financial condition december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally sfas 148 requires disclosure pro forma effect interim financial statements transition annual disclosure requirements sfas 148 effective hps fiscal year 2003 interim disclosure requirements effective second quarter hps fiscal year 2003 hp expect sfas 148 material effect results operations financial condition january 2003 fasb issued fasb interpretation 46 fin 46 consolidation variable interest entities interpretation arb 51 fin 46 requires certain variable interest entities consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 hp currently evaluating effect adoption fin 46 results operations financial condition note 2 net loss earnings per share hps basic loss earnings per share eps calculated based net loss earnings weightedaverage number shares outstanding reporting period diluted eps includes effect potential issuance common stock issuable pursuant exercise stock options conversion debt dilutive reconciliation numerators denominators basic diluted eps calculations follows years ended october 31 2002 2001 2000 fiscal 2002 2001 2000 options purchase 381666000 147583000 37666000 shares hp stock excluded calculation diluted net earnings per share exercise price options greater average market price common shares respective fiscal years therefore effect would antidilutive additionally fiscal 2002 diluted loss per share included weightedaverage shares outstanding inclusion 18282000 additional potential common stock equivalents would antidilutive since hp incurred net loss period note 3 acquisitions divestitures accordance sfas 141 hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations prepared independent third party appraisal firms using estimates assumptions provided management goodwill recorded result acquisitions expected deductible tax purposes assignment goodwill reporting units acquisitions yet completed accordance sfas 142 goodwill purchased intangible assets indefinite useful lives acquired june 30 2001 amortized reviewed least annually impairment purchased intangible assets finite lives amortized straightline basis respective useful lives compaq may 3 2002 hp acquired outstanding stock compaq leading global provider information technology products services solutions enterprise customers exchange 06325 shares hp common stock outstanding share compaq common stock assumption options purchase compaq common stock based ratio addition hp assumed certain compaq stock plans acquisition compaq intended enhance hps combined competitive position key industries strengthening sales force relationships strategic customer bases acquisition intended enable hp focus strategic product customer bases achieve significant cost synergies economies scale improve results combined enterprise systems personal systems services businesses furthermore intended cost savings offer strategic benefits potentially reducing hps cost structure competitive businesses personal computers pcs exchange ratio acquisition derived estimates future revenue earnings combined company assuming completion acquisition measuring relative contributions hp compaq achieving forecasted results addition measuring relative ownership combined company implied contributions transaction resulted issuance approximately 11 billion shares hp common stock fair value approximately 227 billion assumption options purchase approximately 200 million shares hp common stock blackscholes fair value approximately 14 billion estimated direct transaction costs 79 million fair value hp common stock derived using average market price per share hp common stock 2092 based average closing prices range trading days august 30 august 31 september 4 september 5 2001 around announcement date september 3 2001 acquisition based independent valuation prepared using estimates assumptions provided management total purchase price approximately 242 billion allocated follows amortizable intangible assets total purchase price approximately 35 billion allocated amortizable intangible assets including customer contracts developed core technology customer contracts represent existing contracts relate primarily underlying customer relationships pertaining services provided compaq global services including contractual customer service relationships contractual managed services client relationships contractual systems integration consulting client relationships customer lists distribution agreements represent compaqs relationships within installed bases enterprise systems personal systems agreements enterprise systems valueadded resellers hp amortizing fair value assets straightline basis weighted average estimated useful life approximately 9 years developed technology consists products reached technological feasibility includes products compaqs product lines principally compaq himalaya proliant enterprise storage array alphaserver products core technology patents represent combination compaq processes patents trade secrets developed years experience design development relating clustering fault tolerant systems proprietary alpha processor architecture storage area networks compaqs technology products designed hardware software solutions fault tolerant business critical solutions communication products desktop portable personal computers hp intends leverage proprietary knowledge develop new technology improved products manufacturing processes hp amortizing developed core technology patents straightline basis weighted average estimated useful life approximately 6 years intangible asset indefinite life estimated fair value intangible asset indefinite life 14 billion consisting estimated fair value allocated compaq trade name intangible asset amortized indefinite remaining useful life based many factors considerations including length time compaq name use compaq brand awareness market position plans continued use compaq brand within portion hps overall product portfolio inprocess research development total purchase price 735 million allocated iprd expensed third quarter fiscal 2002 projects qualify iprd represent yet reached technological feasibility future alternative uses existed technological feasibility defined equivalent betaphase working prototype remaining risk relating development value assigned iprd determined considering importance project overall development plan estimating costs develop purchased iprd commercially viable products estimating resulting net cash flows projects completed discounting net cash flows present value revenue estimates used value purchased iprd based estimates relevant market sizes growth factors expected trends technology nature expected timing new product introductions compaq competitors rates utilized discount net cash flows present values based compaqs weighted average cost capital weighted average cost capital adjusted reflect difficulties uncertainties completing project thereby achieving technological feasibility percentageofcompletion project anticipated market acceptance penetration market growth rates risks related impact potential changes future target markets based factors discount rates range 25 42 deemed appropriate valuing iprd estimates used valuing iprd based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates deferred compensation accordance terms compaqs equitybased plans compaqs outstanding options granted prior september 1 2001 vested upon compaq shareowner approval acquisition intrinsic value unvested compaq options approximately 70 million may 3 2002 relates options granted subsequent august 31 2001 allocated deferred compensation purchase price allocation deferred compensation amortized remaining vesting period options approximately 35 years may 3 2002 options assumed conjunction acquisition exercise prices ranging 263 7531 weighted average exercise price 3329 weighted average remaining contractual life 71 years approximately 165 million approximately 200 million options assumed fully vested pro forma results following unaudited pro forma financial information presents combined results operations hp compaq acquisition occurred beginning periods presented due different historical fiscal periodends hp compaq results year ended october 31 2002 combine results hp year ended october 31 2002 results compaq six months ended march 31 2002 period may 3 2002 acquisition date october 31 2002 results year ended october 31 2001 combine historical results hp year ended october 31 2001 historical results compaq twelve months ended september 30 2001 adjustments 162 million year ended october 31 2002 340 million year ended october 31 2001 made combined results operations reflecting amortization purchased intangible assets net tax acquisition occurred beginning periods presented unaudited pro forma financial information intended represent indicative consolidated results operations financial condition hp would reported acquisition completed dates presented taken representative future consolidated results operations financial condition hp pro forma results follows fiscal years ended october 31 2002 2001 unaudited pro forma financial information includes following material nonrecurring charges acquisitionrelated inventory writedowns 147 million fiscal 2002 litigationrelated asset writedowns 98 million fiscal 2001 restructuring charges 18 billion fiscal 2002 10 billion fiscal 2001 iprd charges 793 million fiscal 2002 35 million fiscal 2001 acquisitionrelated charges 772 million fiscal 2002 33 million fiscal 2001 net investment losses 100 million fiscal 2002 26 billion fiscal 2001 net divestiture losses 53 million fiscal 2001 litigation settlements 14 million gain fiscal 2002 400 million loss fiscal 2001 indigo march 22 2002 hp acquired substantially outstanding stock indigo nv indigo previously owned hp exchange hp common stock nontransferable contingent value rights cvrs assumption options purchase indigo common stock acquisition intended strengthen hps printer offerings adding high performance digital color printing systems total consideration indigo 719 million included fair value hp common stock issued indigo options assumed well direct transaction costs cost equity investment made hp indigo october 2000 approximately 32 million shares hp common stock approximately 53 million cvrs issued connection transaction hp recorded approximately 499 million goodwill 153 million amortizable purchased intangible assets conjunction acquisition previous equity investment purchased intangible assets amortized estimated useful lives range five eight years addition hp recorded pretax charge approximately 58 million iprd time acquisition second quarter fiscal 2002 technological feasibility established future alternative uses existed cvrs issued conjunction acquisition entitle holder onetime contingent cash payment 450 per cvr based achievement certain cumulative revenue results threeyear period liability related cvrs recorded additional goodwill payout thresholds achieved future cash payout cvrs payable threeyear period commencing april 1 2002 bluestone storageapps january 2001 hp acquired outstanding stock bluestone software inc bluestone exchange hp common stock assumption bluestone options september 2001 hp acquired outstanding stock storageapps inc storageapps exchange hp common stock assumption storageapps options total consideration bluestone 531 million total consideration storageapps 319 million included fair value hp common stock issued options assumed well direct transaction costs acquisitions recorded purchase method accounting accordingly purchase prices allocated tangible assets liabilities intangible assets acquired including iprd based estimated fair values excess purchase price fair values recorded goodwill fair values assigned intangible assets acquired based valuations prepared independent third party appraisal firm using estimates assumptions provided management hp recorded approximately 338 million goodwill identified intangible assets conjunction acquisition bluestone approximately 296 million goodwill identified intangible assets conjunction acquisition storageapps addition hp recorded pretax charge approximately 19 million iprd related bluestone 15 million iprd related storageapps time acquisitions technological feasibility established future alternative uses existed result product roadmap decisions connection acquisition compaq hp determined substantially remaining unamortized balances goodwill intangible assets associated bluestone storageapps impaired accordingly amounts included restructuring charge recorded third quarter fiscal 2002 results operations acquired companies included prospectively date acquisition pro forma results operations reflecting acquisitions indigo bluestone storageapps presented results operations acquired companies either individually collectively material hps results operations hp also acquired companies fiscal 2002 2001 2000 significant financial position results operations hp recorded approximately 1 million iprd related acquisitions fiscal 2001 acquisitions recorded purchase method accounting net book value goodwill purchased intangible assets 200 billion october 31 2002 substantially goodwill 14 billion intangible assets subject amortization accordance sfas 142 net book value goodwill purchased intangible assets 756 million october 31 2001 297 million subject amortization accumulated amortization related assets 17 billion october 31 2002 12 billion october 31 2001 amortization expense goodwill purchased intangible assets 402 million fiscal 2002 174 million fiscal 2001 86 million fiscal 2000 completed divestitures fiscal 2001 net loss divestitures 53 million consisting 131 million loss sale verifone inc subsidiary partially offset gain 78 million sale hps remaining interest ericssonhp technology joint venture ericsson fiscal 2000 net gain divestitures 203 million consisting gains sale nonstrategic businesses well gain sale ericsson part hps interest ericssonhp joint venture note 4 restructuring charges prior close acquisition compaq hps management initiated third fourth quarters fiscal 2002 approved plans restructure operations preacquisition hp preacquisition compaq organizations restructuring plans restructuring plans eliminated certain duplicative activities focused strategic product customer bases reduced hps cost structure better aligned product operating expenses existing general economic conditions consequently hp recorded approximately 18 billion costs associated exiting activities preacquisition hp severance early retirement costs vacating duplicative facilities leased owned contract termination costs asset impairment charges costs associated exiting activities hp preacquisition hp costs accounted eitf issue 943 liability recognition certain employee termination benefits costs exit activity included charge results operations year ended october 31 2002 hp recorded approximately 960 million similar restructuring costs connection restructuring preacquisition compaq organization costs restructure preacquisition compaq accounted eitf issue 953 recognition liabilities connection purchase business combinations costs recognized liability assumed purchase business combination included allocation cost acquire compaq portion restructuring liabilities classified longterm liability accompanying balance sheet restructuring charges recorded third fourth quarters based hps restructuring plans committed management discussed note 18 restructuring charges allocated hps segments however restructuring plans actions undertaken streamline hps business operations total 27 billion restructuring costs recorded fiscal 2002 12 billion 510 million 421 million 76 million attributable actions taken enterprise systems group hp services personal systems group imaging printing group respectively remaining 497 million relates actions taken hps shared services infrastructure functions acquisitionrelated restructuring costs expensed fiscal 2002 charge 18 billion restructure preacquisition hp organization consisted mainly severance early retirement costs employee benefits noninventory asset impairment charges related restructuring activities severance early retirement costs employee benefits related planned early retirement termination 8600 employees worldwide across many regions business functions job classes october 31 2002 approximately 6400 employees included workforce reduction program retired terminated payments approximately 255 million made benefits approximately 215 million paid postretirement pension plans retiring employees additionally approximately 104 million charge noncash relates primarily net pension postretirement settlement curtailment losses hp expects pay remaining balance severance accrual within fiscal 2003 noninventory asset impairment 546 million goodwill purchased intangible assets due primarily product roadmap decisions made conjunction compaq acquisition led elimination substantially middleware storage virtualization offerings acquired fiscal 2001 related restructuring charges consisted primarily cost vacating duplicate facilities cost exiting certain contractual obligations balance accrued restructuring charges recorded conjunction restructuring preacquisition hp organization fiscal 2002 follows october 31 2002 acquisitionrelated restructuring liability capitalized fiscal 2002 cost acquisition restructuring plans also included approximately 960 million incurred connection restructuring preacquisition compaq recognized liability assumed purchase business combination included allocation cost acquire compaq restructuring liability consisted primarily severance early retirement costs employee benefits costs vacating duplicate facilities cost exiting certain contractual obligations severance employee benefits related planned early retirement termination 9300 employees worldwide across many regions business functions job classes well employee relocation costs october 31 2002 approximately 6300 employees included hps workforce reduction program retired terminated hp paid approximately 266 million associated costs additionally approximately 52 million charge noncash relates primarily net pension postretirement settlement curtailment losses hp expects pay remaining balance severance employee benefits accrual within fiscal 2003 related restructuring charges consisted primarily cost vacating duplicate facilities cost exiting certain contractual obligations balance accrued restructuring charges capitalized cost acquisition fiscal 2002 follows october 31 2002 fiscal 2001 plans fiscal 2001 hps management approved restructuring actions respond global economic downturn improve hps cost structure streamlining operations prioritizing resources strategic areas hps business infrastructure hp recorded restructuring charge 384 million fiscal 2001 reflect actions fiscal 2001 charge consisted severance employee benefits related termination approximately 7500 employees worldwide across many regions business functions job classes well costs related consolidation excess facilities hp recorded additional restructuring charges 21 million fiscal 2002 reflect adjustments expected severance cost fiscal 2001 restructuring plans october 31 2002 substantially employees terminated hp paid 394 million accrued costs additionally part acquisition compaq hp acquired remaining obligations compaqs existing restructuring plans initially recorded compaqs 2001 fiscal year october 31 2002 hp paid 47 million related acquired compaq plan balance fiscal 2001 accrued restructuring charges recorded follows october 31 2002 fiscal 2000 early retirement program fiscal 2000 hps management approved enhanced early retirement eer program designed balance workforce based hps longterm business strategy hp offered approximately 2500 us employees opportunity retire early receive enhanced payout approximately 1300 employees accepted offer accordingly hp recorded restructuring charge 71 million consisting 95 million severance 5 million employee benefits offset 29 million related pension postretirement settlement curtailment gains addition eer program hp incurred 31 million restructuring charges fiscal 2000 related various site shutdowns resulting strategic management decisions amounts related eer program paid october 31 2001 note 5 net investment losses gains hps investment portfolio includes equity debt investments publiclytraded privatelyheld emerging technology companies many emerging technology companies still startup development stage hps investments companies inherently risky technologies products development typically early stages may never become successful hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined otherthantemporary impairment charge recorded new cost basis investment established fair values investments public companies determined using quoted market prices fair values investments privatelyheld companies estimated based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies order determine whether decline value otherthantemporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value due economic downturn declines value certain investments emerging technology companies determined otherthantemporary accordingly hp recorded net investment losses 106 million investments publiclytraded privatelyheld emerging technology companies fiscal 2002 hp recorded net investment losses 455 million net investment gains 41 million investments fiscal 2001 2000 respectively depending market conditions hp may incur additional charges investment portfolio future note 6 discontinued operations effective july 31 1999 hp completed plan disposition agilent technologies inc agilent technologies distribution agilent technologies common stock hps stockholders form taxfree spinoff agilent technologies composed hps former measurement organization included testandmeasurement semiconductor products chemical analysis healthcare solutions businesses hps consolidated financial statements periods present agilent technologies discontinued business segment spinoff date june 2 2000 november 1999 agilent technologies completed initial public offering approximately 16 common stock distributed net proceeds approximately 21 billion hp distributed substantially remaining interest agilent technologies stock dividend hp stockholders june 2 2000 resulting 42 billion reduction retained earnings net earnings discontinued operations fiscal 2000 136 million second quarter fiscal 2000 cumulative net earnings agilent technologies since july 31 1999 measurement date began exceed total estimated net costs effect spinoff 136 million net earnings agilent technologies period july 31 1999 measurement date june 2 2000 spinoff date totaled 287 million net related tax expense 174 million net costs effect spinoff 151 million net related tax benefit 23 million note 7 balance sheet details balance sheet details follows october 31 2002 2001 inventory property plant equipment depreciation expense 17 billion fiscal 2002 12 billion fiscal 2001 12 billion fiscal 2000 longterm financing receivables assets accrued liabilities note 8 financial instruments investments debt equity securities investments heldtomaturity availableforsale debt equity securities follows october 31 2002 2001 debt securities consist primarily collateralized notes banks corporate debt securities fair values estimated based quoted market prices pricing models using current market rates estimated fair values may representative actual values financial instruments could realized yearend realized future connection adoption sfas 133 november 1 2000 hp elected reclassify investments debt securities net book value 967 million heldtomaturity availableforsale unrealized loss securities net taxes 5 million time reclassification recorded accumulated comprehensive income part cumulative effect adopting sfas 133 contractual maturities heldtomaturity availableforsale debt securities october 31 2002 follows proceeds sales availableforsale securities 90 million fiscal 2002 17 million fiscal 2001 100 million fiscal 2000 gross realized loss totaled 2 million fiscal 2002 gross realized gains 16 million fiscal 2001 94 million fiscal 2000 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity securities including heldtomaturity availableforsale securities disclosed follows october 31 2002 2001 october 31 2001 hp held 495 equity interest liquidity management corporation lmc accounted equity method accounting remaining 505 equity interest held third party investor november 1 2001 lmc redeemed outstanding equity third party investor leaving hp remaining shareholder lmc accordingly effective november 1 2001 assets liabilities results operations lmc included hps consolidated financial statements november 1 2001 assets lmc consisted primarily 879 million cash equivalents derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part hps risk management strategy hp uses derivative instruments including forwards swaps purchased options hedge certain foreign currency interest rate exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge respectively thereby reducing volatility earnings protecting fair values assets liabilities derivative positions used manage underlying exposures hp based upon criteria established sfas 133 hp designates derivatives fair value hedges cash flow hedges foreign currency hedges hp enters fair value hedges reduce exposure debt investment portfolios interest rate risk foreign currency exchange rate risk hp issues longterm debt either us dollars foreign currencies based market conditions time financing interest rate foreign currency swaps typically used modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payment obligations underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed debt floating rate may terminate previously executed swap fixed rate positions provide beneficial relationship assets liabilities similarly hp may choose hedge foreign currency risk associated foreign currencydenominated debt acts natural foreign exchange rate hedge assets denominated currency order hedge fair value certain fixedrate investments hp periodically enters interest rate swaps convert fixed interest returns variable interest returns derivative instruments designated qualify fair value hedges gain loss derivative instrument well offsetting loss gain hedged item recognized earnings current period interest rate swaps designated fair value hedges critical terms interest rate swap hedged item generally designed match thereby satisfying criteria shortcut method accounting defined sfas 133 ineffective portion hedge reflected interest income expense hedges interest rate risk income expense hedges foreign currency risk hedge ineffectiveness fair value hedges material years ended october 31 2002 2001 september 2002 hp sold interest rate swap associated debt portfolio response movements interest rate market transaction resulted deferred gain 185 million amortized remaining life corresponding debt reduction interest expense hp uses combination forwards purchased options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted revenue lesser extent cost sales denominated currencies us dollar hps cash flow hedges mature generally within six months hp also uses forward contracts designated foreign currency hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated qualify cash flow hedges foreign currency hedges effective portions gain loss derivative instrument initially recorded accumulated comprehensive income separate component stockholders equity subsequently reclassified earnings period hedged transaction recognized earnings ineffective portion gain loss reported income expense immediately effective portion cash flow foreign currency hedges reported financial statement line item changes value hedged item foreign currency option forward contracts designated hedges hedge effectiveness measured comparing cumulative change hedge contract cumulative change hedged item based forward rates october 31 2002 amounts excluded assessment hedge effectiveness hedge ineffectiveness cash flow foreign currency hedges material years ended october 31 2002 2001 addition fiscal 2002 2001 hp discontinue cash flow hedges probable forecasted transaction would occur derivatives designated hedging instruments sfas 133 consist primarily forwards used hedge foreign currency balance sheet exposures warrants companies invested part strategic relationships derivative instruments designated hedging instruments sfas 133 changes fair values recognized earnings period change gains losses foreign currency forward contracts used hedge balance sheet exposures recognized income expense period remeasurement gain loss related foreign currency denominated assets liabilities thus naturally offset gains losses hp net foreign currency exchange losses 165 million 72 million 50 million fiscal 2002 2001 2000 respectively hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value fair market value derivative financial instruments respective sfas 133 classification consolidated balance sheet follows october 31 2002 2001 fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps short longterm debt 77 billion october 31 2002 compared carrying value 78 billion estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 9 financing receivables operating leases financing receivables represent salestype directfinancing operating leases resulting marketing hps complementary thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets components net financing receivables included financing receivables longterm financing receivables assets follows october 31 2002 2001 scheduled maturities hps minimum lease payments receivable october 31 2002 36 billion fiscal 2003 19 billion fiscal 2004 758 million fiscal 2005 236 million fiscal 2006 95 million fiscal 2007 37 million thereafter actual cash collections may differ due primarily customer early buyouts refinancings equipment leased customers operating leases 18 billion october 31 2002 14 billion october 31 2001 included machinery equipment accumulated depreciation equipment lease 782 million october 31 2002 752 million october 31 2001 minimum future rentals noncancelable operating leases 716 million fiscal 2003 354 million fiscal 2004 110 million fiscal 2005 14 million fiscal 2006 2 million fiscal 2007 note 10 borrowings notes payable shortterm borrowings related average interest rates follows october 31 2002 2001 march 2002 hp replaced 10 billion committed borrowing facility due expire april 2002 two senior unsecured credit facilities totaling 40 billion borrowing capacity including 27 billion 364day facility 13 billion threeyear facility credit facilities interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities generally available support issuance commercial paper corporate purposes october 31 2002 2001 borrowings outstanding credit facilities hp 40 billion commercial paper program established december 2000 500 million euro commercial papercertificate deposit established may 2001 total amount outstanding programs 537 million october 31 2002 952 million october 31 2001 longterm debt related maturities interest rates follows october 31 2002 2001 may 2002 connection hps acquisition compaq outstanding debt compaq consolidated financial results hp face value compaq debt consisted 17 billion commercial paper 275 million unsecured 745 mediumterm notes matured august 1 2002 300 million unsecured 765 mediumterm notes mature august 1 2005 300 million unsecured 62 mediumterm notes mature may 15 2003 65 million debt including debt issued digital equipment corporation interest rates ranging 7125 8625 matures various dates march 15 2004 april 1 2023 outstanding compaq debt assumed hp entire balance compaq commercial paper paid third quarter fiscal 2002 debt aggregate fair value approximately 27 billion acquisition date october 31 2002 outstanding amount debt acquired connection acquisition compaq 643 million february 2002 hp filed shelf registration statement 2002 shelf registration statement sec register 30 billion debt securities common stock preferred stock depositary shares warrants 2002 shelf registration statement declared effective march 2002 june 2002 hp offered 2002 shelf registration statement 10 billion unsecured 55 global notes mature july 1 2007 unless previously redeemed also june 2002 hp offered 2002 shelf registration statement 500 million unsecured 65 global notes mature july 1 2012 unless previously redeemed hp may redeem either series global notes time redemption prices described prospectus supplement dated june 21 2002 october 31 2002 hp capacity remaining issue approximately 15 billion securities 2002 shelf registration statement hp ability offer time 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange notes denominated currency including euro however notes registered united states july 2001 750 million euro 636 million based exchange rate date issuance 525 mediumterm notes maturing july 5 2006 issued program october 31 2002 hp remaining capacity issue approximately 23 billion mediumterm notes program february 2000 hp filed shelf registration statement 2000 shelf registration statement sec register 30 billion debt securities common stock preferred stock depositary shares warrants 2000 shelf registration statement declared effective march 2000 june 2000 hp offered 2000 shelf registration statement 15 billion unsecured 715 global notes mature june 15 2005 unless previously redeemed hp may redeem 715 global notes time redemption prices described prospectus supplement dated june 6 2000 may 2001 hp filed prospectus supplement 2000 shelf registration statement allowed hp offer time 15 billion mediumterm notes series due nine months date issue series mediumterm note program addition types securities described december 2001 hp offered 2000 shelf registration statement 10 billion unsecured 575 global notes mature december 15 2006 unless previously redeemed fiscal 2001 hp issued aggregate 210 million mediumterm notes variable rates maturing 2003 2004 2000 shelf registration statement series mediumterm note program mediumterm notes weighted average interest rate 213 353 fiscal 2002 2001 respectively october 31 2002 hp capacity remaining issue approximately 290 million securities 2000 shelf registration statement see note 19 information regarding issuances 2000 shelf registration statement subsequent october 31 2002 october 1997 hp issued 18 billion face value zerocoupon subordinated convertible notes proceeds 968 million november 1997 hp issued additional 200 million face value notes proceeds 108 million notes due 2017 notes convertible holders rate 1509 shares hps common stock 1000 face value notes payable either cash common stock hps election time hp may redeem notes book value payable cash notes subordinated existing future senior indebtedness hp december 2000 board directors authorized repurchase program notes repurchase program hp repurchased notes time varying prices fiscal 2002 hp repurchased 257 million face value notes book value 158 million aggregate purchase price 127 million resulting extraordinary gain early extinguishment debt 20 million net related taxes 11 million fiscal 2001 hp repurchased 12 billion face value notes book value 729 million aggregate purchase price 640 million resulting extraordinary gain early extinguishment debt 56 million net related taxes 33 million october 31 2002 notes remaining book value 318 million hp also maintains various international lines credit total capacity 27 billion various short longterm borrowings number financial institutions institutional investors approximately 484 million 666 million outstanding borrowings october 31 2002 2001 respectively borrowings weighted average interest rate 33 35 october 31 2002 2001 respectively aggregate future maturities face value longterm debt outstanding october 31 2002 excluding fair value adjustment related sfas 133 315 million discounts debt issuances totaling 187 million 743 million 2003 302 million 2004 18 billion 2005 802 million 2006 20 billion 2007 10 billion thereafter hp occasionally repurchases debt prior maturity based assessment current market conditions financing alternatives note 11 taxes earnings benefit provision taxes earnings continuing operations extraordinary item cumulative effect change accounting principle taxes follows years ended october 31 2002 2001 2000 significant components deferred tax assets deferred tax liabilities follows october 31 2002 2001 current portion deferred tax asset included current assets 33 billion october 31 2002 31 billion october 31 2001 hp recorded gross deferred tax assets 44 billion gross deferred tax liabilities 23 billion upon acquisition compaq gross deferred tax assets composed primarily loss tax credit carryforwards capitalized research development costs temporary differences gross deferred tax liabilities composed primarily provisions made foreign earnings intended indefinitely reinvested timing differences related purchased intangible assets gross deferred tax assets recorded reduced valuation allowance 774 million hp determines realize tax attributes related compaq future related decrease valuation allowance reduce goodwill instead provision taxes october 31 2002 hp federal net operating loss carryforwards approximately 11 billion expire 2022 hp also foreign net operating loss carryforwards totaling 13 billion 513 million expire 2003 2012 remainder foreign net operating loss carryforwards unlimited carryforward period total capital loss carryforwards 11 billion expire 2006 foreign tax credit carryforwards approximately 767 million expire 2003 2007 approximately 505 million expiring 2006 242 million expiring 2007 alternative minimum tax credit carryforwards approximately 305 million unlimited carryforward period general business credit carryforwards approximately 280 million expire 2003 2022 approximately 142 million amount expiring 2019 2022 carryforwards expire october 31 year indicated gross deferred tax assets october 31 2002 reduced valuation allowances 877 million principally tax loss carryforwards credit carryforwards primarily associated compaq acquisition management determined likely expire unused valuation allowance increased 803 million fiscal 2002 74 million fiscal 2001 tax benefits 21 million fiscal 2002 16 million fiscal 2001 495 million fiscal 2000 associated exercise employee stock options employee stock programs allocated stockholders equity differences us federal statutory income tax benefit rate hps effective tax benefit rate follows years ended october 31 2002 2001 2000 domestic foreign components losses earnings continuing operations extraordinary item cumulative effect change accounting principle taxes follows years ended october 31 2002 2001 2000 hp provided us federal income foreign withholding taxes 145 billion undistributed earnings nonus puerto rican operations october 31 2002 earnings intended reinvested indefinitely earnings distributed foreign tax credits may become available current law reduce eliminate resulting us income tax liability excess cash accumulated hps nonus subsidiaries advantageous business operations tax foreign exchange reasons subsidiary earnings remitted result certain employment actions capital investments undertaken hp income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes years 2013 income tax benefits attributable tax status subsidiaries estimated 389 million 016 per share fiscal 2002 457 million 024 per share fiscal 2001 969 million 049 per share fiscal 2000 internal revenue service irs completed examination income tax returns hp compaq years 1995 1997 respectively october 31 2002 irs process examining hps income tax returns years 1996 2001 compaqs tax returns years 1998 2000 hp believes adequate accruals hp compaq provided years note 12 stockholders equity authorized common stock february 2001 hp stockholders approved amendment hps certificate incorporation increase number authorized shares common stock 96 billion shares 48 billion authorized preferred stock preferred share purchase rights plan hp 300000000 authorized shares preferred stock august 31 2001 hp classified 4500000 shares series participating preferred stock conjunction hps adoption preferred stock rights agreement date rights agreement hp board directors approved termination preferred share purchase rights issued pursuant rights agreement rights agreement effective close business january 21 2003 effect rights agreement provided issuance one right share hp common stock held record close business september 17 2001 issued thereafter right conferred right purchase one onethousandth share hps series participating preferred stock purchase price 18000 subject adjustment certain circumstances certain conditions involving acquisition proposed acquisition person group 15 hps common stock rights would become exercisable upon exercise holder right also would right receive hp common stock value equal two times purchase price time person group acquired 15 hps common stock less 50 common stock hps board directors could exchanged rights whole part exchange ratio one common share per right adjusted reflect stock split stock dividend similar transaction board directors certain conditions also could redeemed purchase rights whole part price 0001 per right rights voting privileges attached automatically traded hp common stock occurrence specified triggering events dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per share fiscal 2002 2001 2000 acquisition compaq connection acquisition compaq hp assumed certain compaqs existing stock option plans july 2002 hr compensation committee board directors amended assumed plans conform general terms hp stock option plans also amended exclude directors certain officers eligibility receive option grants assumed plans restrict grants nonqualified options agilent technologies spinoff june 2 2000 distribution date hp distributed substantially remaining interest agilent technologies stock dividend hp stockholders record close business may 2 2000 distribution made amount 03814 share agilent technologies common stock outstanding share hp common stock decrease intrinsic value hps employee stock plans attributable distribution agilent technologies restored accordance methodology set forth eitf issue 909 changes fixed employee stock option plans result equity restructuring accordingly number hp employee options shares restricted stock yet released including unvested matching shares employee stock purchase plan espp outstanding may 2 2000 increased case options exercise prices correspondingly decreased reflect decline intrinsic value distribution date holders options exercised shares restricted stock released prior may 2 2000 received shares agilent technologies connection spinoff employee stock purchase plan effective november 1 2000 hp adopted hps board directors stockholders approved new employee stock purchase plan hewlettpackard company 2000 employee stock purchase plan also referred 2000 espp plan noncompensatory plan qualifies section 423 internal revenue code 1986 amended plan regular fulltime parttime employee may contribute 10 base compensation subject certain income limits semiannual purchase shares hps common stock purchase price 85 fair market value certain plandefined dates october 31 2002 approximately 139000 employees eligible participate approximately 67000 employees participants plan fiscal 2002 employee participants purchased 18536000 shares hp common stock plan weightedaverage price 14 per share fiscal 2001 employee participants purchased 5868000 shares hp common stock plan weightedaverage price 24 per share october 31 2000 employees longer permitted make contributions hps prior espp prior espp eligible employees could generally contribute 10 base compensation quarterly purchase shares hps common stock employee contributions purchase shares partially matched shares contributed hp generally vested two years october 31 2002 remaining unvested shares hp contributed employees 615000 matching shares weightedaverage price 47 fiscal 2001 related shares purchased employees last quarterly purchase period fiscal 2000 hp contributed employees including persons became employees agilent technologies 2534000 matching shares weightedaverage price 50 fiscal 2000 distribution date 569000 shares hp stock held agilent technologies employees forfeited agilent technologies replaced forfeited hp shares agilent technologies stock equivalent value compensation expense recognized prior espp plan 29 million fiscal 2002 74 million fiscal 2001 89 million fiscal 2000 incentive compensation plans hp four principal stock option plans adopted 2000 1995 1990 1985 stock options outstanding plans permit options granted qualify incentive stock options us internal revenue code exercise price stock option generally equal fair market value hps common stock date option granted term generally ten years 2000 stock plan 1990 1995 incentive stock plans hr compensation committee board directors certain cases may choose establish discounted exercise price less 75 fair market value grant date hp granted discounted options purchase 679000 shares fiscal 2002 4177000 shares fiscal 2001 5151000 shares fiscal 2000 options generally vest rate 25 per year period four years date grant exception discounted options discounted options generally may exercised third fifth anniversary option grant date time options become fully vested cost discounted options determined difference exercise price option fair market value hps common stock date option grant expensed ratably option vesting period option activity follows years ended october 31 2002 2001 2000 information options outstanding follows october 31 2002 2000 stock plan 1990 1995 incentive stock plans 1985 incentive compensation plan certain employees granted cash restricted stock awards cash restricted stock awards independent option grants subject restrictions considered appropriate hr compensation committee majority shares restricted stock outstanding october 31 2002 subject forfeiture employment terminates prior three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding cost awards determined fair market value shares date grant expensed ratably period restrictions lapse hp 1370000 shares restricted stock outstanding october 31 2002 2501000 shares outstanding october 31 2001 6079000 shares outstanding october 31 2000 shares available option espp restricted stock grants 248557000 october 31 2002 including 54216000 shares assumed compaq plans 283080000 october 31 2001 349101000 october 31 2000 regular employees considered eligible receive stock options fiscal 2002 approximately 127000 employees holding options one option plans october 31 2002 compensation expense recognized incentive compensation plans 84 million fiscal 2002 90 million fiscal 2001 149 million fiscal 2000 information presented regarding incentive compensation plans includes activity related agilent technologies employees distribution date except noted existing terms stock option plans substantially stock options held agilent technologies employees cancelled replaced agilent technologies stock options became fully vested distribution date fully vested options exercised expired within three months distribution date options purchase total 25543000 shares hp common stock held agilent technologies employees cancelled replaced options purchase agilent technologies stock distribution date options purchase 812000 shares became fully vested amount options purchase 91000 shares expired three months date total 1177000 shares hp restricted stock held agilent technologies employees forfeited cancelled distribution date replaced shares agilent technologies stock equivalent value stockbased compensation pro forma net earnings information hp applies intrinsicvaluebased method prescribed apb opinion 25 accounting stock issued employees accounting employee stock options accordingly compensation expense recognized options granted discounted exercise price resulting compensation expense recognized ratably associated service period generally option vesting term hp determined pro forma net earnings per share information required sfas 123 accounting stockbased compensation hp accounted employee stock options sfas 123s fair value method fair value options estimated using blackscholes option pricing model following weightedaverage assumptions years ended october 31 2002 2001 2000 purposes pro forma disclosures estimated fair value options amortized expense fouryear average vesting period options estimated fair value employee stock purchase grants amortized end period weightedaverage fair value options granted year 864 fiscal 2002 1230 fiscal 2001 2440 fiscal 2000 weighted fair value employee stock purchase plan grants 581 fiscal 2002 988 fiscal 2001 pro forma effect net earnings loss continuing operations extraordinary item cumulative effect change accounting principle fair value stockbased compensation recognized compensation expense straightline basis vesting period grant follows years ended october 31 2002 2001 2000 shares reserved hp 713477000 shares common stock reserved october 31 2002 507328000 shares reserved october 31 2001 future issuance employee benefit plans employee stock plans additionally hp 21494000 shares reserved october 31 2002 21495000 shares reserved october 31 2001 future issuances related conversions zerocoupon subordinated notes stock repurchase program hp repurchases shares common stock systematic program manage dilution created shares issued employee stock plans opportunistic share repurchases plan authorizes purchases open market private transactions fiscal 2002 39623000 shares repurchased aggregate price 671 million october 31 2002 hp authorization remaining future repurchases approximately 960 million fiscal 2001 45036000 shares repurchased aggregate price 12 billion fiscal 2000 96978000 shares repurchased aggregate price 56 billion stock split august 16 2000 hps board directors approved twoforone stock split form stock dividend october 27 2000 hp distributed one additional share hp common stock every share common stock outstanding stockholders record close business september 27 2000 par value hps common stock split remained 001 per share additional paidin capital reduced par value additional common shares issued rights holders securities otherwise modified shares pershare market price data related hps common shares outstanding employee stock plans reflect retroactive effects stock split note 13 comprehensive loss income changes components comprehensive income net taxes follows years ended october 31 2002 2001 2000 components accumulated comprehensive loss income net taxes follows october 31 2002 2001 note 14 supplemental cash flow information supplemental cash flow information follows years ended october 31 2002 2001 2000 note 15 retirement postretirement benefit plans general substantially hps employees covered various defined benefit defined contribution pension deferred profitsharing retirement plans addition hp sponsors medical life insurance plans provide benefits retired us employees acquisition compaq may 3 2002 acquisition date compaq hp assumed responsibility pension postretirement benefits current former preacquisition compaq employees qualified existing pension postretirement plans compaq pension plan january 1 2003 hp extended eligibility existing preacquisition hp pension postretirement benefit plans substantially preacquisition compaq employees united states eligible compaq pension plan agilent technologies spinoff june 2 2000 spinoff date agilent technologies agilent technologies assumed responsibility pension deferred profitsharing postretirement benefits current former employees whose last work assignment prior distribution date businesses spunoff agilent technologies united states hewlettpackard company retirement plan deferred profitsharing plan master trust converted group trust hewlettpackard company deferred profitsharing plan retirement plan agilent technologies inc deferred profitsharing plan retirement plan group trust hp agilent technologies retirement plans include postretirement medical accounts prorata share assets group trust assigned hp retirement plan deferred profitsharing trusts respective agilent technologies trusts outside united states generally prorata share hp pension assets transferred otherwise assigned agilent technologies entity accordance local law practice prorata shares proportion projected benefit obligations hp employees total projected benefit obligations hp agilent technologies april 30 2000 periods presented assets liabilities related retirement postretirement benefit plans agilent technologies included net assets discontinued operations hps accompanying consolidated balance sheet spinoff date june 2 2000 related costs included net earnings discontinued operations hps accompanying consolidated statement earnings june 2 2000 information note periods excludes agilent technologies retirement plans hp sponsors number defined benefit defined contribution postretirement employee benefit plans benefits defined benefit pension plans generally based pay years service worldwide pension postretirement costs including defined benefit defined contribution postretirement plans 10 billion fiscal 2002 392 million fiscal 2001 442 million fiscal 2000 included worldwide pension postretirement costs restructuring charges consisting net curtailment gains losses net settlement gains losses special termination benefits 319 million 38 million 66 million fiscal 2002 2001 2000 respectively see note 4 consolidated financial statements eligible service us employees october 31 1993 benefit payable retirement plan reduced amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp since closed new participants combined status us defined benefit pension plans dpsp follows october 31 2002 2001 global capital market developments resulted negative returns hps retirement benefit plan assets decline discount rates used estimate liability result hp required record additional minimum pension liability 570 million 379 million tax plans accumulated benefit obligation exceeded fair market value respective plan assets additional minimum pension liability included hps accumulated comprehensive loss postretirement benefit plans addition providing pension benefits hp sponsors postretirement benefit plans providing medical life insurance benefits us retired employees substantially hps current us employees could become eligible benefits existing benefit obligation relates primarily employees participating medical plan retirees may choose managedcare indemnity options contributions dependent options chosen length service 401k plan us employees may participate tax saving capital accumulation plan taxcap established supplemental retirement program beginning february 1 1998 enrollment taxcap automatic employees meet eligibility requirements unless decline participation taxcap program hp matches contributions employees maximum 4 employees annual compensation portion matching contribution may made form hp common stock extent employee elects hp stock investment option plan beginning november 1 2000 maximum contribution taxcap 20 employees annual eligible compensation subject certain irs limitations hps expense related taxcap 120 million fiscal 2002 119 million fiscal 2001 110 million fiscal 2000 october 31 2000 maximum combined contribution espp taxcap 25 employees annual eligible compensation subject certain regulatory plan limitations effective may 3 2002 hp assumed sponsorship compaq computer corporation 401k investment plan compaq 401k plan hp matches contributions employees maximum 6 employees annual compensation similar hps preacquisition 401k plans contributions invested direction employee various funds including hp common stock amount charged expense associated compaq 401k plan 56 million components net pension postretirement benefit costs hps net pension postretirement benefit costs follows years ended october 31 2002 2001 2000 funded status defined benefit postretirement benefit plans follows october 31 2002 2001 net amount recognized hps defined benefit postretirement benefit plans follows october 31 2002 2001 defined benefit plans projected benefit obligations exceeding fair value plan assets follows october 31 2002 2001 defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows october 31 2002 2001 plan assets consist primarily listed stocks bonds hps practice fund plans extent contributions taxdeductible assumptions used measure benefit obligations compute expected longterm return assets hps defined benefit postretirement benefit plans follows years ended october 31 2002 2001 2000 rate increase medical costs assumed decrease gradually 2010 remain level thereafter assumed health care cost trend rates could significant effect amounts reported health care plans 10 percentage point increase assumed health care cost trend rates would increased total service interest cost components reported fiscal 2002 19 million would increased postretirement benefit obligation reported fiscal 2002 219 million 10 percentage point decrease assumed health care cost trend rates would decreased total service interest cost components reported fiscal 2002 14 million would decreased postretirement obligation reported fiscal 2002 179 million note 16 commitments hp leases certain real personal property noncancelable operating leases future annual minimum lease payments october 31 2002 493 million fiscal 2003 397 million fiscal 2004 286 million fiscal 2005 228 million fiscal 2006 192 million fiscal 2007 522 million thereafter payments partially offset sublease rental income commitments future minimum sublease rental income commitments october 31 2002 23 million fiscal 2003 14 million fiscal 2004 10 million per year fiscal years 2005 2007 10 million thereafter certain leases require hp pay property taxes insurance routine maintenance include escalation clauses rent expense 566 million fiscal 2002 374 million fiscal 2001 344 million fiscal 2000 sublease rental income 17 million fiscal 2002 20 million fiscal 2001 19 million fiscal 2000 note 17 litigation contingencies pending litigation hp v cooper et al lawsuit filed united states district court northern district california march 23 1998 cooper defendants claim hps laserjet printers infringe us patent 5424780 allegedly covers portions resolution enhancement technology employed printers seek injunction monetary damages attorneys fees costs based opinion outside counsel hp believes laserjet printers infringe patent us patent office agreed reexamine patent based prior art identified parties litigation stayed pending outcome us patent office reexamination us patent office issued reexamination certificate july 2002 stay litigation subsequently lifted stevens v hp unfair business practices consumer class action filed state court riverside county california july 31 2000 consumer class action lawsuits filed coordination original plaintiffs 32 additional states various plaintiffs throughout country claim purchased different models hp inkjet printers past four years basic factual allegation actions affected consumer purchased hp printers received halffull economy ink cartridges instead full cartridges plaintiffs claim hps advertising packaging marketing representations printers led consumers believe would receive full cartridges actions seek injunctive relief disgorgement profits compensatory damages punitive damages attorneys fees various state unfair business practices statutes common law claims fraud negligent misrepresentation hp recently obtained summary judgment plaintiffs california action plaintiffs appealing hp also received summary judgment kansas arizona matter certified class action north carolina state court trial date set june 9 2003 ohio new york litigation dismissed connecticut trial court denied plaintiffs motion certify class action oregon washington case dismissed without prejudice litigation various stages jurisdictions alvis v hp nationwide defective product consumer class action filed united states district court jefferson county texas resident eastern texas april 2001 february 2000 similar suit captioned lapray v compaq filed united states district court jefferson county texas compaq may 2000 sprung v hp compaq filed united states district court 60th judicial district colorado actions part series similar suits filed several computer manufacturers basic allegation hp compaq sold computers containing floppy disk controllers fail alert user certain floppy disk controller errors failure alleged result data loss data corruption plaintiffs alvis lapray seek injunctive relief declaratory relief rescission attorneys fees july 2001 nationwide class certified lapray case compaq filed petition review texas supreme court texas supreme court requested additional briefing class certification hearing alvis set february 2003 sprung case dismissed may 31 2002 addition hp compaq continue provide information us government state attorneys general california illinois response inquiries regarding floppy disk controllers computers sold government entities december 27 2001 cornell university cornell research foundation inc filed action hp united states district court northern district new york alleging hps parisc 8000 family microprocessors infringes cornell patent describes way executing microprocessor instructions action seeks declaratory injunctive relief court expected hold hearing construe disputed claims terms cornells patent early 2003 reviewing pertinent materials hp believes products infringe patent furthermore hp believes cornells patent invalid number purported stockholder class actions brought 1998 compaq certain present former directors officers compaq behalf persons purchased compaq common stock july 10 1997 march 6 1998 actions consolidated title berger v compaq computer corporation et al december 23 1998 united states district court texas consolidated amended complaint alleges defendants violated section 10b securities exchange act 1934 amended rule 10b5 promulgated thereunder withholding information making misleading statements channel inventory factoring receivables compaq marketing programs order inflate price compaqs common stock alleges number individual defendants sold compaq common stock purportedly inflated prices july 2000 case certified class action later vacated fifth circuit court appeals compaq reached mediated settlement lead plaintiffs attorneys amount approximately 29 million approximately 28 million covered insurance parties presented settlement district court approval june 2002 final hearing fairness settlement held november 1 2002 november 25 2002 district court entered two orders one order approved settlement granted final judgment dismissed lawsuit prejudice second order awarded fees expenses plaintiffs counsel digwamaji et al v bank america et al purported class action lawsuit hp numerous multinational corporations named defendants filed september 27 2002 united states district court southern district new york behalf current former south african citizens survivors suffered violence oppression apartheid regime lawsuit alleges hp companies helped perpetuate profited apartheid regime period 19481994 selling products services agencies south african government claims based alien tort claims act torture protection act racketeer influenced corrupt organizations act variety international laws treaties relating violations human rights war crimes humanity complaint seeks among things accounting creation historic commission compensatory damages excess 200 billion punitive damages excess 200 billion costs attorneys fees matter early stage litigation hp preparing response two nonbinding arbitration proceedings ongoing germany arbitration board patent trademark office proceedings brought verwertungsgesellschaft wort collection agency representing certain copyright holders hp relate whether extent copyright levies imposed upon certain products enable production copies private persons accordance copyright laws implemented germany proceedings instituted june 2001 june 2002 respectively addition hp may face similar proceedings european jurisdictions based copyright laws implemented jurisdictions levies imposed would based upon number products sold particular jurisdictions perproduct amounts levies vary products subject claims germany include multifunction devices personal computers printers products issue jurisdictions include belgium cd media cdwriters spain cd media greece photocopiers photocopying paper switzerland cd media dvd media mp3 players eu member countries yet levy schemes place expected implement similar legislation hp companies various industry associations opposing certain aspects levies kassin v agilent technologies nationwide securities class action filed november 26 2001 united states district court southern district new york agilent technologies inc several banks underwriters conduct concerning commission structure agilent technologies initial public offering ipo late 1999 consolidated amended complaint filed april 2002 alleging defendant banks underwriters offered agilent technologies ipo shares exchange excessive commissions guarantees buy shares inflated price ipo aftermarket case similar numerous cases filed united states district court southern district new york concerning ipo market late 1990s stipulation individual defendants dismissed case without prejudice omnibus motion dismiss filed behalf issuer defendants hp named defendant action hp includes litigation report due indemnification agreement hp agilent technologies hp contacted informally san francisco district office us securities exchange commission sec march 2002 requesting voluntary provision documents related information concerning hps relationships communications deutsche bank affiliated parties communications regarding solicitation votes deutsche bank affiliated parties connection compaq acquisition sec advised hp inquiry construed indication sec staff violations law occurred considered reflection upon person entity security hp cooperating fully inquiry april 2002 hp received subpoena us attorneys office southern district new york produce information concerning voting deutsche bank northern trust respective affiliated parties proposal issue shares connection compaq acquisition hp understands inquiry response press accounts concerning vote proposal hp special meeting shareowners held march 19 2002 hp fully cooperating inquiry hp involved lawsuits claims investigations proceedings addition identified consisting patent commercial securities employment environmental matters arise ordinary course business accordance sfas 5 accounting contingencies hp makes provision liability probable liability incurred amount loss reasonably estimated provisions reviewed least quarterly adjusted reflect impacts negotiations settlements rulings advice legal counsel information events pertaining particular case litigation inherently unpredictable however hp believes valid defenses respect legal matters pending well adequate provisions probable estimable losses possible nevertheless cash flows results operations could affected particular period resolution one contingencies litigation settlement june 4 2001 hp pitney bowes inc pitney bowes announced entered agreements resolved pending patent litigation parties without admission infringement connection therewith hp paid pitney bowes 400 million cash june 7 2001 addition companies entered technology licensing agreement expect pursue business commercial relationships litigation related pitney bowes claims hp laserjet printers infringed pitney bowes character edge smoothing patent hps claims pitney bowes copiers fax machines document management software postal metering machine infringed hps patents note 18 segment information description segments hp leading global provider products technologies solutions services consumers businesses hps offerings span information technology infrastructure personal computing access devices global services imaging printing october 31 2002 hp organized operations five business segments imaging printing group personal systems group enterprise systems group hp services hp financial services segments determined accordance management views evaluates hps businesses first quarter fiscal 2002 hp made strategic changes move pc business computing systems personal systems servers storage software computing systems enterprise systems personal appliances personal systems hp financial services separate reporting segment third quarter fiscal 2002 hp made another strategic change move workstations computing systems personal systems remaining businesses services became hp services segment financial data years ended october 31 2001 2000 restated reflect organizational changes factors management uses identify hps separate businesses include customer base homogeneity products technology delivery channels description types products services provided reportable segment follows •imaging printing group provides home business imaging printing devices digital imaging publishing systems printing supplies consulting services home business imaging printing devices include color monochrome printers shared personal use multifunction laser allinone inkjet devices personal color copiers faxes wide largeformat inkjet printers digital presses digital imaging publishing systems include scanners photosmart printers digital photography products supplies include laser inkjet printer cartridges related printing media consulting services provided customers optimize use printing imaging assets •personal systems group provides commercial personal computers pcs consumer pcs workstations range handheld computing devices digital entertainment systems calculators related accessories software services commercial consumer markets commercial pcs include hp epc compaq evo desktop series well evo notebook pcs home pcs include hp pavilion compaq presario series multimedia consumer desktop pcs notebook pcs workstations provided unix® windows® linuxbased systems handheld computing devices include ipaq series products run pocket pc software digital entertainment systems offer dvdrw drives well digital entertainment center products postcompaq acquisition product roadmap decisions include discontinuance vectra desktop series armada omnibook notebook series jornada handheld products •enterprise systems group provides business critical servers industry standard servers storage software solutions business critical servers include reduced instruction set computing riscbased servers running hpux operating system itanium®based servers running hpux windows® linux hp alphaserver product line running tru64 unix® open vms various server offerings range lowend servers highend scalable servers including superdome line additionally hp offers nonstop faulttolerant server products deliver high levels availability performance scalability manageability business critical solutions industry standard servers offer primarily entrylevel midrange proliant servers run windows® linux novell inc operating systems storage provides entrylevel midrange enterprise array offerings storage area networks storage management software virtualization technologies well tape drives tape libraries optical archival storage software offerings include openview management telecommunications software solutions designed primarily largescale systems networks software solutions run variety operating systems including windows® multiple versions unix® postcompaq acquisition product roadmap decisions include discontinuance netserver line •hp services provides comprehensive integrated portfolio services including customer support consulting integration managed services customer support provides range services standalone product support high availability services complex global networked multivendor environments customer support also manages delivery warranty support service organization well fullservice resellers independent service companies consulting integration provides services design build integrate infrastructure consulting integration also provides crossindustry solutions areas customer relationship management supply chain ecommerce business portals messaging security well industryfocused solutions financial services telecommunications manufacturing public sector managed services offers range management services comprehensive selective including transformational infrastructure services client computing managed services managed web services application services well business continuity recovery services hp services teams leading software networking services companies bring complete solutions hps customers •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial services offerings enable hps customers worldwide acquire complete solutions including hardware software services hp financial services offerings include lease loan financing computing printing utility offerings well financial asset management services large global enterprise customers hp financial services also offers array specialized financial services small mediumsized businesses educational governmental customers hp financial services offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs prior fiscal 2002 hps immaterial operating segments aggregated form category meet materiality threshold reportable segment category included primarily verifone business prior divestiture third quarter fiscal 2001 four principal reportable segments disclosed consolidated financial statements based hps management organizational structure october 31 2002 separate segment reporting also included hp financial services included enterprise systems groups organizational structure due distinct nature business future changes organizational structure may result changes reportable segments disclosed segment revenue profit accounting policies used derive reportable segment results generally described note 1 consolidated financial statements intersegment net revenue earnings operations include transactions segments intended reflect arms length transfer best price available comparable external customers primarily related intercompany sales products hp financial services leasing transactions significant portion segments expenses arise shared services infrastructure hp historically allocated segments order realize economies scale use resources efficiently expenses include costs centralized research development legal accounting employee benefits real estate insurance services information technology services treasury corporate infrastructure costs first quarter fiscal 2002 hp revised allocation methodology shared services infrastructure hp believes allocation changes resulted better reflection utilization services provided benefits received segments segment financial data years ended october 31 2001 2000 restated reflect changes segment data results reportable segments derived directly hps management reporting system results based hps method internal reporting necessarily conformity accounting principles generally accepted united states management measures performance segment based several metrics including earnings operations results used part evaluate performance allocate resources segments certain operating expenses separately managed corporate level allocated segments unallocated costs include primarily acquisitionrelated charges restructuring charges purchased iprd amortization purchased intangible assets goodwill amount profitdependent bonus expenses certain employeerelated benefit program costs differ targeted level recorded segments asset data reviewed management segment level exception inventory allocated directly managed segment products services within respective segments generally considered similar nature therefore separate disclosure similar classes products services segment level presented financial information reportable segment follows fiscal years ended october 31 2002 2001 2000 reconciliation segment information hp consolidated totals follows years ended october 31 2002 2001 2000 major customers single customer represented 10 hps total net revenue period presented geographic information net revenue net property plant equipment classified major geographic areas hp operates follows years ended october 31 2002 2001 2000 net revenue geographic area based upon sales location predominately represents customer location single country outside united states represented 10 hps total net revenue period presented single country outside united states represented 10 hps total net property plant equipment period presented exception ireland singapore held 11 10 assets october 31 2001 respectively hps longlived assets goodwill purchased intangible assets allocated specific geographic locations composed principally net property plant equipment note 19 subsequent events october 31 2002 hp held 49 equity interest intriahp corporation intria provider services jointly owned canadian imperial bank commerce cibc november 1 2002 hp acquired remaining outstanding stock intria related assets cibc connection acquisition hp also entered multiyear contract provide services cibc acquisition accounted purchase method accounting effective november 1 2002 hp include assets liabilities results operations consolidated financial statements december 11 2002 hp offered 2000 shelf registration statement 200 million 3375 series mediumterm notes 3375 notes mature december 15 2005 50 million 425 series mediumterm notes 425 notes mature december 17 2007 hp may redeem 3375 notes 425 notes time redemption prices described prospectus supplement dated june 6 2000 result compaq acquisition associated credit rating changes approximately 250 million hps debt due ccf charterhouse hsbcccf became subject put option whereby debt became repayable option hsbcccf december 17 2002 put option waived hsbcccf renegotiated debt becomes repayable hsbcccfs election september 29 2003 hewlettpackard company subsidiaries quarterly summary1 unaudited notes 1certain reclassifications made prior quarter balances order conform current presentation 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year 3hp adopted sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 2000 item 9item 8 financial statements supplementary data report independent auditors board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2003 2002 related consolidated statements operations stockholders equity cash flows three years period ended october 31 2003 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2003 2002 consolidated results operations cash flows three years period ended october 31 2003 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements november 1 2002 company changed method accounting goodwill intangible assets 2002 company changed method depreciation assets placed service may 1 2002 november 1 2000 company changed method accounting revenue recognition ernst young llp san jose california november 19 2003 statement management responsibility hps management responsible preparation integrity objectivity consolidated financial statements financial information included hps 2003 annual report form 10k consolidated financial statements prepared conformity accounting principles generally accepted united states reflect effects certain estimates judgments made management hps management maintains effective system internal control designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization system regularly monitored direct management review internal auditors conduct extensive program audits throughout hp selects trains qualified people provided expected adhere hps standards business conduct standards set forth highest principles business ethics conduct key element hps control system hps consolidated financial statements three years period ended october 31 2003 audited ernst young llp independent auditors audits conducted accordance auditing standards generally accepted united states included review financial controls tests accounting records procedures respectively considered necessary circumstances audit committee board directors composed outside directors meets regularly management internal auditors independent auditors review accounting reporting auditing internal control matters audit committee direct private access internal external auditors carleton fiorina robert p wayman carleton fiorina robert p wayman chairman chief executive officer executive vice president chief financial officer hewlettpackard company subsidiaries consolidated statement operations accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheet accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statement cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statement stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies acquisitions may 3 2002 hewlettpackard company hp acquired outstanding stock compaq computer corporation compaq leading global provider information technology products services solutions exchange 06325 shares hp common stock outstanding share compaq stock assumption options based ratio march 22 2002 hp acquired substantially outstanding stock indigo nv indigo previously owned hp exchange hp common stock options nontransferable contingent value rights cvrs november 1 2002 hp acquired remaining outstanding stock intriahp corporation intria hp held 49 equity interest october 31 2002 hp included results companies respective acquisition dates consolidated results operations see note 3 discussion hps acquisition activities principles consolidation consolidated financial statements include accounts hp whollyowned controlled majorityowned subsidiaries significant intercompany accounts transactions eliminated use estimates preparation financial statements accordance accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported hps financial statements accompanying notes actual results could differ materially estimates revenue recognition general hp adopted securities exchange commission staff accounting bulletin 101 sab 101 revenue recognition financial statements fourth quarter fiscal 2001 retroactive november 1 2000 accordingly hp restated consolidated results operations first three quarters fiscal 2001 including cumulative effect change accounting principle 272 million net related taxes 108 million recorded reduction net income beginning first quarter fiscal 2001 hp adopted eitf 0021 revenue arrangements multiple deliverables fourth quarter fiscal 2003 impact adopting eitf 0021 material hps results operations hp recognizes revenue persuasive evidence sales arrangement exists delivery occurs services rendered sales price fixed determinable collectibility reasonably assured following policies apply hps major categories revenue transactions products product revenue consists mainly revenue hardware software product sales imaging printing personal systems enterprise systems businesses excluding revenue generated servicerelated solutions businesses included services revenue discussed first quarter fiscal 2003 hp substantially conformed standard terms conditions sales agreements change impacted primarily preacquisition compaq businesses standard sales agreement terms conditions generally transferred title risk loss customer point shipment accordingly revenue recognized time hps standard terms conditions sale title risk loss transfer customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates offerings occur sales programs established hp directly hps distributors resellers hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue software revenue software consists software licensing postcontract customer support software revenue allocated license support elements using vendor specific objective evidence fair value vsoe absence vsoe residual method price charged element sold separately generally determines vsoe absence vsoe delivered element hp first allocates revenue fair value undelivered elements residual revenue delivered elements hp recognizes revenue allocated software licenses inception license hp recognizes revenue allocated postcontract support ratably term contract services revenue consists mainly revenue hp services business addition services revenue also includes revenue generated servicerelated solutions imaging printing personal systems enterprise systems businesses hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts ratably contractual period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contractual period proportional performance basis determined relationship contract costs incurred date estimated total contract costs regularly revised life contact fixedprice outsourcing contracts hp recognizes revenue ratably contractual service period recognizes costs associated contracts incurred hp amortizes revenue costs associated transition phase outsourcing contracts contractual service period losses fixedprice contracts recognized period loss becomes evident hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables financing hp recognizes revenue sale equipment salestype leases directfinancing leases product revenue inception lease hp earns associated financing interest income accrual basis effective interest method hp ceases revenue recognition delinquent accounts deemed delinquent based upon number factors including customer credit history number days past due terms customer agreement hp resumes revenue recognition recognizes associated deferred revenue appropriate customer actions taken remove accounts delinquent status hp recognizes revenue operating leases accrual basis product revenue rental payments become due multiple element arrangements elements hardware software consulting services contained single arrangement related arrangements customer hp allocates revenue element based relative fair value provided element meets criteria treatment separate unit accounting price charged element sold separately generally determines fair value absence fair value delivered element hp allocates revenue first fair value undelivered elements allocates residual revenue delivered elements absence fair value undelivered element arrangement accounted single unit accounting resulting delay revenue recognition delivered elements undelivered elements fulfilled hp limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecified return refund privileges shipping handling costs related shipping handling included cost sales periods presented advertising costs expensed incurred amounted 18 billion fiscal 2003 14 billion fiscal 2002 11 billion fiscal 2001 taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents maturity investment three months less purchase date interest income 240 million fiscal 2003 241 million fiscal 2002 203 million fiscal 2001 allowance doubtful accounts hp recognizes allowance doubtful accounts ensure trade financing receivables overstated due uncollectibility bad debt reserves maintained customers based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience additional reserve individual accounts recorded hp becomes aware customers inability meet financial obligations case bankruptcy filings deterioration customers operating results financial position circumstances related customers change estimates recoverability receivables would adjusted inventory valued lower cost market cost computed firstin firstout basis property plant equipment property plant equipment stated cost less accumulated depreciation additions improvements major renewals capitalized maintenance repairs minor renewals expensed incurred depreciation provided using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 10 years machinery equipment leasehold improvements depreciated life lease asset whichever shorter equipment held lease depreciated initial term lease equipments estimated residual value hp adopted straightline method depreciation property plant equipment placed service april 30 2002 property plant equipment placed service prior may 1 2002 continues depreciated using accelerated methods buildings improvements majority machinery equipment straightline method leasehold improvements leased equipment hp believes change allocates costs new property appropriately financial results better allocating costs new property useful lives assets addition new method closely conforms prevalent practices industries hp operates effect change material hps earnings financial position years ended october 31 2003 2002 goodwill indefinitelived purchased intangible assets effective november 1 2002 connection implementation statement financial accounting standards sfas 142 goodwill intangible assets goodwill purchased intangible assets indefinite useful lives longer amortized hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 provisions sfas 142 require twostep impairment test performed goodwill first step hp compares fair value reporting unit carrying value hp determines fair value reporting units using combination income approach market approach income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step determine implied fair value reporting units goodwill compared carrying value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference sfas 142 also requires fair value indefinitelived purchased intangible assets estimated compared carrying value hp estimates fair value intangible assets using income approach hp recognizes impairment loss estimated fair value intangible asset less carrying value longlived assets including finitelived purchased intangible assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets ranging two ten years longlived assets property plant equipment purchased intangible assets finite lives evaluated impairment whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 144 accounting impairment disposal longlived assets hp assesses fair value assets based future cash flow assets expected generate recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset impairment identified hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values capitalized software hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software capitalized costs amortized three years derivative financial instruments hp enters derivative financial instrument contracts hedge certain foreign currency interest rate exposures november 1 2000 hp adopted sfas 133 accounting derivative instruments hedging activities amended sfas 149 amendment statement 133 derivative instruments hedging activities cumulative effect adopting sfas 133 material hps consolidated financial statements see note 7 full description hps hedging activities related accounting policies investments hps investments consist principally time deposits municipal securities repurchase agreements debt securities well equity securities public privatelyheld companies investments maturities less one year classified shortterm investments october 31 2003 hps debt securities equity investments public companies classified availableforsale securities carried fair value fiscal 2002 debt securities hp ability intent hold maturity accounted heldtomaturity securities carried amortized cost majority availableforsale securities unrealized gains losses net taxes recorded accumulated comprehensive loss remainder availableforsale securities hedged changes fair value securities recognized earnings offset gains losses related derivative instruments equity investments privatelyheld companies generally carried cost equity investments companies hp ability exercise significant influence hold controlling interest accounted equity method hps proportionate share income losses recorded interest net losses investments hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined otherthantemporary impairment charge recorded new cost basis investment established fair values investments public companies determined using quoted market prices fair values investments privatelyheld companies estimated based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies order determine whether decline value otherthantemporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value declines value certain investments determined otherthantemporary accordingly hp recorded net investment losses including impairments investments publiclytraded privatelyheld emerging technology companies 29 million fiscal 2003 106 million fiscal 2002 455 million fiscal 2001 included losses investments net consolidated statement operations depending market conditions hp may incur additional charges investment portfolio future concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash investments accounts receivable financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively represented 21 total accounts receivable october 31 2003 22 october 31 2002 single customer accounts 10 total accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances hp generally experienced longer accounts receivable collection cycles emerging markets particular asiapacific latin america compared united states european markets event accounts receivable collection cycles developing markets significantly deteriorate one hps larger resellers regions fail hps operating results could adversely affected stockbased compensation hp applies intrinsicvaluebased method prescribed accounting principles board apb opinion 25 accounting stock issued employees accounting employee stockbased compensation accordingly hp generally recognizes compensation expense grants options discounted exercise price hp recognizes resulting compensation expense ratably associated service period generally option vesting term hp determined pro forma net earnings loss net earnings loss per share information fair value method described sfas 123 accounting stockbased compensation applied employee stockbased compensation fair value stock options purchase rights hewlettpackard company 2000 employee stock purchase plan espp estimated date grant using blackscholes option pricing model following weighted average assumptions years ended october 31 2003 2002 2001 purposes pro forma disclosures estimated fair value options amortized fouryear average vesting period options estimated fair value espp purchase rights amortized purchase period subject modification date purchase weightedaverage fair value options granted year 515 fiscal 2003 864 fiscal 2002 1230 fiscal 2001 weightedaverage fair value espp purchase rights 592 fiscal 2003 581 fiscal 2002 988 fiscal 2001 pro forma effect net earnings loss cumulative effect change accounting principle fair value stockbased compensation recognized compensation expense straightline basis vesting period stock option purchase right follows years ended october 31 2003 2002 2001 foreign currency translation hp uses us dollar predominately functional currency foreign currency assets liabilities remeasured us dollars endofperiod exchange rates except inventory property plant equipment assets deferred revenue remeasured historical exchange rates revenue cost sales expenses remeasured average exchange rates effect period except revenue cost sales expenses related previously noted balance sheet amounts remeasured historical exchange rates gains losses foreign currency remeasurement included net earnings loss certain foreign subsidiaries designate local currency functional currency related cumulative translation adjustments included component accumulated comprehensive income loss comprehensive income loss comprehensive income loss includes net earnings loss well additional comprehensive income loss hps comprehensive income loss consists unrealized gains losses availableforsale securities unrealized gains losses derivative instruments minimum pension liability cumulative translation adjustments recorded net tax reclassifications certain reclassifications made prior year balances order conform current year presentation fiscal 2003 gains early extinguishment debt previously reported extraordinary item net taxes reclassified losses investments net recent pronouncements may 2003 eitf reached consensus issue 035 applicability aicpa statement position 972 software revenue recognition nonsoftware deliverables arrangement containing morethanincidental software fasb ratified consensus august 2003 eitf issue 035 affirms aicpa statement position 972 applies nonsoftware deliverables hardware arrangement software essential functionality nonsoftware deliverables adoption eitf issue 035 material impact hps results operations financial condition january 2003 fasb issued fasb interpretation 46 fin 46 consolidation variable interest entities interpretation arb 51 addresses consolidation business enterprises variable interest entities vies either 1 sufficient equity investment risk permit entity finance activities without additional subordinated financial support 2 equity investors lack essential characteristic controlling financial interest december 2003 fasb completed deliberations proposed modifications fin 46 revised interpretations resulting multiple effective dates based nature well creation date vie vies created january 31 2003 prior january 1 2004 may accounted either based original interpretation revised interpretations however revised interpretations must applied later hps second quarter fiscal 2004 vies created january 1 2004 must accounted revised interpretations special purpose entities spes created prior february 1 2003 may accounted original revised interpretations provisions later hps first quarter fiscal 2004 nonspes created prior february 1 2003 accounted revised interpretations provisions later hps second quarter fiscal 2004 hp entered material arrangements vies created january 31 2003 hp currently evaluating effect adoption fin 46 vies created prior february 1 2003 results operations financial condition note 2 net earnings loss per share hps basic earnings loss per share eps calculated using net earnings loss weightedaverage number shares outstanding reporting period diluted eps includes effect potential issuance common stock issuable pursuant exercise stock options reconciliation numerators denominators basic diluted eps calculations follows years ended october 31 2003 2002 2001 fiscal 2003 2001 options purchase 361784000 147583000 shares respectively hp stock excluded calculation diluted net earnings per share exercise price options greater average market price common shares respective fiscal years therefore effect would antidilutive addition conversion zerocoupon subordinated notes 7624000 shares stock would antidilutive year ended october 31 2003 therefore reflected diluted eps period diluted loss per share year ended october 31 2002 based weightedaverage number shares outstanding period inclusion options purchase 459333000 shares hp stock 7625000 potentially dilutive securities principally convertible zerocoupon subordinated notes would antidilutive note 3 acquisitions divestitures accordance sfas 141 business combinations hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations prepared independent third party appraisal firms using estimates assumptions provided management goodwill recorded result acquisitions expected deductible tax purposes accordance sfas 142 beginning november 1 2002 goodwill purchased intangible assets indefinite useful lives amortized reviewed annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable purchased intangible assets finite lives amortized straightline basis respective useful lives intriahp november 1 2002 hp acquired remaining outstanding stock intria hp held 49 equity interest october 31 2002 related assets cibc cash consideration approximately 100 million intria provider managed services hp jointly owned cibc connection acquisition hp also entered multiyear contract provide managed services cibc acquisition outsourcing relationship cibc add depth capability hp services including expertise managing complex heterogeneous operating environments customers financial services industry others demand high availability computing solutions hp recorded approximately 60 million goodwill amortizable purchased intangible assets connection acquisition purchased intangible assets consisting mainly customer contracts amortized estimated weightedaverage useful lives range three ten years compaq may 3 2002 hp acquired outstanding stock compaq leading global provider information technology products services solutions exchange 06325 shares hp common stock outstanding share compaq common stock assumption options purchase compaq common stock based ratio addition hp assumed certain compaq stock plans acquisition compaq enhanced hps competitive position key industries strengthening sales force relationships strategic customer bases acquisition enabled hp focus strategic product customer bases achieve significant cost synergies economies scale improve results combined enterprise systems group personal systems group hp services businesses furthermore cost savings offer strategic benefits reducing hps cost structure competitive businesses personal computers pcs acquisition also allows imaging printing group leverage interrelationship pc printer sales utilize compaqs direct distribution capabilities hp derived exchange ratio acquisition estimates future revenue earnings combined company assuming completion acquisition measuring relative contributions hp compaq achieving forecasted results addition measuring relative ownership combined company implied contributions transaction resulted issuance approximately 11 billion shares hp common stock fair value approximately 227 billion assumption compaq options purchase approximately 200 million shares hp common stock blackscholes fair value approximately 14 billion estimated direct transaction costs 79 million fair value hp common stock derived using average market price per share hp common stock 2092 based average closing prices range trading days august 30 august 31 september 4 september 5 2001 around announcement date september 3 2001 acquisition based independent valuation prepared using estimates assumptions provided management total purchase price approximately 242 billion date acquisition october 31 2002 allocated follows certain adjustments made goodwill subsequent acquisition date described note 4 amortizable intangible assets total purchase price approximately 35 billion allocated amortizable intangible assets including customer contracts developed core technology customer contracts represent existing contracts relate primarily underlying customer relationships pertaining services provided compaq global services including contractual customer service relationships contractual managed services client relationships contractual systems integration consulting client relationships customer lists distribution agreements represent compaqs relationships within installed bases enterprise systems personal systems agreements enterprise systems valueadded resellers hp amortizing fair value assets straightline basis weighted average estimated useful life approximately 9 years developed technology consists products reached technological feasibility includes products compaqs product lines principally compaq himalaya proliant enterprise storage array alphaserver products core technology patents represent combination compaq processes patents trade secrets developed years experience design development relating clustering fault tolerant systems proprietary alpha processor architecture storage area networks compaqs technology products designed hardware software solutions fault tolerant business critical solutions communication products desktop portable personal computers hp leveraged intends leverage proprietary knowledge develop new technology improved products manufacturing processes hp amortizing developed core technology patents straightline basis weighted average estimated useful life approximately 6 years intangible asset indefinite life estimated fair value intangible asset indefinite life 14 billion consisting estimated fair value allocated compaq trade name intangible asset amortized indefinite remaining useful life based many factors considerations including length time compaq name use compaq brand awareness market position plans continued use compaq brand within portion hps overall product portfolio inprocess research development total purchase price 735 million allocated iprd expensed third quarter fiscal 2002 projects qualify iprd represent yet reached technological feasibility future alternative uses exist technological feasibility defined equivalent betaphase working prototype remaining risk relating development value assigned iprd determined considering importance project overall development plan estimating costs develop purchased iprd commercially viable products estimating resulting net cash flows projects completed discounting net cash flows present value revenue estimates used value purchased iprd based estimates relevant market sizes growth factors expected trends technology nature expected timing new product introductions compaq competitors rates utilized discount net cash flows present values based compaqs weighted average cost capital weighted average cost capital adjusted reflect difficulties uncertainties completing project thereby achieving technological feasibility percentageofcompletion project anticipated market acceptance penetration market growth rates risks related impact potential changes future target markets based factors discount rates range 25 42 deemed appropriate valuing iprd estimates used valuing iprd based upon assumptions believed reasonable inherently uncertain unpredictable result actual results may differ estimates deferred compensation accordance terms compaqs equitybased plans compaqs outstanding options granted prior september 1 2001 vested upon compaq stockholder approval acquisition intrinsic value unvested compaq options approximately 70 million may 3 2002 relates options granted subsequent august 31 2001 allocated deferred compensation purchase price allocation deferred compensation amortized remaining vesting period options approximately 35 years may 3 2002 options assumed conjunction acquisition exercise prices ranging 263 7531 weighted average exercise price 3329 weighted average remaining contractual life 71 years approximately 165 million approximately 200 million options assumed fully vested may 3 2002 pro forma results following unaudited pro forma financial information presents combined results operations hp compaq acquisition occurred beginning period presented due different historical fiscal period ends hp compaq results year ended october 31 2002 combine historical results hp year ended october 31 2002 historical quarterly results compaq six months ended march 31 2002 period may 3 2002 acquisition date october 31 2002 adjustment 162 million made combined results operations reflecting amortization purchased intangible assets net tax would recorded acquisition occurred beginning period presented unaudited pro forma financial information intended represent indicative consolidated results operations financial condition hp would reported acquisition completed beginning periods presented taken representative future consolidated results operations financial condition hp pro forma results follows year ended october 31 2002 1cost products cost services financing interest indigo march 22 2002 hp acquired substantially outstanding stock indigo previously owned hp exchange hp common stock nontransferable cvrs assumption options purchase indigo common stock acquisition strengthened hps printer offerings adding high performance digital color printing systems total consideration indigo 719 million included fair value hp common stock issued options assumed purchase hp stock well direct transaction costs cost equity investment made hp indigo october 2000 hp issued approximately 32 million shares hp common stock consolidated subsidiary hp issued approximately 53 million cvrs hp guaranteed connection transaction hp recorded approximately 499 million goodwill 153 million amortizable purchased intangible assets conjunction acquisition previous equity investment hp amortizing purchased intangible assets estimated useful lives range five eight years addition hp recorded pretax charge approximately 58 million iprd completion acquisition technological feasibility established future alternative uses existed cvrs issued conjunction acquisition entitle holder onetime contingent cash payment 450 per cvr based achievement certain cumulative revenue results threeyear period liability related cvrs recorded additional goodwill payout thresholds achieved future cash payout cvrs payable threeyear period began april 1 2002 could result maximum obligation 237 million hp incurred liability associated cvrs october 31 2003 liquidity management corporation october 31 2001 hp held 495 equity interest liquidity management corporation lmc nonstrategic investment company accounted equity method accounting third party investor held remaining 505 equity interest november 1 2001 lmc redeemed outstanding equity third party investor leaving hp sole stockholder lmc accordingly effective november 1 2001 hp included assets liabilities results operations lmc consolidated financial statements november 1 2001 assets lmc consisted primarily 879 million cash equivalents bluestone storageapps january 2001 hp acquired outstanding stock bluestone software inc bluestone exchange hp common stock bluestone options assumed purchase hp stock september 2001 hp acquired outstanding stock storageapps inc storageapps exchange hp common stock storageapps options assumed purchase hp stock total consideration bluestone 531 million total consideration storageapps 319 million included fair value hp common stock issued options assumed well direct transaction costs acquisitions recorded purchase method accounting accordingly purchase prices allocated tangible assets liabilities intangible assets acquired including iprd based estimated fair values excess purchase price fair values recorded goodwill fair values assigned intangible assets acquired based valuations prepared independent third party appraisal firm using estimates assumptions provided management hp recorded approximately 338 million goodwill identified intangible assets conjunction acquisition bluestone approximately 296 million goodwill identified intangible assets conjunction acquisition storageapps addition hp recorded pretax charge approximately 19 million iprd related bluestone 15 million iprd related storageapps time acquisitions technological feasibility established future alternative uses existed result product roadmap decisions connection acquisition compaq hp determined substantially remaining unamortized balances goodwill intangible assets associated bluestone storageapps impaired accordingly amounts included restructuring charge recorded third quarter fiscal 2002 results operations acquired companies included prospectively date acquisition pro forma results operations reflecting acquisitions intria indigo lmc bluestone storageapps presented results operations acquired companies either individually collectively material hps results operations acquisitions hp also acquired companies fiscal 2003 2002 2001 significant financial position results operations hp recorded approximately 1 million iprd related acquisitions fiscal 2003 2001 acquisitions recorded purchase method accounting completed divestitures fiscal 2001 net loss divestitures 53 million consisting 131 million loss sale verifone inc subsidiary partially offset gain 78 million sale hps remaining interest ericssonhp technology joint venture ericsson note 4 goodwill purchased intangible assets hp adopted sfas 142 effective november 1 2002 requires hp allocate goodwill various reporting units determine carrying value businesses estimate fair value reporting units twostep goodwill impairment test performed sfas 142 requires impairment testing performed initially upon adoption annually whenever events changes circumstances indicate may potential impairment hps reporting units consistent reportable segments identified note 18 first step goodwill impairment test fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing performed carrying value exceeds fair value second step must performed implied fair value reporting units goodwill must determined compared carrying value goodwill reporting unit carrying value reporting units goodwill exceeds implied fair value impairment loss equal difference recorded fair value hps reporting units determined using combination income approach market approach income approach fair value reporting unit calculated based present value estimated future cash flows market approach fair value estimated based market multiples revenue earnings comparable companies based results transitional annual impairment tests hp determined impairment goodwill existed november 1 2002 august 1 2003 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth quarter whenever events changes circumstances indicate may potential impairment addition goodwill impairment testing described hp required perform transitional annual impairment tests purchased intangible asset indefinite life compaq trade name based results transitional annual impairment tests hp determined impairment compaq trade name existed november 1 2002 august 1 2003 however future impairment tests could result charge earnings hp continue evaluate purchased intangible asset indefinite life annual basis beginning fourth quarter whenever events changes circumstances indicate may potential impairment hp also evaluated remaining useful lives finitelived purchased intangible assets determine adjustments useful lives necessary assets indefinite lives therefore subject amortization hp determined adjustments useful lives finitelived purchased intangible assets necessary finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weighted average useful lives approximately nine years developed core technology patents product trademarks weighted average useful lives approximately six years previously described note 3 hps purchased intangible assets associated completed acquisitions october 31 2003 october 31 2002 composed amortization expense related finitelived purchased intangible assets 563 million fiscal 2003 295 million fiscal 2002 13 million fiscal 2001 estimated future amortization expense related purchased intangible assets october 31 2003 follows goodwill allocated hps reportable segments october 31 2002 changes carrying amount goodwill year ended october 31 2003 follows goodwill adjustment relates following reversal 263 million valuation allowance previously provided deferred tax asset related preacquisition compaq us capital loss carryforward realization previously uncertain revisions 104 million acquisitionrelated tax estimates resulted addition goodwill reduction restructuring liability 120 million associated fiscal 2002 2001 preacquisition compaq restructuring plans reduction restructuring liability adjusted original estimates actual costs incurred various locations throughout world provisions sfas 142 effect periods presented hps net earnings loss net earnings loss per share would follows years ended october 31 2003 2002 2001 note 5 restructuring charges fiscal 2003 restructuring plans second third fourth quarters fiscal 2003 hps management approved implemented plans restructure certain operations actions included workforce reductions associated managing hps cost structure better align current business conditions second quarter action also included asset impairments associated identification duplicative assets facilities leased owned relating acquisition compaq 800 million charge recorded fiscal 2003 composed following 175 million charge fourth quarter action 342 million charge third quarter action 235 million charge second quarter action 48 million adjustment fiscal year 2002 actions discussed detail total cost hp expects incur fourth quarter action approximately 188 million hp recorded approximately 175 million amount hp recorded fourth quarter action 162 million charge associated severance early retirement employee benefits related termination early retirement approximately 2000 employees worldwide across many regions job classes including 10 million noncash charges october 31 2003 approximately 600 employees terminated placed workforce reduction program retired hp made payments relating terminations totaling approximately 20 million hp expects pay majority remaining 132 million relating severance employee benefits end fiscal 2004 fourth quarter action also included restructuring charges 13 million remaining costs approximately 13 million associated primarily cost vacating duplicative facilities leased owned contract termination costs hp anticipates substantially settled end fiscal 2004 hp record liability october 31 2003 associated remaining costs components meet recognition criteria sfas 146 hp recorded restructuring charge approximately 342 million connection third quarter restructuring plan charge third quarter action associated severance early retirement employee benefits related termination early retirement approximately 4700 employees worldwide across many regions job classes including 11 million noncash charges october 31 2003 approximately 4100 employees terminated placed workforce reduction program retired hp made payments relating terminations totaling approximately 232 million hp expects pay majority remaining 99 million relating severance employee benefits end fiscal 2004 total cost hp expects incur second quarter action approximately 268 million hp recorded approximately 235 million amount 135 million associated severance employee benefits related termination approximately 2300 employees worldwide across many regions job classes hp services terminated placed workforce reduction program period plan approved payments severance employee benefits approximately 127 million made october 31 2003 hp also recorded approximately 100 million charges associated asset impairments costs vacating duplicative facilities leased owned contract termination costs primarily personal systems group enterprise systems group remaining costs approximately 33 million associated primarily cost vacating duplicative facilities leased owned contract termination costs hp anticipates substantially settled end fiscal 2004 hp record liability october 31 2003 associated remaining costs components meet recognition criteria sfas 146 total amount costs expected incurred associated fiscal year 2003 actions operating segment follows total amount costs incurred date associated fiscal year 2003 actions operating segment follows prior years restructuring plans fiscal 2002 hps management initiated approved plans restructure operations preacquisition hp preacquisition compaq organizations consequently hp recorded approximately 18 billion costs associated exiting activities preacquisition hp severance early retirement employee benefits costs vacating duplicative facilities leased owned contract termination costs asset impairment charges costs associated exiting activities hp asset impairments result primarily writeoff goodwill purchased intangible assets associated product roadmap decisions made connection compaq acquisition led elimination substantially middleware storage virtualization offerings acquired fiscal 2001 hp accounted cost restructure preacquisition organization eitf issue 943 liability recognition certain employee termination benefits costs exit activity included costs charge results operations year ended october 31 2002 hp recorded approximately 960 million similar restructuring costs connection restructuring preacquisition compaq organization hp accounted costs restructure preacquisition compaq eitf issue 953 recognition liabilities connection purchase business combinations hp recognized costs liability assumed purchase business combination included allocation cost acquire compaq severance early retirement costs employee benefits related termination planned early retirement 17600 employees worldwide across many regions business functions job classes october 31 2003 approximately 17500 employees included workforce reduction program terminated retired hp made payments related workforce reduction program approximately 12 billion hp paid pay benefits approximately 215 million postretirement pension plans retiring employees hp expects pay majority remaining balance severance accrual end fiscal 2004 related restructuring activities consist primarily contractual obligations facility leases anticipated paid life related obligation hp expects obligations substantially settled end fiscal 2005 fiscal 2003 hp recorded 48 million additional costs net reductions estimated severance costs employee benefits asset impairments restructuring costs related preacquisition hp plan initially recorded fiscal 2002 charge results operations charges consisted following year ended october 31 2003 asset impairment adjustments related mainly buildings vacated result acquisition net addition employee severance employee benefits related primarily voluntary severance actions met criteria accrual third quarter fiscal 2003 well adjustments original estimates actual costs incurred various locations throughout world hp adjusted charges related restructuring activities original estimates lease contract termination costs adjusted actual costs incurred remaining balance fiscal 2002 plans consists severance employee benefits well restructuring activities fiscal 2001 hps management approved restructuring actions respond global economic downturn improve hps cost structure streamlining operations prioritizing resources strategic areas hps business infrastructure hp recorded restructuring charge 384 million fiscal 2001 reflect actions fiscal 2001 charge consisted severance employee benefits related termination approximately 7500 employees worldwide across many regions business functions job classes well costs related consolidation excess facilities hp recorded additional restructuring charges 18 million fiscal 2002 reflect adjustments expected severance cost fiscal 2001 restructuring plans substantially employees terminated substantially accrued costs related severance related employee benefits paid additionally part acquisition compaq hp acquired remaining obligations compaqs existing restructuring plans 259 million initially recorded compaqs 2001 fiscal year october 31 2003 hp paid 115 million related acquired compaq plans remaining balance fiscal 2001 plans consist primarily restructuring costs well severance employee benefits associated preacquisition compaq plan hp expects settle majority remaining balance severance accrual end fiscal 2004 related restructuring activities consist primarily contractual obligations facility leases anticipated paid life related obligations substantially settled end fiscal 2005 fourth quarter fiscal 2003 hp reduced liability associated fiscal 2002 2001 preacquisition compaq restructuring plans reducing goodwill recorded connection acquisition 94 million fiscal 2002 restructuring plan 26 million fiscal 2001 restructuring plan reductions primarily estimated severance costs employee benefits adjusted original estimates actual costs incurred various locations throughout world summary restructuring plans activity accrued restructuring balances related plans described follows fiscal 2003 october 31 2003 2002 hp included longterm portion restructuring liability 98 million 138 million respectively liabilities accompanying consolidated balance sheet note 6 balance sheet details balance sheet details follows october 31 2003 2002 inventory current assets property plant equipment depreciation expense 20 billion fiscal 2003 17 billion fiscal 2002 12 billion fiscal 2001 longterm financing receivables assets accrued liabilities note 7 financial instruments investments debt equity securities investments heldtomaturity availableforsale debt equity securities follows october 31 2003 2002 debt securities consist primarily collateralized notes banks corporate debt securities hp estimated fair values based quoted market prices pricing models using current market rates estimated fair values may representative actual values financial instruments could realized yearend realized future connection adoption sfas 133 november 1 2000 hp elected reclassify investments debt securities net book value 967 million heldtomaturity availableforsale unrealized loss securities net taxes 5 million time reclassification recorded accumulated comprehensive income part cumulative effect adopting sfas 133 may 2003 hp sold investment debt security net book value 65 million classified heldtomaturity security proceeds sale used operating purposes book value debt security approximated market value date sale realized loss associated sale immaterial result transaction hp transferred investments heldtomaturity securities availableforsale securities unrealized holding gain loss recognized accumulated comprehensive income separate component shareholders equity contractual maturities availableforsale debt securities october 31 2003 follows proceeds sales availableforsale securities 588 million fiscal 2003 90 million fiscal 2002 17 million fiscal 2001 gross realized gains losses totaled 36 million 8 million respectively fiscal 2003 gross realized losses totaled 2 million fiscal 2002 gross realized gains totaled 16 million fiscal 2001 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity follows october 31 2003 2002 derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments including forwards swaps options hedge certain foreign currency interest rate exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge respectively thereby reducing volatility earnings protecting fair values assets liabilities hp use derivative contracts speculative purposes hp applies hedge accounting based upon criteria established sfas 133 whereby hp designates derivatives fair value hedges cash flow hedges net investment hedges fair value hedges hp enters fair value hedges reduce exposure debt investment portfolios interest rate risk foreign currency exchange rate risk hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp typically uses interest rate swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payment obligations underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed debt floating rate may terminate previously executed swap fixed rate positions provide beneficial relationship assets liabilities similarly hp may choose hedge foreign currency risk associated foreign currencydenominated debt acts natural foreign currency hedge assets denominated currency order hedge fair value certain fixedrate investments hp may periodically enter interest rate swaps convert fixed interest returns variable interest returns derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item earnings current period september 2002 hp sold interest rate swap associated debt portfolio response movements interest rate market transaction resulted premium adjustment 185 million corresponding debt september 2002 amortized interest expense remaining life debt fiscal 2003 hps premium discount adjustment debt portfolio associated interest rate swap terminations material cash flow hedges hp uses cash flow hedges hedge variability liborbased interest income received certain variablerate investments hp enters interest rate swaps convert variable rate interest returns fixedrate interest returns interest rate swaps designated qualify cash flow hedges changes fair values recorded accumulated comprehensive income separate component stockholders equity subsequently reclassified earnings period hedged transaction recognized earnings hp uses combination forwards options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted revenue lesser extent cost sales denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six months however certain leasing revenuerelated forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portions gain loss derivative instrument accumulated comprehensive income separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports ineffective portion gain loss income expense immediately hp reports effective portion cash flow hedges financial statement line item changes value hedged item net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument cumulative translation adjustment separate component stockholders equity net gain loss net investment hedges included cumulative translation adjustment material years ended october 31 2003 2002 hp reports effective portion net investment hedges financial statement line item changes value hedged item hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt investment change fair value derivative interest rate swaps designated cash flow hedges hp measures hedging effectiveness offsetting change variable leg interest rate swaps changes expected interest income received due fluctuations libor based interest rate foreign currency option forward contracts designated cash flow net investment hedges hp measures hedge effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates ineffective portion hedge well amounts included assessment effectiveness recognized interest net october 31 2003 portion hedging instruments gains losses excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material years ended october 31 2003 2002 2001 october 31 2003 amounts related derivatives qualifying cash flow hedges amounted reduction equity 87 million net tax 71 million expected transferred earnings next 12 months along earnings effects related forecasted transactions addition fiscal 2003 2002 hp discontinue cash flow hedges probable forecasted transaction would occur derivatives designated hedging instruments sfas 133 consist primarily forwards used hedge foreign currency balance sheet exposures warrants companies invested part strategic relationships derivative instruments designated hedging instruments sfas 133 hp recognizes changes fair values earnings period change hp recognizes gains losses foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities thus naturally offsets gains losses hp recognized net foreign currency exchange losses 125 million fiscal 2003 165 million fiscal 2002 72 million fiscal 2001 related primarily forward points hedging contracts hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value fair market value derivative financial instruments respective sfas 133 classification consolidated balance sheet follows october 31 2003 2002 fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps short longterm debt 78 billion october 31 2003 compared carrying value 76 billion estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 8 financing receivables operating leases financing receivables represent salestype directfinancing operating leases resulting marketing hps complementary thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets components net financing receivables included financing receivables longterm financing receivables assets follows october 31 2003 2002 scheduled maturities hps minimum lease payments receivable october 31 2003 minimum future rentals noncancelable operating leases follows 1actual cash collections may differ due primarily customer early buyouts refinancings equipment leased customers operating leases 21 billion october 31 2003 18 billion october 31 2002 included machinery equipment accumulated depreciation equipment lease 12 billion october 31 2003 782 million october 31 2002 note 9 guarantees november 2002 fasb issued fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 elaborates existing disclosure requirements thirdparty guarantees including loan guarantees standby letters credit also clarifies time company issues guarantee company must recognize initial liability fair value market value obligations assumes guarantee must disclose information interim annual financial statements provisions related recognizing liability inception guarantee fair value guarantors obligations apply product warranties guarantees accounted derivatives initial recognition initial measurement provisions apply prospective basis guarantees issued modified december 31 2002 adoption fin 45 material impact hps results operations financial condition additionally material impacts hps results operations financial condition result guarantees issued subsequent adoption fin 45 indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates material usage service delivery costs differ estimates revisions estimated warranty liability would required information regarding changes hps aggregate product warranty liabilities follows year ended october 31 2003 deferred revenue hp also offers fixedprice support maintenance contracts including extended warranties customers change deferred revenue associated primarily support maintenance similar service contracts shown table year ended october 31 2003 hp separated extended service revenues routine maintenance service revenues practical note 10 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt related average interest rates amounts remaining available future borrowings follows october 31 2003 2002 hp established 40 billion us commercial paper program december 2000 hewlettpackard international bank plc whollyowned subsidiary hp established 500 million euro commercial papercertificate deposit programme may 2001 notes payable banks lines credit include deposits primarily banks 192 million 369 million october 31 2003 2002 respectively result compaq acquisition associated credit rating changes satisfaction specified conditions hps debt 250 million due ccf charterhouse hsbcccf became repayable hp paid debt september 29 2003 hp also maintains various foreign subsidiaries lines credit number financial institutions hp established 17 billion 364day senior unsecured committed borrowing facility march 2003 13 billion threeyear credit facility march 2002 together credit facilities interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities generally available support issuance commercial paper corporate purposes longterm debt book value longterm debt related maturities interest rates amounts registered unissued applicable registration statement available future borrowings euro mediumterm note programme case shown amount available column follows october 31 2003 2002 hp registered sale 30 billion debt global securities global notes common stock preferred stock depositary shares warrants shelf registration statement declared effective march 2002 shelf registration statement december 2002 hp filed supplement 2002 shelf registration statement allows hp offer time 15 billion mediumterm notes series b due nine months date issuance series b mediumterm note program hp may redeem global notes set forth table series b mediumterm notes issued 2002 shelf registration statement time redemption prices described prospectus supplements relating thereto october 31 2003 hp issued mediumterm notes pursuant series b mediumterm note program hp also registered sale 30 billion debt global securities common stock preferred stock depositary shares warrants shelf registration statement declared effective march 2000 shelf registration statement may 2001 hp filed supplement 2000 shelf registration statement allowed hp offer time 15 billion mediumterm notes series due nine months date issuance series mediumterm note program hp may redeem global notes series mediumterm notes issued 2000 shelf registration statement set forth table time redemption prices described prospectus supplements relating thereto hp issue additional securities 2000 shelf registration statement hp registered sale 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange offered notes set forth table hp denominate notes currency including euro however notes registered united states hp may redeem euro mediumterm notes time redemption prices described prospectus supplements relating thereto may 2002 connection hps acquisition compaq hp consolidated outstanding debt compaq financial position hp subsequently assumed debt longterm portion debt aggregate fair value approximately 1 billion acquisition date amounts outstanding set forth table 1997 hp issued 20 billion face value zerocoupon subordinated convertible notes due 2017 lyons convertible holders adjusted rate 1509 shares hp common stock 1000 face value lyons payable either cash common stock hps election time hp may redeem lyons book value payable cash december 2000 board directors authorized repurchase program lyons allowed hp repurchase lyons time varying prices fiscal 2002 hp repurchased 257 million face value lyons book value 158 million aggregate purchase price 127 million resulting gain early extinguishment debt 31 million hp included losses investments net period hp repurchase lyons fiscal 2003 expect make repurchases aggregate future maturities face value longterm debt outstanding october 31 2003 excluding fair value adjustment related sfas 133 166 million discounts debt issuances totaling 184 million follows 1actual cash payments may differ scheduled maturities hp occasionally repurchases debt prior maturity based assessment current market conditions financing alternatives interest expense borrowings 277 million fiscal 2003 212 million fiscal 2002 260 million fiscal 2001 note 11 taxes earnings provision benefit taxes earnings continuing operations cumulative effect change accounting principle taxes follows years ended october 31 2003 2002 2001 significant components deferred tax assets deferred tax liabilities follows october 31 2003 2002 hp recorded gross deferred tax assets 44 billion gross deferred tax liabilities 23 billion upon acquisition compaq fiscal year ended october 31 2002 gross deferred tax assets composed primarily loss tax credit carryforwards capitalized research development costs temporary differences gross deferred tax liabilities composed primarily provisions made foreign earnings intended indefinitely reinvested timing differences related purchased intangible assets gross deferred tax assets recorded reduced valuation allowance 774 million october 31 2003 hp deferred tax asset 416 million relating foreign net operating loss carryforwards large portion foreign net operating loss carryforwards expiration date hp provided full valuation allowance portion foreign net operating losses expire 2004 2012 foreign tax credit carryforwards approximately 351 million expire 2006 remaining 221 million expire 2007 alternative minimum tax credit carryforwards approximately 439 million unlimited carryforward period 230 million general business credit carryforwards approximately 207 million expire 2019 2023 carryforwards expire october 31 year indicated gross deferred tax assets october 31 2003 2002 reduced valuation allowances 400 million 877 million october 31 2003 hps valuation allowance composed primarily 228 million foreign net operating loss carryforwards 92 million unrealized capital losses decrease valuation allowance october 31 2002 october 31 2003 attributed primarily reduction 263 million related preacquisition compaq us capital loss carryforward recorded reduction goodwill release 131 million valuation allowance capital loss carryforwards resulting tax benefit addition 164 million valuation allowances due foreign losses 400 million valuation allowances october 31 2003 152 million related certain compaq deferred tax assets existing time acquisition future determine realization deferred tax assets likely reversal related valuation allowance reduce goodwill instead provision taxes tax benefits 24 million fiscal 2003 21 million fiscal 2002 16 million fiscal 2001 associated exercise employee stock options employee stock programs allocated stockholders equity differences us federal statutory income tax rate benefit hps effective tax rate benefit follows years ended october 31 2003 2002 2001 domestic foreign components earnings losses cumulative effect change accounting principle taxes follows years ended october 31 2003 2002 2001 hp provided us federal income foreign withholding taxes 144 billion undistributed earnings nonus puerto rican operations october 31 2003 earnings intended reinvested indefinitely outside united states earnings distributed foreign tax credits may become available current law reduce eliminate resulting us income tax liability excess cash accumulated hps nonus subsidiaries advantageous business operations tax cash reasons subsidiary earnings remitted result certain employment actions capital investments undertaken hp income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes years 2013 income tax benefits attributable tax status subsidiaries estimated 705 million 023 per share fiscal 2003 389 million 016 per share fiscal 2002 457 million 024 per share fiscal 2001 internal revenue service irs completed examination income tax returns hp years 1995 compaq years 1997 october 31 2003 irs process examining hps income tax returns years 1996 2001 compaqs tax returns years 1998 2002 hp believes adequate accruals hp compaq provided years note 12 stockholders equity authorized common stock hps certificate incorporation authorizes 96 billion shares common stock authorized preferred stock hp 300000000 authorized shares preferred stock shares outstanding dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per share fiscal 2003 2002 2001 employee stock purchase plan hp implemented hewlettpackard company 2000 employee stock purchase plan espp adopted hps board directors approved stockholders espp noncompensatory plan qualifies section 423 internal revenue code 1986 amended espp regular fulltime parttime employee may contribute 10 base compensation subject certain income limits semiannual purchase shares hps common stock purchase price 85 fair market value certain plandefined dates october 31 2003 approximately 127000 employees eligible participate approximately 61000 employees participants espp fiscal 2003 employee participants purchased 23884000 shares hp common stock espp weightedaverage price 14 per share fiscal 2002 employee participants purchased 18536000 shares hp common stock espp weightedaverage price 14 per share fiscal 2001 employee participants purchased 5868000 shares hp common stock espp weightedaverage price 24 per share october 31 2000 employees longer permitted make contributions hewlettpackard company employee stock purchase plan legacy espp legacy espp eligible employees could generally contribute 10 base compensation quarterly purchase shares hps common stock employee contributions purchase shares partially matched shares contributed hp generally vested two years october 31 2003 remaining unvested shares hp contributed employees 615000 matching shares weightedaverage price 47 fiscal 2001 related shares purchased employees last quarterly purchase period fiscal 2000 compensation expense recognized legacy espp plan 29 million fiscal 2002 74 million fiscal 2001 incentive compensation plans hp stock option plans including principal plans adopted 2000 1995 1990 well various stock option plans assumed acquisitions stock options outstanding principal plans adopted 2000 1995 1990 permit options granted qualify incentive stock options us internal revenue code exercise price stock option generally equal fair market value hps common stock date option granted term options granted fiscal 2003 generally eight years options granted prior fiscal 2003 generally tenyear term 2000 stock plan 1990 1995 incentive stock plans hr compensation committee board directors certain cases may choose establish discounted exercise price less 75 fair market value grant date hp grant discounted options fiscal 2003 hp granted discounted options purchase 679000 shares fiscal 2002 4177000 shares fiscal 2001 options generally vest rate 25 per year period four years date grant exception discounted options discounted options generally may exercised third fifth anniversary option grant date time options become fully vested cost discounted options determined difference exercise price option fair market value hps common stock date option grant expensed ratably option vesting period option activity follows years ended october 31 2003 2002 2001 information options outstanding follows october 31 2003 2000 stock plan 1990 1995 incentive stock plans certain employees granted cash restricted stock awards cash restricted stock awards independent option grants subject restrictions considered appropriate hr compensation committee majority shares restricted stock outstanding october 31 2003 subject forfeiture employment terminates prior three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding cost awards determined fair market value shares date grant expensed ratably period restrictions lapse hp 1008000 shares restricted stock outstanding october 31 2003 1370000 shares restricted stock outstanding october 31 2002 2501000 shares outstanding october 31 2001 shares available option espp restricted stock grants 168951000 october 31 2003 including 42967000 shares assumed compaq plans 248557000 october 31 2002 including 54216000 shares assumed compaq plans 283080000 october 31 2001 regular employees considered eligible receive stock options fiscal 2003 approximately 133000 employees holding options one option plans october 31 2003 compensation expense recognized incentive compensation plans 45 million fiscal 2003 84 million fiscal 2002 90 million fiscal 2001 shares reserved hp 670929000 shares common stock reserved october 31 2003 713477000 shares reserved october 31 2002 future issuance employee benefit plans employee stock plans additionally hp 21494000 shares reserved october 31 2003 2002 future issuances related conversions zerocoupon subordinated notes stock repurchase program hp repurchases shares common stock systematic program manage dilution created shares issued employee stock plans purposes program authorizes purchases open market private transactions fiscal 2003 39780000 shares repurchased aggregate price 751 million fiscal 2002 39623000 shares repurchased aggregate price 671 million fiscal 2001 45036000 shares repurchased aggregate price 12 billion september 2003 board directors hp authorized additional 10 billion future repurchases outstanding shares common stock october 31 2003 hp authorization remaining future repurchases approximately 12 billion note 13 comprehensive income loss changes components comprehensive income loss net taxes follows years ended october 31 2003 2002 2001 components accumulated comprehensive loss net taxes follows october 31 2003 2002 note 14 supplemental cash flow information supplemental cash flow information follows years ended october 31 2003 2002 2001 note 15 retirement postretirement benefit plans general substantially hps employees covered various defined benefit defined contribution pension plans addition hp sponsors medical life insurance plans provide benefits retired us employees worldwide pension postretirement costs including defined benefit defined contribution postretirement plans 12 billion fiscal 2003 10 billion fiscal 2002 392 million fiscal 2001 included worldwide pension postretirement costs restructuring charges consisting net curtailment gains losses net settlement gains losses special termination benefits 10 million fiscal 2003 319 million fiscal 2002 38 million fiscal 2001 see note 5 acquisition compaq may 3 2002 acquisition date compaq hp assumed responsibility pension postretirement benefits current former preacquisition compaq employees qualified existing pension postretirement plans compaq pension plan defined benefit pension plans hp sponsors number defined benefit plans worldwide significant united states benefits defined benefit pension plans generally based pay years service hp also sponsors defined benefit plans benefits accrue pursuant cash accumulation account formula based upon percentage pay plus interest preacquisition compaq employees united states december 31 2002 permitted participate hp retirement plan retirement plan defined benefit pension plan computes benefits based pay years service subject eligibility requirements retirement plan hp grant prior service credit employees joined retirement plan coinciding date retirement plan closed employees hired rehired hp subsequent december 31 2002 eligible service us employees october 31 2003 benefit payable retirement plan reduced amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp closed new participants october 31 1993 effective january 1 2003 former frozen compaq defined benefit pension plan computes benefits based cash accumulation account formula opened provide pension benefits employees hired rehired hp january 1 2003 employees hired prior january 1 2003 formerly worked digital equipment corporation may also benefit plan eligible ongoing cash balance pay credits combined status us defined benefit pension plans dpsp follows october 31 2003 2002 fiscal 2003 global capital market performance improved hp increased contributions pension trusts result hp reduced additional minimum pension liability 308 million 211 million tax postretirement benefit plans addition providing pension benefits hp sponsors postretirement benefit plans providing medical life insurance benefits retired employees substantially hps us employees december 31 2002 could become eligible benefits existing benefit obligation relates primarily employees participating medical plan retirees may choose managedcare indemnity options contributions dependent options chosen length service employees hired rehired january 1 2003 may eligible participate postretirement medical plan must bear full cost particpation defined contribution plans hp offers defined contribution plans around world significant plans us 401k plan us employees may participate hp 401k plan formerly known tax saving capital accumulation plan established supplemental retirement program beginning february 1 1998 enrollment hp 401k plan automatic employees meet eligibility requirements unless decline participation effective may 3 2002 hp assumed sponsorship compaq computer corporation 401k investment plan compaq 401k plan beginning january 1 2003 maximum contribution hp 401k plan compaq 401k plan 50 employees annual eligible compensation subject certain irs limitations starting july 15 2003 plans accepted additional pretax catchup contributions 25 eligible pay subject certain irs limitations employees age 50 older hp 401k plan hp matches contributions employees maximum 4 employees annual compensation upon assumption compaq 401k plan hp matched employee contributions plan maximum 6 employees annual compensation effective january 1 2003 compaq 401k plan hp matched contributions employees maximum 4 employees annual compensation align plan hp 401k plan pretax catchup contributions eligible hp matching contributions portion matching contribution may made form hp common stock extent employee elects hp stock investment option either plan hp 401k plan compaq 401k plan combined single plan effective january 1 2004 hps expense related 401k programs 201 million fiscal 2003 176 million fiscal 2002 119 million fiscal 2001 components net pension postretirement benefit costs hps net pension postretirement benefit costs follows years ended october 31 2003 2002 2001 funded status defined benefit postretirement benefit plans follows october 31 2003 2002 net amount recognized hps defined benefit postretirement benefit plans follows october 31 2003 2002 defined benefit plans projected benefit obligations exceeding fair value plan assets follows october 31 2003 2002 defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows october 31 2003 2002 plan assets consist primarily listed stocks bonds hps funding policy contribute cash pension plans minimum contribution requirements established local government funding taxing authorities met assumptions hp used following assumptions calculated based weighted averages measure benefit obligations compute expected longterm return assets hps defined benefit postretirement benefit plans years ended october 31 2003 2002 2001 hp amortizes unrecognized gainslosses using straight line method remaining estimated service life rate increase medical costs assumed decrease gradually 2010 remain level thereafter based actuarial projections plan provisions sharing expenses employees assumed health care cost trend rates could significant effect amounts reported postretirement health care plans 10 percentage point increase assumed health care cost trend rates would increased total service interest cost components reported fiscal 2003 38 million would increased postretirement benefit obligation reported fiscal 2003 222 million 10 percentage point decrease assumed health care cost trend rates would decreased total service interest cost components reported fiscal 2003 30 million would decreased postretirement obligation reported fiscal 2003 181 million note 16 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include escalation clauses rent expense 703 million fiscal 2003 566 million fiscal 2002 374 million fiscal 2001 sublease rental income 46 million fiscal 2003 17 million fiscal 2002 20 million fiscal 2001 future annual minimum lease payments sublease rental income commitments october 31 2003 follows note 17 litigation contingencies pending litigation proceedings stevens v hp renamed erickson v hp unfair business practices consumer class action filed superior court california riverside county july 31 2000 consumer class action lawsuits filed coordination original plaintiffs 32 additional states various plaintiffs throughout country claim purchased different models hp inkjet printers past four years basic factual allegation actions affected consumers purchased hp printers received halffull economy ink cartridges instead full cartridges plaintiffs claim hps advertising packaging marketing representations printers led consumers believe would receive full cartridges actions seek injunctive relief disgorgement profits compensatory damages punitive damages attorneys fees various state unfair business practices statutes common law claims fraud negligent misrepresentation initial california matter court granted summary judgment hps favor denied class certification october 2003 california appellate court affirmed lower courts decisions dismissed plaintiffs appeal matter certified class action however north carolina state court filed hughes v hewlettpackard company hp prevailed trial case concluded september 2003 plaintiffs seeking new trial sanctions matter litigation trial jurisdictions dismissed five jurisdictions thus far alvis v hp nationwide defective product consumer class action filed state court jefferson county texas resident eastern texas april 2001 february 2000 similar suit captioned lapray v compaq filed state court jefferson county texas basic allegation hp compaq sold computers containing floppy disk controllers fail alert user certain floppy disk controller errors failure alleged result data loss data corruption plaintiffs alvis lapray seek injunctive relief declaratory relief damages attorneys fees july 2001 nationwide class certified lapray case beaumont court appeals affirmed june 2002 compaq filed petition review texas supreme court june 2003 texas supreme court agreed review certification class heard oral arguments october 15 2003 class certification hearing held july 1 2003 alvis case court granted plaintiffs motion certify nationwide class action hp filed appeal certification 9th court appeals beaumont texas june 4 2003 barrett v hp grider v compaq filed state court cleveland county oklahoma factual allegations similar alvis lapray respectively plaintiffs barrett grider seek among things specific performance declaratory relief damages attorneys fees parties conducting discovery barrett november 5 2003 court heard hps motion dismiss barrett v hp grider v compaq motion subsequently denied december 22 2003 court entered order staying barrett grider cases conclusions alvis lapray actions addition civil division department justice general services administration office inspector general federal agencies conducting investigation allegations hp compaq made caused made false claims payment united states computers known hp compaq contain defective parts otherwise perform defective manner relating alleged floppy disk controller errors hp executed agreement department justice tolling statue limitations investigation march 1 2004 hp also continues provide information state attorneys general california illinois response similar inquiries hp cooperating fully inquiries december 27 2001 cornell university cornell research foundation inc filed action hp united states district court northern district new york alleging hps parisc 8000 family microprocessors infringes cornell patent describes way executing microprocessor instructions action seeks declaratory injunctive relief court held hearing construe disputed claims terms cornells patent april 2003 although order since issued trial expected begin late 2004 digwamaje et al v bank america et al purported class action lawsuit names hp numerous multinational corporations defendants filed september 27 2002 united states district court southern district new york behalf current former south african citizens survivors suffered violence oppression apartheid regime lawsuit alleges hp companies helped perpetuate profited apartheid regime period 19481994 selling products services agencies south african government claims based alien tort claims act torture protection act racketeer influenced corrupt organizations act state law complaint seeks among things accounting creation historic commission compensatory damages excess 200 billion punitive damages excess 200 billion costs attorneys fees hp filed motion dismiss action heard november 6 2003 court yet issued decision intergraph hardware technologies company v hp dell gateway suit filed united states district court eastern district texas december 16 2002 suit accuses hp infringement three patents related cache memory 4899275 4933835 5091846 intergraph hardware technologies company intergraph seeks damages including enhanced damages injunction prejudgment interest costs attorneys fees complaint served hp april 1 2003 may 21 2003 hp answered counterclaimed declaratory judgment patents infringed hp patents invalid unenforceable intergraph obtained significant settlements defendants relating similar causes action claim construction hearing scheduled march 12 2004 fact discovery except willfullness scheduled close april 21 2004 jury selection scheduled begin august 2 2004 discovery ongoing may 28 2003 hp sued intergraph corporation parent intergraph united states district court northern district california san francisco division accusing intergraph corporation infringement following hp patents related computer aided design 5297541 4549499 6105028 4635208 september 6 2003 court dismissed hps original complaint leave amend hp subsequently amended complaint claim construction hearing scheduled july 9 2004 trial expected early 2005 december 9 2003 intergraph filed motion transfer matter alabama hp seeks damages injunction prejudgment interest costs attorneys fees initial proceedings pursued hp certain european union eu member countries seeking impose levies upon equipment printers dvd writers multifunction devices alleging devices enable producing private copies copyrighted materials two nonbinding arbitration proceedings instituted june 2001 june 2002 respectively brought germany arbitration board patent trademark office verwertungsgesellschaft wort collection agency representing certain copyright holders brought proceedings hp relate whether extent copyright levies imposed accordance copyright laws implemented germany relating multifunction devices printers allegedly enable production copies private persons nonbinding proposal presented proceeding relating multifunction devices rejected hp matter still pending april 1998 auvibel scrl belgian collection agency filed appeal judgment hps favor court appeal brussels relating dispute whether extent copyright levies imposed upon cdwriters cd media case removed courts list pending cases without prejudice parties right reinstate matter april 2001 organization collective management works literature organization collective management works plastic arts applications organization collective management protection intellectual property photographers brought five proceedings hp hellas compaq computer epe greece relating whether levy 2 payable upon computer products including central processing units monitors keyboards mice diskettes printers scanners related items accordance greek copyright law amendment september 2002 proceedings pending court first instance athens court appeal athens levies imposed would based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposing extension levies digital environment advocating compensation rights holders digital rights management systems hp v emc corporation emc suit filed united states district court northern district california september 30 2002 hp accuses emc infringing seven hp patents hp seeks permanent injunction well unspecified monetary damages patent infringement july 21 2003 emc filed answer crossclaim asserting among things numerous hp storage printer products infringe six emc patents hearing construe disputed claims terms patents scheduled april 5 2004 discovery ongoing emc seeks permanent injunction well unspecified monetary damages patent infringement april 2002 emc filed unfair trade practice proceeding hitachi data systems united states international trade commission also filed parallel infringement lawsuit hitachi data systems united states district court worcester massachusetts alleging infringement six emc patents emc filed suit hp united states district court worcester massachusetts september 30 2002 alleging certain hp storage products built hardware sourced hitachi data systems corporation parent hitachi ltd together hitachi infringed six patents emc asserting hitachi suit sought permanent injunction well unspecified monetary damages patent infringement june 20 2003 emc hitachi entered global settlement agreement release crosslicense parties filed joint motion dismiss suit without prejudice emc also filed suit storageapps company acquired hp fiscal 2001 united states district court worcester massachusetts october 20 2000 suit accused storageapps infringement five emc patents relating storage devices sought permanent injunction well unspecified monetary damages patent infringement june 20 2003 emc filed amended complaint omitted two five patents originally asserted july 21 2003 hp filed motion partial summary judgment noninfringement two omitted patents october 24 2003 court denied hps motion partial summary judgment holding emcs conditional covenant sue made issue validity two patents moot court held hearing construe disputed claims terms emcs three remaining patents suit july 2122 2003 issued claim construction ruling september 12 2003 discovery ongoing trial scheduled begin may 3 2004 neubauer et al v intel corporation hewlettpackard company et al neubauer et al v compaq computer corporation separate lawsuits filed june 3 2002 state court madison county illinois alleging hp compaq along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel plaintiffs claim lawsuit treated nationwide class action plaintiffs seek unspecified damages restitution attorneys fees costs class action certification hearing scheduled april 29 hp case hearing scheduled compaq case although case set trial october 4 2004 motions dismiss cases filed hp compaq action denied court hp compaq also filed forum non conveniens motions pending may 2002 european commission eu publicly stated considering conducting investigation oem activities concerning sales printers supplies consumers within eu european commission contacted hp requesting information printing systems businesses hp cooperating fully inquiry government canada conducting cost audits certain contracts public works government services canada compaq canada corp hewlettpackard canada co relating services provided canadian department national defence compaq canada corp combined hewlettpackard canada co following acquisition compaq hp cost audits began following notice government canada dated august 1 2003 government canada indicated believes may overcharged contracts may received value certain items billed contracts requested supporting documentation certain invoices submitted hp connection audit pending completion audit government canada declined pay outstanding receivables contracts time hp cooperating fully audit conducted inquiry contracts march 2003 korea fair trade commission commenced investigation korean printing supplies market commission contacted hp requesting information printing systems business hearing may held early 2004 hp cooperating fully inquiry hp involved lawsuits claims investigations proceedings including identified consisting patent commercial securities employment environmental matters arise ordinary course business accordance sfas 5 accounting contingencies hp makes provision liability probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impacts negotiations settlements rulings advice legal counsel information events pertaining particular case litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies environmental hp party otherwise involved proceedings brought united states state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies policy apply strict standards environmental protection sites inside outside united states even subject regulations imposed local governments liability environmental remediation environmental costs accrued considered probable costs reasonably estimated historically environmental costs material operations financial position litigation settlement june 4 2001 hp pitney bowes inc pitney bowes announced entered agreements resolved pending patent litigation parties without admission infringement connection therewith hp paid pitney bowes 400 million june 7 2001 addition companies entered technology licensing agreement expect pursue business commercial relationships litigation related pitney bowes claims hp laserjet printers infringed pitney bowes character edge smoothing patent hps claims pitney bowes copiers fax machines document management software postal metering machine infringed hps patents note 18 segment information description segments hp leading global provider information technology products solutions services consumers businesses hps offerings span infrastructure personal computing access devices global services imaging printing october 31 2003 hp organized operations six business segments imaging printing group personal systems group enterprise systems group hp services hp financial services corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology delivery channels business segments disclosed form 10k based organizational structure information reviewed hps management evaluate associated business group results first quarter fiscal 2003 hp reorganized minor product crossfunctional organizations reclassified aggregated operating results functions previous business segments new corporate investments segment financial data years ended october 31 2002 2001 restated reflect organizational change changes organizational structure may result changes reportable segments disclosed description types products services provided reportable segment follows •imaging printing group provides home business imaging printing publishing devices systems digital imaging products printer supplies consulting services home business imaging printing publishing devices systems include color monochrome printers shared personal use multifunction laser allinone inkjet devices personal color copiers faxes wide largeformat inkjet printers digital presses digital imaging products include scanners photosmart printers digital photography products printer supplies include laser inkjet printer cartridges related printing media consulting services provided customers optimize use printing imaging assets •personal systems group provides commercial pcs consumer pcs workstations range handheld computing devices digital entertainment systems calculators related accessories software services commercial consumer markets commercial pcs include hp epc compaq evo desktop series evo notebook pcs well compaq tablet pc consumer pcs include hp pavilion compaq presario series multimedia consumer desktop pcs notebook pcs well hp media center pc workstations provided unix® windows® linuxbased systems handheld computing devices include ipaq series products run pocket pc software digital entertainment systems include dvdrw drives well digital entertainment center products postacquisition product roadmap decisions included discontinuance vectra desktop services armada omnibook notebook pc series jornada handheld products •enterprise systems group provides servers storage software solutions business critical servers include reduced instruction set computing riscbased servers running hpux operating system itanium®based servers running hpux windows® linux hp alphaserver product line running tru64 unix® open vms various server offerings range lowend servers highend scalable servers including superdome line additionally hp offers nonstop faulttolerant server products business critical solutions industry standard servers include primarily entrylevel midrange proliant servers run windows® linux novell inc operating systems hps storageworks offerings include entrylevel midrange enterprise arrays storage area networks san network attached storage nas storage management software intelligent fabric technologies well tape drives tape libraries optical archival storage adaptive management software offerings include hp openview management offerings telecommunications software includes hp opencall hp openview temip solutions postacquisition product roadmap decisions included discontinuance netserver line well transition certain tape library storage products •hp services provides portfolio services including customer support consulting integration managed services collaboration hps enterprise systems group hp services teams software networking companies local systems integrators bring solutions hps customers customer support provides range services standalone product support high availability services complex global networked multivendor environments customer support also manages delivery warranty support service organization well authorized resellers consulting integration services help customers measure assess maintain link business design integrate customers environments adaptive infrastructure align extend manage applications business processes consulting integration provides crossindustry solutions areas supply chain business portals messaging security managed services offers management services including comprehensive outsourcing transformational infrastructure services client computing managed services managed web services application services well business continuity recovery services •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial life cycle management services hp financial services enables hps customers worldwide acquire complete solutions including hardware software services group offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hp financial services also provides array specialized financial services small mediumsized businesses education government entities hp financial services offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments managed office strategy technology includes hp labs certain business incubation projects revenue category attributable sale certain network infrastructure products enhance computing enterprise solutions well licensing specific hp technology third parties segment revenue earnings loss operations intersegment net revenue earnings operations include transactions segments intended reflect arms length transfer best price available comparable external customers primarily related primarily intercompany sales products hp financial services leasing transactions significant portion segments expenses arises costs maintaining shared services infrastructure costs hp allocates segments expenses include costs employee benefits real estate insurance services information technology services treasury certain legal accounting corporate infrastructure costs maintained corporate level order realize economies scale use resources efficiently first quarter fiscal 2003 hp revised methodology shared services infrastructure began allocating segments company performance bonus expense including previously unallocated amount actual bonus expense differs targeted amount addition hp longer distributes segments certain corporate governancerelated costs including internal audit government affairs executive office functions hp believes changes expense distribution methodology result better reflection use services provided benefits received segments segment financial data years ended october 31 2002 2001 restated reflect changes segment data results reportable segments derived directly hps internal management reporting system accounting policies used derive reportable segment results substantially used consolidated company management measures performance segment based several metrics including earnings operations results used part evaluate performance assign resources segments certain operating expenses separately managed corporate level allocated segments unallocated costs include primarily acquisitionrelated charges restructuring charges purchased iprd amortization goodwill prior hps november 1 2002 adoption sfas 142 purchased intangible assets well certain corporate governance costs selected financial information reportable segment follows years ended october 31 2003 2002 2001 reconciliation segment information hp consolidated totals follows years ended october 31 2003 2002 2001 assets allocated individual segments based primary segments benefiting assets certain assets deferred tax assets cannot directly attributable segment allocated based certain drivers corporate unallocated assets composed primarily cash equivalents shortterm investments total assets segment reconciliation segment assets hp consolidated total assets follows years ended october 31 2003 2002 major customers single customer represented 10 hps total net revenue period presented geographic information net revenue classified major geographic areas hp operates follows years ended october 31 2003 2002 2001 net property plant equipment classified major geographic areas hp operates follows years ended october 31 2003 2002 net revenue geographic area based upon sales location predominately represents customer location single country outside united states represented 10 hps total net revenue period presented single country outside united states represented 10 hps total net assets period presented exception belgium held 10 net assets october 31 2003 single country outside united states represented 10 hps total net property plant equipment period presented hps longlived assets goodwill purchased intangible assets allocated specific geographic locations impracticable composed principally net property plant equipment hewlettpackard company subsidiaries quarterly summary1 unaudited notes 1certain reclassifications made prior quarter balances order conform current presentation 2gross margin calculated net revenue less cost sales 3cost products cost services financing interest 4eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2004 2003 related consolidated statements operations stockholders equity cash flows three years period ended october 31 2004 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2004 2003 consolidated results operations cash flows three years period ended october 31 2004 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements november 1 2002 company changed method accounting goodwill intangible assets 2002 company changed method depreciation assets placed service may 1 2002 ernst young llp san jose california november 16 2004 statement management responsibility hps management responsible preparation integrity objectivity consolidated financial statements financial information included hps 2004 annual report form 10k consolidated financial statements prepared conformity us generally accepted accounting principles reflect effects certain estimates judgments made management hps management maintains effective system internal control designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization system regularly monitored direct management review internal auditors conduct extensive program audits throughout hp selects trains qualified people provided expected adhere hps standards business conduct standards set forth highest principles business ethics conduct key element hps control system hps consolidated financial statements three years period ended october 31 2004 audited ernst young llp independent auditors audits conducted accordance standards public company accounting oversight board united states included review financial controls tests accounting records procedures respectively considered necessary circumstances audit committee board directors composed entirely independent directors meets regularly management internal auditors independent auditors review accounting reporting auditing internal control matters audit committee direct private access internal external auditors carleton fiorina robert p wayman carleton fiorina robert p wayman chairman chief executive officer executive vice president chief financial officer hewlettpackard company subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp equity investments companies hp ability exercise significant influence hold controlling interest accounted equity method hps proportionate share income losses recorded interest net consolidated statements operations significant intercompany accounts transactions eliminated reclassifications segment reorganization certain reclassifications made prior year amounts balances order conform current year presentation longterm portion deferred revenue previously classified current deferred revenue reclassified liabilities prior year presentation also reclassified comparative purposes reclassification impact hps consolidated net revenue also impact hps consolidated statements operations consolidated statements cash flows consolidated statements stockholders equity periods presented described note 18 beginning first quarter fiscal 2004 hps business segments realigned prior period segment operating results restated periods presented reflect new organizational structure use estimates preparation financial statements accordance us generally accepted accounting principles requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition hp recognizes revenue persuasive evidence sales arrangement exists delivery occurs services rendered sales price fee fixed determinable collectibility reasonably assured sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based relative fair value fair value software determined based vendor specific objective evidence vsoe absence vsoe elements residual method vsoe exists undelivered elements price charged software sold separately determines vsoe absence fair value delivered element hp first allocates revenue fair value undelivered elements residual revenue delivered elements fair value undelivered element cannot determined hp defers revenue delivered elements undelivered elements delivered hp limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecified return refund privileges hp ceases revenue recognition delinquent accounts based upon number factors including customer credit history number days past due terms customer agreement hp resumes revenue recognition recognizes associated deferred revenue appropriate customer actions taken remove accounts delinquent status products hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates offerings occur sales programs established hp directly hps distributors resellers hp recognizes revenue allocated software licenses inception license revenue sale equipment salestype leases directfinancing leases recorded product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract support contracts ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered revenue fixedprice consulting arrangements recognized contract period proportional performance basis determined relationship actual costs incurred date estimated total contract costs estimates regularly revised life contact outsourcing contracts hp recognizes revenue ratably contractual service period fixed price contracts output consumption basis outsourcing contracts hp recognizes costs associated outsourcing contracts incurred unless costs relate transition phase outsourcing contract case hp generally amortizes costs contractual service period losses consulting outsourcing arrangements recognized period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables hp recognizes revenue operating leases accrual basis services revenue rental payments become due financing income financing income produced salestype directfinancing leases recognized accrual basis effective interest method certain financing receivables hp recorded specific reserves placed nonaccrual status nonaccrual assets receivables specific reserves delinquent accounts likely hp unable collect amounts due according terms customer agreement income recognition discontinued receivables financing receivables removed nonaccrual status appropriate customer actions taken remove accounts delinquent status shipping handling costs related shipping handling included cost sales periods presented advertising costs expensed incurred advertising first run totaled approximately 18 billion fiscal 2004 2003 14 billion fiscal 2002 taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents maturity investment three months less purchase date interest income approximately 238 million fiscal 2004 240 million fiscal 2003 241 million fiscal 2002 allowance doubtful accounts hp establishes allowance doubtful accounts ensure trade financing receivables overstated due uncollectibility bad debt reserves maintained based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers specific reserve individual accounts recorded hp becomes aware customers inability meet financial obligations case bankruptcy filings deterioration customers operating results financial position circumstances related customers change estimates recoverability receivables would adjusted inventory valued lower cost market cost computed firstin firstout basis property plant equipment property plant equipment stated cost less accumulated depreciation additions improvements major renewals capitalized maintenance repairs minor renewals expensed incurred depreciation provided using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 10 years machinery equipment leasehold improvements depreciated life lease asset whichever shorter equipment held lease depreciated initial term lease equipments estimated residual value hp uses straightline method depreciation property plant equipment placed service april 30 2002 property plant equipment placed service prior may 1 2002 depreciated using accelerated methods buildings improvements majority machinery equipment effect change material hps earnings financial position fiscal year ended october 31 2002 goodwill indefinitelived purchased intangible assets statement financial accounting standards sfas 142 goodwill intangible assets effective hp fiscal 2003 prohibits amortization goodwill purchased intangible assets indefinite useful lives hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 hp performs twostep impairment test first step hp compares fair value reporting unit carrying value hp determines fair value reporting units based weighting income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference sfas 142 also requires fair value indefinitelived purchased intangible assets estimated compared carrying value hp estimates fair value intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value longlived assets including finitelived purchased intangible assets purchased intangible assets finite lives amortized using straightline method estimated economic lives assets ranging one ten years longlived assets property plant equipment purchased intangible assets finite lives evaluated impairment whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 144 accounting impairment disposal longlived assets hp assesses fair value assets based undiscounted future cash flow assets expected generate recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset impairment identified hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values capitalized software hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software capitalized costs amortized estimated useful lives software generally one three years derivative financial instruments hp uses derivative financial instruments including forwards swaps options hedge certain foreign currency interest rate exposures derivatives designated hedges may also used hp primarily forwards used hedge foreign currency balance sheet exposures warrants companies invested part strategic relationships hp use derivative financial instruments speculative purposes see note 8 full description hps derivative financial instrument activities related accounting policies investments hps investments consist principally time deposits repurchase agreements municipal securities debt securities equity securities publiclyheld privatelyheld companies investments maturities less one year classified shortterm investments hps investments debt securities equity investments public companies classified availableforsale securities carried fair value fair values investments public companies determined using quoted market prices unrealized gains losses availableforsale securities net taxes recorded accumulated comprehensive loss equity investments privatelyheld companies carried lower cost fair value fair values investments privatelyheld companies may estimated based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies losses investments hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined otherthantemporary impairment charge recorded new cost basis investment established order determine whether decline value otherthantemporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value declines value certain investments determined otherthantemporary accordingly hp recorded impairments approximately 26 million fiscal 2004 72 million fiscal 2003 106 million fiscal 2002 impairments included gains losses investments early extinguishment debt consolidated statements operations depending market conditions hp may record additional impairments investment portfolio future concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash investments accounts receivable financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively concentrated primarily north america represented approximately 23 gross accounts receivable october 31 2004 21 october 31 2003 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances hp generally experienced longer accounts receivable collection cycles emerging markets particular asia pacific latin america compared united states european markets event accounts receivable collection cycles emerging markets significantly deteriorate one hps larger resellers regions fail hps operating results could adversely affected stockbased compensation hp applies intrinsicvaluebased method prescribed accounting principles board apb opinion 25 accounting stock issued employees accounting employee stockbased compensation accordingly hp generally recognizes compensation expense grants options discounted exercise price hp recognizes resulting compensation expense ratably associated service period generally option vesting term hp determined pro forma amounts fair value method required sfas 123 accounting stockbased compensation applied stockbased compensation see note 13 descriptions hps stockbased compensation plans fair value stock options stock purchase rights estimated date grant using blackscholes option pricing model weighted average fair values assumptions used calculating values fiscal year follows pro forma effect net earnings loss fair value stockbased compensation recognized compensation expense straightline basis vesting period stock option purchase right follows fiscal years ended october 31 foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars endofperiod exchange rates except inventory property plant equipment assets deferred revenue remeasured historical exchange rates net revenue cost sales expenses remeasured average exchange rates effect period except net revenue cost sales expenses related previously noted balance sheet amounts remeasured historical exchange rates gains losses foreign currency remeasurement included net earnings loss certain foreign subsidiaries designate local currency functional currency translation assets liabilities us dollars balance sheet dates recorded translation adjustments included component accumulated comprehensive income loss retirement postretirement plans hp various defined benefit defined contribution contributory noncontributory retirement postretirement plans hp amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date plans september 30 fiscal 2004 fiscal 2003 fiscal 2002 measurement dates october 31 hp plans september 30 compaq plans see note 15 full description plans accounting funding policies recent pronouncements fasb staff position fsp 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 1092 provides guidance fasb statement 109 accounting income taxes respect recording potential impact repatriation provisions american jobs creation act 2004 jobs act enterprises income tax expense deferred tax liability jobs act enacted october 22 2004 fsp 1092 states enterprise allowed time beyond financial reporting period enactment evaluate effect jobs act plan reinvestment repatriation foreign earnings purposes applying fasb statement 109 hp yet completed evaluating impact repatriation provisions accordingly provided fsp 1092 hp adjusted tax expense deferred tax liability reflect repatriation provisions jobs act may 2004 fasb issued fsp 1062 fsp 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 medicare act medicare act enacted december 8 2003 fsp 1062 supersedes fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 provides authoritative guidance accounting federal subsidy specified medicare act medicare act provides federal subsidy equal 28 certain prescription drug claims sponsors retiree health care plans drug benefits least actuarially equivalent offered medicare part beginning 2006 hp concluded prescription drug benefits provided plans least actuarially equivalent prescription drug benefits offered medicare part fsp 1062 provides 1 effect federal subsidy accounted actuarial experience gain 2 since federal subsidy exempt federal taxes planrelated temporary income tax difference exclude effect subsidy 3 effective date fsp 1062 first interim annual period beginning june 15 2004 early adoption encouraged third quarter fiscal 2004 hp adopted fsp 1062 retroactive december 2003 date enactment medicare act annual measurement date hps us postretirement benefit plans september 30 hps 2004 fiscal year expense impacted approximately 10 months expected subsidy reduced hps accumulated postretirement benefit obligation approximately 133 million hp recognized reduction unrecognized net actuarial loss hp amortizes unrecognized net actuarial loss average remaining service life hps employees eligible postretirement benefits adoption fsp 1062 also affects service interest costs associated plans reduced net periodic postretirement cost approximately 10 million fiscal 2004 expense amounts shown note 15 reflect effects early adoption fsp 1062 hp may adjust amounts future detailed regulations necessary implement medicare act issued adoption following recent accounting pronouncements material impact hps results operations financial condition •fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness othersan interpretation fasb statements 5 57 107 rescission fasb interpretation 34 •fasb interpretation 46r fin 46r consolidation variable interest entitiesan interpretation arb 51 •fasb issued revised sfas 132 r revised 2003 employers disclosures pensions postretirement benefitsan amendment fasb statements 87 88 106 •eitf issue 031 meaning otherthantemporary impairment application certain investments •eitf issue 035 applicability aicpa statement position 972 nonsoftware deliverables arrangement containing morethanincidental software november 2004 fasb issued sfas 151 inventory costsan amendment arb 43 chapter 4 sfas 151 sfas 151 amends guidance arb 43 chapter 4 inventory pricing clarify accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage among provisions new rule requires items idle facility expense excessive spoilage double freight rehandling costs recognized currentperiod charges regardless whether meet criterion abnormal stated arb 43 additionally sfas 151 requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective fiscal years beginning june 15 2005 required adopted hp first quarter fiscal 2006 beginning november 1 2005 hp currently evaluating effect adoption sfas 151 consolidated results operations financial condition expect sfas 151 material impact december 2004 fasb issued sfas 123 revised 2004 sharebased payment sfas 123r replaces sfas 123 accounting stockbased compensation sfas 123 supercedes apb opinion 25 accounting stock issued employees sfas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first interim annual period june 15 2005 early adoption encouraged pro forma disclosures previously permitted sfas 123 longer alternative financial statement recognition hp required adopt sfas 123r fourth quarter fiscal 2005 beginning august 1 2005 sfas 123r hp must determine appropriate fair value model used valuing sharebased payments amortization method compensation cost transition method used date adoption transition methods include prospective retroactive adoption options retroactive option prior periods may restated either beginning year adoption periods presented prospective method requires compensation expense recorded unvested stock options restricted stock beginning first quarter adoption sfas 123r retroactive methods would record compensation expense unvested stock options restricted stock beginning first period restated hp evaluating requirements sfas 123r expects adoption sfas 123r material impact hps consolidated results operations earnings per share hp yet determined method adoption effect adopting sfas 123r determined whether adoption result amounts similar current pro forma disclosures sfas 123 december 2004 fasb issued sfas 153 exchanges nonmonetary assetsan amendment apb opinion 29 accounting nonmonetary transactions sfas 153 sfas 153 eliminates exception fair value measurement nonmonetary exchanges similar productive assets paragraph 21b apb opinion 29 accounting nonmonetary transactions replaces exception exchanges commercial substance sfas 153 specifies nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective fiscal periods beginning june 15 2005 required adopted hp first quarter fiscal 2006 beginning november 1 2005 hp currently evaluating effect adoption sfas 153 consolidated results operations financial condition expect material impact note 2 net earnings loss per share eps hps basic eps calculated using net earnings loss weightedaverage number shares outstanding reporting period diluted eps includes effect potential issuance common stock issuable pursuant exercise stock options assumed conversion convertible notes reconciliation numerators denominators basic diluted eps calculations follows fiscal years ended october 31 fiscal 2004 2003 2002 options purchase approximately 408 million 362 million 459 million respectively hp stock excluded calculation diluted eps effect antidilutive stock options antidilutive exercise price options greater average market price common shares period results operations net loss addition assumed conversion zerocoupon subordinated notes approximately 8 million shares hp stock excluded calculation diluted eps fiscal 2003 2002 effect antidilutive note 3 balance sheet details balance sheet details follows october 31 accounts financing receivables hp entered sixyear revolving agreement third quarter fiscal 2004 sell certain trade receivables without recourse sold receivables collected third party sales receivables limited outstanding maximum balance receivables yet collected third party trade receivables approximately 680 million euros sold last half fiscal 2004 primarily fourth quarter implementation program material impact hps outstanding receivable balance utilization program limited certain customer receivables already alternative prompt payment program fees associated program differ materially cash discounts offered customers alternative prompt payment program inventory current assets property plant equipment depreciation expense approximately 18 billion fiscal 2004 20 billion fiscal 2003 17 billion fiscal 2002 longterm financing receivables assets accrued liabilities note 4 supplemental cash flow information supplemental cash flow information follows fiscal years ended october 31 note 5 acquisitions recorded using purchase method accounting accordingly results operations included hps consolidated results date acquisition hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill fair value assigned assets acquired based valuations using managements estimates assumptions goodwill recorded result acquisitions expected deductible tax purposes compaq may 3 2002 hp acquired outstanding stock compaq computer corporation compaq leading global provider information technology products services solutions exchange 06325 shares hp common stock outstanding share compaq common stock assumption options purchase compaq common stock based ratio addition hp assumed certain compaq stock plans acquisition compaq enhanced hps competitive position key industries strengthening sales force relationships strategic customer bases acquisition enabled hp focus strategic product customer bases achieve significant cost synergies economies scale improve results enterprise storage servers ess software businesses formerly combined enterprise systems group personal systems group psg hp services hps businesses furthermore cost savings offer strategic benefits reducing hps cost structure competitive businesses personal computers pcs acquisition also allowed imaging printing group ipg leverage interrelationship pc printer sales utilize compaqs direct distribution capabilities hp derived exchange ratio acquisition estimates future revenue earnings combined company assuming completion acquisition measuring relative contributions hp compaq achieving forecasted results addition measuring relative ownership combined company implied contributions transaction resulted issuance approximately 11 billion shares hp common stock fair value approximately 227 billion assumption compaq options purchase approximately 200 million shares hp common stock blackscholes fair value approximately 14 billion estimated direct transaction costs 79 million total purchase price 242 billion fair value hp common stock derived using average market price per share hp common stock 2092 based average closing prices range trading days around september 3 2001 announcement date acquisition total purchase price acquisition 145 billion allocated goodwill 35 billion allocated amortizable purchased intangible assets 14 billion allocated intangible assets indefinite life purchase price also included 184 billion additional assets 143 billion assumed liabilities hp amortizing purchased intangibles straightline basis weighted average estimated useful lives approximately 9 years customer contracts approximately 6 years developed core technology patents intangible asset indefinite life compaq trade name intangible asset amortized indefinite remaining useful life based many factors considerations including length time compaq name use compaq brand awareness market position plans continued use compaq brand within portion hps overall product portfolio total purchase price 735 million allocated iprd expensed third quarter fiscal 2002 projects qualify iprd represent yet reached technological feasibility future alternative uses exist technological feasibility defined equivalent betaphase working prototype remaining risk relating development value assigned iprd determined considering importance project overall development plan estimating costs develop purchased iprd commercially viable products estimating resulting net cash flows projects completed discounting net cash flows present value revenue estimates used value purchased iprd based estimates relevant market sizes growth factors expected trends technology nature expected timing new product introductions compaq competitors rates utilized discount net cash flows present values based compaqs weighted average cost capital weighted average cost capital adjusted reflect difficulties uncertainties completing project thereby achieving technological feasibility percentageofcompletion project anticipated market acceptance penetration market growth rates risks related impact potential changes future target markets based factors discount rates range 25 42 deemed appropriate valuing iprd accordance terms compaqs equitybased plans compaqs outstanding options granted prior september 1 2001 vested upon compaq stockholder approval acquisition intrinsic value unvested compaq options approximately 70 million may 3 2002 relates options granted subsequent august 31 2001 allocated deferred compensation purchase price allocation hp amortizes deferred compensation remaining vesting period options approximately 35 years may 3 2002 pro forma results following unaudited pro forma financial information presents combined results operations hp compaq acquisition occurred beginning period presented due different historical fiscal period ends hp compaq results year ended october 31 2002 combine historical results hp year ended october 31 2002 historical quarterly results compaq six months ended march 31 2002 period may 3 2002 acquisition date october 31 2002 adjustment 162 million made combined results operations reflecting amortization purchased intangible assets net tax would recorded acquisition occurred beginning period presented unaudited pro forma financial information intended represent indicative consolidated results operations financial condition hp would reported acquisition completed beginning period presented taken representative future consolidated results operations financial condition hp pro forma results follows fiscal year ended october 31 2002 1cost products cost services financing interest synstar october 2004 hp acquired approximately 997 outstanding stock ukbased synstar plc synstar purchase price approximately 343 million included 298 million cash paid well direct transaction costs certain liabilities recorded connection transaction synstar leading independent provider information technology services across europe acquisition intended strengthen hps offering primarily area multitechnology support services hp recorded approximately 172 million goodwill 122 million amortizable purchased intangible assets connection acquisition hp amortizing purchased intangibles principally customer contracts relationships straightline basis estimated useful lives ranging three seven years triaton april 2004 hp acquired outstanding stock triaton gmbh subsidiaries singapore china brazil triaton france sas triaton na inc usa collectively triaton purchase price approximately 464 million included 306 million cash paid well direct transaction costs certain liabilities recorded connection transaction triaton one germanys largest independent service providers acquisition intended increase hps capacity deliver adaptive enterprise offerings customers benefiting added managed services technology services formerly called customer support consulting integration capabilities hp recorded approximately 285 million goodwill 179 million amortizable purchased intangible assets connection acquisition hp amortizing purchased intangibles principally customer contracts relationships straightline basis estimated useful lives ranging two eight years digital globalsoft limited fiscal 2004 hp paid approximately 315 million cash additional shares digital globalsoft limited consolidated subsidiary hp dgs increase hps ownership 501 approximately 972 dgs globallyfocused software development services company subsidiary enhanced hps capability services including expertise life cycle services migration technical application services hp recorded approximately 281 million goodwill connection acquisition intriahp november 2002 hp acquired remaining outstanding stock intria corporation intria hp held 49 equity interest october 31 2002 related assets canadian imperial bank commerce cibc approximately 100 million cash intria provider managed services hp jointly owned cibc connection acquisition hp also entered multiyear contract provide managed services cibc acquisition outsourcing relationship cibc added depth capability hps including expertise managing complex heterogeneous operating environments customers financial services industry others demand high availability computing solutions hp recorded approximately 27 million goodwill 33 million amortizable purchased intangible assets connection acquisition hp amortizing purchased intangible assets consisting mainly customer contracts estimated weightedaverage useful lives ranging three ten years indigo march 2002 hp acquired substantially outstanding stock indigo nv indigo previously owned hp exchange hp common stock nontransferable contingent value rights cvrs assumption options purchase indigo common stock acquisition strengthened hps printer offerings adding high performance digital color printing systems total purchase price indigo approximately 719 million included fair value hp common stock issued options assumed purchase hp stock well direct transaction costs cost equity investment made hp indigo october 2000 hp issued approximately 32 million shares hp common stock consolidated subsidiary hp issued approximately 53 million cvrs hp guaranteed connection transaction hp recorded approximately 499 million goodwill 153 million amortizable purchased intangible assets conjunction acquisition previous equity investment hp amortizing purchased intangible assets estimated useful lives ranging five eight years addition hp recorded pretax charge approximately 58 million iprd completion acquisition technological feasibility established future alternative uses existed cvrs issued conjunction acquisition entitle holder onetime contingent cash payment 450 per cvr based achievement certain cumulative revenue results threeyear period liability related cvrs recorded additional goodwill payout thresholds achieved future cash payout cvrs payable threeyear period began april 1 2002 could result maximum obligation 237 million hp incurred liability associated cvrs october 31 2004 liquidity management corporation october 31 2001 hp held 495 equity interest liquidity management corporation lmc nonstrategic investment company hp accounted equity method accounting third party investor held remaining 505 equity interest november 1 2001 lmc redeemed outstanding equity third party investor leaving hp sole stockholder lmc accordingly effective november 1 2001 hp included assets liabilities results operations lmc consolidated financial statements november 1 2001 assets lmc consisted primarily 879 million cash equivalents acquisitions hp also acquired companies fiscal 2004 2003 significant financial position results operations total consideration acquisitions approximately 250 million 85 million fiscal 2004 2003 respectively hp recorded approximately 181 million goodwill 49 million purchased intangibles fiscal 2004 64 million goodwill 20 million purchased intangibles fiscal 2003 connection acquisitions hp also recorded approximately 37 million 1 million iprd related acquisitions fiscal 2004 2003 respectively hp included results operations acquisitions prospectively respective dates transactions except compaq acquisition hp presented pro forma results operations acquired businesses results material hps consolidated results operations individually aggregate acquisitionrelated charges acquisitionrelated charges approximately 54 million fiscal 2004 consisted deferred compensation mergerrelated inventory adjustments professional fees charges approximately 280 million fiscal 2003 701 million fiscal 2002 attributable primarily costs incurred employee retention bonuses connection compaq acquisition well professional fees consulting services addition acquisitionrelated charges fiscal 2002 included costs incurred proxy solicitation advertising related compaq acquisition note 6 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2003 changes carrying amount goodwill fiscal year ended october 31 2004 follows goodwill reallocation shown table relates reorganization hps business segments discussed note 18 goodwill formerly included enterprise systems group allocated ess software based relative fair value approach goodwill adjustment shown table relates primarily revisions acquisitionrelated tax estimates resulted additions goodwill offset partially reduction restructuring liability asset impairments associated fiscal 2002 2001 preacquisition compaq restructuring plans reduction restructuring liability asset impairments adjusted original estimates actual costs incurred various locations throughout world november 1 2002 hp adopted sfas 142 requires goodwill longer amortized instead tested impairment periodic basis based results annual impairment tests hp determined impairment goodwill existed august 1 2004 august 1 2003 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment provisions sfas 142 effect periods presented hps net earnings loss net earnings loss per share would unchanged fiscal 2004 2003 fiscal 2002 net loss basic net loss per share diluted net loss per share would 796 million 032 respectively represents improvement reported net loss basic net loss per share diluted net loss per share 107 million 004 respectively purchased intangible assets hps purchased intangible assets associated completed acquisitions october 31 composed amortization expense related finitelived purchased intangible assets approximately 603 million fiscal 2004 563 million fiscal 2003 295 million fiscal 2002 hp performs annual impairment test purchased intangible asset indefinite life compaq trade name based results annual impairment tests hp determined impairment compaq trade name existed august 1 2004 august 1 2003 however future impairment tests could result charge earnings hp continue evaluate purchased intangible asset indefinite life annual basis beginning fourth quarter whenever events changes circumstances indicate may potential impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weighted average useful lives approximately eight years developed core technology patents product trademarks weighted average useful lives approximately six years estimated future amortization expense related finitelived purchased intangible assets october 31 2004 follows note 7 restructuring charges fiscal 2003 restructuring plans second third fourth quarters fiscal 2003 hps management approved implemented plans restructure certain operations plans entered intent better managing hps cost structure aligning certain operations effectively current businesses conditions initial charge actions totaled 752 million included costs 639 million relating severance employee benefits workforce reductions costs 42 million vacating duplicative facilities leased owned contract termination costs well asset impairments 71 million associated identification duplicative assets facilities leased owned relating acquisition compaq fiscal 2004 hp recorded 37 million additional charges 2003 restructuring plans represented changes original estimates well new charges meet recognition criteria fiscal 2003 accordingly charged expense incurred fiscal 2004 certain adjustments original estimates operating segment reflected total costs incurred expected adjustments effect decreasing estimated costs incurred psg segment approximately 48 million increasing estimated costs incurred remaining segments approximately 54 million original estimates 2300 4700 2000 employees across many regions job classes included second third fourth quarter workforce reduction plans respectively total 9000 employees october 31 2004 approximately 8300 employees terminated placed workforce reduction programs retired consisted substantially employees included second third quarter actions majority employees fourth quarter action additional 300 employees fourth quarter action expected leave fiscal 2005 bringing total estimated number employees affected 2003 plans 8600 reduction 400 employees original estimate hp expects pay majority remaining costs relating severance employee benefits connection remainder fourth quarter action fiscal 2005 minor remaining severance employee benefits expected paid phased retirement plans required certain international locations end fiscal 2010 hp anticipates remaining costs vacating duplicative facilities contract terminations associated second fourth quarter actions substantially settled end fiscal 2005 addition approximately 6 million costs related 2003 plans yet accrued charged operations restructuring activities occur fiscal 2005 fiscal 2002 restructuring plans fiscal 2002 hps management initiated approved plans restructure operations preacquisition hp preacquisition compaq organizations consequently hp recorded approximately 18 billion costs associated exiting activities preacquisition hp severance early retirement employee benefits costs vacating duplicative facilities leased owned contract termination costs asset impairment charges costs associated exiting activities hp costs included charge results operations fiscal year ended october 31 2002 addition hp recorded approximately 960 million similar charges connection restructuring preacquisition compaq organization hp recognized costs liability assumed purchase included allocation cost acquire compaq fiscal 2004 2003 hp recorded 75 million 48 million respectively additional costs net reductions estimated severance employee benefits well asset impairment restructuring costs related fiscal 2002 restructuring plans additionally fiscal 2004 2003 hp recorded adjustments reduce goodwill 71 million 94 million respectively adjustments related trueups fiscal premerger compaq 2002 restructuring plan fiscal 2004 2003 adjustments included changes asset impairments buildings vacated part acquisition adjustments restructuring liabilities changes severance estimates contract termination costs severance early retirement costs employee benefits related termination planned early retirement originally estimated 17900 employees worldwide across many regions business functions job classes october 31 2004 approximately 17600 employees included workforce reduction program terminated retired reduction 300 employees original estimate hp expects pay majority remaining balance severance costs end fiscal 2005 hp anticipates paying remaining balance costs related restructuring activities consist primarily contractual obligations facility leases lives related obligations extend end fiscal 2010 fiscal 2001 restructuring plans fiscal 2001 hps management approved restructuring actions respond global economic downturn improve hps cost structure streamlining operations prioritizing resources strategic areas hps business infrastructure hp recorded restructuring charge 384 million fiscal 2001 reflect actions consisted primarily severance employee benefits related termination 7500 employees worldwide fiscal 2002 hp recorded 21 million additional charges reflect adjustments expected severance cost fiscal 2001 plan end fiscal 2003 hp terminated substantially employees terminated paid substantially accrued costs part acquisition compaq hp assumed remaining obligations compaqs existing restructuring plans 259 million compaq initially recorded 2001 fiscal year fiscal 2004 2003 hp recorded adjustments decrease goodwill related trueups plans 2 million 26 million respectively remaining balance premerger compaq fiscal 2001 plan consists primarily severance employee benefits well restructuring costs hp expects settle majority remaining balance severance accrual phased retirement plans required certain international locations end fiscal 2009 hp anticipates paying related restructuring activities consist primarily contractual obligations facility leases lives related obligations extend end fiscal 2010 summary restructuring plans activity accrued restructuring balances related plans described follows fiscal 2004 october 31 2004 october 31 2003 hp included longterm portion restructuring liability 95 million 98 million respectively liabilities accompanying consolidated balance sheets note 8 financial instruments investments debt equity securities investments availableforsale debt equity securities fair value follows october 31 debt securities consist primarily collateralized notes banks corporate debt securities equity securities public companies primarily common stock hp estimated fair values based quoted market prices pricing models using current market rates estimated fair values may representative actual values financial instruments could realized yearend realized future may 2003 hp sold investment debt security net book value 65 million classified heldtomaturity security proceeds sale used operating purposes book value debt security approximated market value date sale realized loss associated sale material result transaction hp reclassified heldtomaturity securities composed approximately 200 million time deposits availableforsale securities book value securities approximated estimated fair value net unrealized loss material recognized accumulated comprehensive loss separate component stockholders equity gross unrealized losses october 31 2004 2003 associated investments public equity securities fair value 9 million 1 million respectively continuous loss position less 12 months contractual maturities availableforsale debt securities follows october 31 2004 proceeds sales maturities availableforsale securities 11 billion fiscal 2004 588 million fiscal 2003 90 million fiscal 2002 gross realized gains losses totaled 27 million 4 million respectively fiscal 2004 gross realized gains losses totaled 36 million 8 million respectively fiscal 2003 gross realized losses totaled 2 million fiscal 2002 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity follows october 31 derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments including forward contracts swaps options hedge certain foreign currency interest rate exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge respectively thereby reducing volatility earnings protecting fair values assets liabilities hp use derivative contracts speculative purposes hp applies hedge accounting based upon criteria established sfas 133 accounting derivative instruments hedging activities whereby hp designates derivatives fair value hedges cash flow hedges net investment hedges fair value hedges hp enters fair value hedges reduce exposure debt investment portfolios interest rate risk foreign currency exchange rate risk hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp typically uses interest rate swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payment obligations underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollar denominated amounts alternatively hp may choose swap fixed debt floating rate may terminate previously executed swap fixed rate positions provide beneficial relationship assets liabilities similarly hp may choose hedge foreign currency risk associated foreign currencydenominated debt acts natural foreign currency hedge assets denominated currency order hedge fair value certain fixedrate investments hp periodically may enter interest rate swaps convert fixed interest returns variable interest returns october 31 2004 hp total notional amount approximately 6 billion fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item earnings current period september 2002 hp terminated interest rate swap effectively converted fixed rate interest variable rate interest debt matures 2005 deferred gain 185 million termination amortized reduction interest expense remaining life underlying debt fiscal 2004 2003 hps interest rate swap terminations material cash flow hedges hp uses cash flow hedges hedge variability liborbased interest income received certain variablerate investments hp enters interest rate swaps convert variable rate interest returns fixedrate interest returns october 31 2004 hp total notional amount 250 million interest rate swaps classified cash flow hedges interest rate swaps designated qualify cash flow hedges changes fair values recorded accumulated comprehensive income separate component stockholders equity subsequently reclassified earnings period hedged transaction recognized earnings hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six months however certain leasing revenuerelated forward contracts extend duration lease term five years october 31 2004 hp total notional amount 49 billion forwards options derivative instruments designated qualify cash flow hedges hp initially records effective portions gain loss derivative instrument accumulated comprehensive income separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports ineffective portion gain loss income expense immediately hp reports effective portion cash flow hedges financial statement line item changes value hedged item october 31 2004 hp expects 98 million derivative losses included accumulated comprehensive income reclassified earnings within next twelve months net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency october 31 2004 hp total notional amount 750 million forward contracts derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument cumulative translation adjustment separate component stockholders equity loss net investment hedges included cumulative translation adjustment 43 million 18 million fiscal years ended october 31 2004 2003 respectively hp reports effective portion net investment hedges financial statement line item changes value hedged item derivatives designated hedging instruments sfas 133 consist primarily forward contracts used hedge foreign currency balance sheet exposures warrants companies invested part strategic relationships october 31 2004 hp total notional amount 14 billion derivatives designated hedging instruments derivative instruments designated hedging instruments sfas 133 hp recognizes changes fair values earnings period change hp recognizes gains losses foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities thus naturally offsets gains losses hp recognized net foreign currency exchange losses approximately 142 million fiscal 2004 125 million fiscal 2003 165 million fiscal 2002 related primarily forward points hedging contracts hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt investment change fair value derivative interest rate swaps designated cash flow hedges hp measures hedging effectiveness offsetting change variable portion interest rate swaps changes expected interest income received due fluctuations libor based interest rate foreign currency option forward contracts designated cash flow net investment hedges hp measures hedge effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates ineffective portion hedge well amounts included assessment effectiveness recognized interest net october 31 2004 portion hedging instruments gains losses excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years ended october 31 2004 2003 2002 october 31 2004 amounts related derivatives qualifying cash flow hedges amounted reduction accumulated comprehensive income 115 million net tax 98 million expected transferred earnings next 12 months along earnings effects related forecasted transactions addition fiscal 2004 2003 hp discontinue cash flow hedges probable forecasted transaction would occur hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value fair market value derivative financial instruments respective sfas 133 classification consolidated balance sheets follows october 31 fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps shortand longterm debt approximately 69 billion october 31 2004 compared carrying value 71 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 9 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting marketing hps complementary thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables included financing receivables longterm financing receivables assets follows october 31 scheduled maturities hps minimum lease payments receivable follows october 31 2004 equipment leased customers operating leases 23 billion october 31 2004 21 billion october 31 2003 included machinery equipment accumulated depreciation equipment lease 09 billion october 31 2004 12 billion october 31 2003 minimum future rentals noncancelable operating leases related leased equipment follows october 31 2004 note 10 guarantees indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates material usage service delivery costs differ estimates revisions estimated warranty liability would required information regarding changes hps aggregate product warranty liabilities follows october 31 deferred revenue components deferred revenue follows october 31 deferred support contract services revenue represents amounts received billed advance primarily fixedprice support maintenance contracts services include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments service amounts deferred time customer billed recognized ratably contract life services rendered deferred revenue represents amounts received billed advance contracts related primarily consulting integration projects managed services startup transition work well minor amounts training product sales hp recognizes majority amounts revenue based proportional performance method note 11 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows october 31 notes payable banks lines credit includes deposits primarily banks approximately 241 million 192 million october 31 2004 2003 respectively longterm debt longterm debt follows october 31 hp may redeem global notes medium term notes series medium term notes euro mediumterm notes collectively notes set forth table time redemption prices described prospectus supplements relating thereto notes senior unsecured debt lyons convertible holders adjusted rate 1509 shares hp common stock 1000 face value lyons payable either cash common stock hps election time hp may redeem lyons book value payable cash december 2000 board directors authorized repurchase program lyons allowed hp repurchase lyons time varying prices fiscal 2002 hp repurchased 257 million face value lyons book value 158 million aggregate purchase price 127 million resulting gain 31 million gain included gains losses investments early extinguishment debt consolidated statements operations hp repurchase lyons fiscal 2004 2003 hp established 40 billion us commercial paper program december 2000 hewlettpackard international bank plc whollyowned subsidiary hp established 500 million euro commercial papercertificate deposit programme may 2001 hps 17 billion 364day credit facility expiring march 2004 13 billion threeyear credit facility expiring march 2005 replaced 15 billion 364day credit facility 15 billion fiveyear credit facility respectively march 2004 together credit facilities interest rates terms borrowing credit facilities vary applicable based hps external credit ratings credit facilities subject weighted average commitment fees eight basis points per annum unused portion senior unsecured committed borrowing arrangements available general corporate purposes including supporting issuance commercial paper hp also maintains various foreign subsidiaries lines credit number financial institutions hp registered sale 30 billion debt global securities global notes common stock preferred stock depositary shares warrants shelf registration statement march 2002 shelf registration statement december 2002 hp filed supplement 2002 shelf registration statement allows hp offer time 15 billion mediumterm notes series b due nine months date issuance series b mediumterm note program hp may redeem series b mediumterm notes time redemption prices described prospectus supplements relating thereto october 31 2004 hp issued mediumterm notes pursuant series b mediumterm note program hp registered sale 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange offered notes set forth table hp denominate notes currency including euro however notes registered united states october 31 2004 hp available borrowing resources 127 billion 2002 registration statement credit facilities programs described aggregate future maturities debt face value including fair value adjustment related sfas 133 44 million follows october 31 2004 interest expense borrowings 247 million fiscal 2004 277 million fiscal 2003 212 million fiscal 2002 note 12 taxes earnings provision benefit taxes earnings follows fiscal years ended october 31 significant components deferred tax assets deferred tax liabilities follows october 31 october 31 2004 hp deferred tax asset 403 million loss carryforwards 398 million relates foreign net operating losses hp provided valuation allowance 321 million foreign net operating loss carryforwards likely utilized total tax credit carryforwards 678 million hp alternative minimum tax credit carryforwards 391 million expire research development credit carryforwards 83 million expire fiscal 2023 2024 hp also tax credits 204 million foreign countries hp provided valuation allowance 29 million gross deferred tax assets october 31 2004 2003 reduced valuation allowances 447 million 400 million respectively october 31 2004 addition 350 million valuation allowances foreign net operating losses tax credits hp valuation allowances 92 million 5 million unrealized capital losses items respectively 447 million valuation allowances october 31 2004 139 million related certain compaq deferred tax assets existing time acquisition future determine realization compaq deferred tax assets likely reversal related valuation allowance reduce goodwill instead provision taxes total tax benefits resulting exercise employee stock options employee stock programs amounts booked stockholders equity approximately 35 million fiscal 2004 24 million fiscal 2003 21 million fiscal 2002 differences us federal statutory income tax rate benefit hps effective tax rate benefit follows fiscal years ended october 31 fiscal 2004 tax rate benefited net favorable adjustments previously estimated tax liabilities 207 million decreased provision taxes approximately 007 per share excluding adjustments tax rate year would 216 significant favorable adjustments related resolution california state tax audit net favorable revision estimated tax accruals upon filing 2003 us income tax return reduction taxes foreign earnings due change regulatory policy favorable adjustments offset part net effect smaller adjustments income tax liabilities various jurisdictions domestic foreign components earnings losses follows fiscal years ended october 31 result certain employment actions capital investments undertaken hp income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal 2018 gross income tax benefits attributable tax status subsidiaries estimated approximately 947 million 031 per share fiscal 2004 705 million 023 per share fiscal 2003 473 million 019 per share fiscal 2002 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors internal revenue service irs completed examination income tax returns hp years 1998 compaq years 1997 hps tax years 1993 1998 currently irss appeals division october 31 2004 irs process examining hps income tax returns years 1999 2003 compaqs income tax returns years 1998 2002 addition hp subject numerous ongoing audits state foreign tax authorities hp believes adequate accruals hp compaq provided years hp provided us federal income foreign withholding taxes 150 billion undistributed earnings nonus operations october 31 2004 earnings intended reinvested indefinitely outside united states excess cash accumulated hps nonus subsidiaries advantageous business operations tax cash reasons subsidiary earnings remitted earnings distributed foreign tax credits may become available current law reduce eliminate resulting us income tax liability hp reevaluated position respect indefinite reinvestment foreign earnings take account possible election repatriation provisions contained american jobs creation act 2004 status hps evaluation provisions described following section american jobs creation act 2004repatriation foreign earnings american jobs creation act 2004 jobs act enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction would result approximate 525 federal tax rate repatriated earnings qualify deduction earnings must reinvested united states pursuant domestic reinvestment plan established companys chief executive officer approved companys board directors certain criteria jobs act must satisfied well maximum amount hps foreign earnings qualify temporary deduction 145 billion hp oneyear period qualifying distributions made fiscal 2005 hp process evaluating whether repatriate foreign earnings repatriation provisions jobs act amount repatriated range reasonably possible amounts hp considering repatriation would eligible temporary deduction zero 145 billion hp awaiting issuance regulatory guidance passage statutory technical corrections respect certain provisions jobs act prior determining amounts repatriate regulatory guidance technical corrections favorable hp likely repatriate amounts high end range hp expects determine amounts sources foreign earnings repatriated third quarter fiscal 2005 hp yet position determine impact qualifying repatriation choose make one income tax expense fiscal 2005 amount indefinitely reinvested foreign earnings amount deferred tax liability respect foreign earnings hp plan repatriate maximum amount eligible temporary deduction 145 billion foreign earnings previously indefinitely reinvested hp estimates would accrue additional tax expense fiscal 2005 850 million 925 million amount additional tax expense accrued would reduced part eligible dividend attributable foreign earnings deferred tax liability previously accrued nonindefinitely reinvested earnings note 13 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per common share fiscal 2004 2003 2002 employee stock purchase plan hp sponsors hewlettpackard company 2000 employee stock purchase plan also known share ownership plan espp noncompensatory plan eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock purchased semiannually price equal 85 fair market value certain plandefined dates october 31 2004 approximately 143000 employees eligible participate approximately 62000 employees participants espp fiscal 2004 participants purchased 25868000 shares hp common stock weightedaverage price 14 per share fiscal 2003 participants purchased 23884000 shares hp common stock weightedaverage price 14 per share fiscal 2002 participants purchased 18536000 shares hp common stock weightedaverage price 14 per share october 31 2000 employees longer permitted make contributions hewlettpackard company employee stock purchase plan legacy espp october 31 2004 2003 remaining unvested shares legacy espp compensation expense recognized legacy espp 29 million fiscal 2002 shares hp matched employee stock purchases incentive compensation plans hp stock option plans including principal plans adopted 2000 1995 1990 well various stock option plans assumed acquisitions stock options outstanding regular employees considered eligible receive stock options fiscal 2004 approximately 135000 employees holding options one option plans october 31 2004 hp adopted additional principal plan fiscal 2004 stock options granted principal plans adopted 2004 2000 1995 1990 permit options granted qualify incentive stock options us internal revenue code exercise price stock option generally equal fair market value hps common stock date option granted term options granted fiscal 2004 2003 generally eight years options granted prior fiscal 2003 generally tenyear term 2000 stock plan 1990 1995 incentive stock plans hp may choose certain cases establish discounted exercise price less 75 fair market value grant date hp grant discounted options fiscal 2004 2003 hp granted discounted options purchase 679000 shares fiscal 2002 options generally vest rate 25 per year period four years date grant exception discounted options discounted options generally may exercised third fifth anniversary option grant date time options become fully vested cost discounted options determined difference exercise price option fair market value hps common stock date option grant expensed ratably option vesting period option activity follows fiscal years ended october 31 information options outstanding follows october 31 2004 2000 stock plan 1990 1995 incentive stock plans certain employees granted cash restricted stock awards cash restricted stock awards independent option grants subject restrictions majority shares restricted stock outstanding october 31 2004 subject forfeiture employment terminates prior release restrictions generally one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding cost awards determined fair market value shares date grant expensed ratably period restrictions lapse hp 1533000 shares restricted stock outstanding october 31 2004 1008000 shares restricted stock outstanding october 31 2003 1370000 shares restricted stock outstanding october 31 2002 compensation expense recognized incentive compensation plans approximately 48 million fiscal 2004 45 million fiscal 2003 84 million fiscal 2002 shares reserved shares available espp incentive compensation plans 257554000 october 31 2004 including 29123000 shares assumed compaq plans 168951000 october 31 2003 including 42967000 shares assumed compaq plans hp 808855000 shares common stock reserved october 31 2004 670929000 shares common stock reserved october 31 2003 future issuance stockrelated benefit plans additionally hp 21494000 shares common stock reserved october 31 2004 2003 future issuances related conversion zerocoupon subordinated notes stock repurchase program hp repurchases shares common stock systematic program manage dilution created shares issued employee stock plans also return cash hps stockholders program authorizes purchases open market private transactions fiscal year 2004 hps board directors authorized 50 billion future repurchases outstanding common stock including authorization repurchase 30 billion hp shares fourth quarter hp completed share repurchases approximately 172 million shares 33 billion 40 million shares 751 million 40 million shares 671 million fiscal 2004 2003 2002 respectively shares repurchased fiscal 2004 included open market repurchases 66 million shares 13 billion 72 million shares 13 billion accelerated share repurchase program investment bank accelerated purchase 34 million shares 679 million david lucile packard foundation packard foundation shares repurchased packard foundation fiscal years 2003 2002 13 million shares 3 million shares 241 million 31 million respectively accelerated purchase occurred september 20 2004 completed november 2004 first quarter fiscal 2005 upon completion program hp paid 51 million price adjustment based difference 1882 weighted average price open market stock purchases investment bank initial purchase price 1811 per share price adjustment also included certain amounts reflecting investment banks carrying costs benefits purchasing shares prices initial price benefits receiving 13 billion payment advance purchases accelerated purchase accounted equity transaction cash settlement dates shares repurchased packard foundation purchased terms memorandum understanding dated september 9 2002 amended restated september 17 2004 among things prices repurchases reference volume weightedaverage price composite new york stock exchange transactions trading days repurchase occurs either hp packard foundation may suspend terminate sales amended restated memorandum understanding time october 31 2004 hp authorization remaining future repurchases approximately 29 billion note 14 comprehensive income loss changes components comprehensive income loss net taxes follows fiscal years ended october 31 components accumulated comprehensive loss net taxes follows october 31 note 15 retirement postretirement benefit plans substantially hps employees covered various defined benefit plans defined contribution plans met eligibility requirements addition hp sponsors medical life insurance plans provide benefits retired us employees meet eligibility requirements defined benefit plans hp sponsors number defined benefit plans worldwide significant united states us employees hired rehired january 1 2003 hp sponsors hewlettpackard company cash account pension plan cash account pension plan defined benefit plan benefits accrue pursuant cash accumulation account formula based upon percentage pay plus interest hp retirement plan retirement plan defined benefit pension plan us employees hired december 31 2002 benefits retirement plan generally based pay years service except eligible preacquisition compaq employees receive credit years service prior january 1 2003 benefit payable us employee retirement plan service 1993 reduced amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp closed new participants 1993 dpsp plan obligations equal plan assets recognized offset retirement plan hp calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp september 30 measurement date follows postretirement benefit plans us employees hired rehired january 1 2003 may eligible participate postretirement medical plan hp retiree medical program must bear full cost participation addition substantially hps us employees december 31 2002 could become eligible retiree life insurance benefits partially subsidized retiree medical benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service medicare act reduced hps postretirement medical plan obligations expense fiscal 2004 see note 1 full description impact medicare act adopted hp third quarter fiscal 2004 retroactive december 2003 date enactment medicare act defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 405 million fiscal 2004 377 million fiscal 2003 309 million fiscal 2002 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation may 3 2002 hp assumed sponsorship compaq computer corporation 401k investment plan compaq 401k plan effective january 1 2004 compaq 401k plan merged hp 401k plan us employees may contribute 50 eligible compensation pretax basis subject certain limits prior january 1 2003 maximum employee contribution 20 eligible compensation hp matches employee contributions cash contributions maximum 4 eligible compensation last eight months calendar 2002 compaq 401k plan hp matched maximum 6 eligible compensation effective january 31 2004 hp stock fund designated employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 13 million dividends hp common shares held hp stock fund fiscal 2004 dividends recorded reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 40 million shares hp common stock october 31 2004 pension postretirement benefit expense hps net pension postretirement benefit costs follows fiscal years ended october 31 weighted average assumptions used calculate net benefit cost follows fiscal years ended october 31 medical cost related assumptions used calculate postretirement benefit cost fiscal years ended october 31 follows 10 percentage point increase medical cost trend rate would increased fiscal 2004 service interest components postretirement benefit costs 7 million 10 percentage point decrease would resulted decrease 7 million period funded status funded status defined benefit postretirement benefit plans follows october 31 weighted average assumptions used calculate benefit obligation measurement dates set forth note 1 follows 10 percentage point increase medical cost trend rate would increased total postretirement benefit obligation reported october 31 2004 73 million 10 percentage point decrease would resulted decrease 71 million net amount recognized hps defined benefit postretirement benefit plans follows october 31 defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows plan asset allocations hps weightedaverage target asset allocations september 30 measurement date follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment purposes hp occasionally utilizes derivatives effect asset allocation changes hedge certain investment exposures target asset allocation selected plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp regularly conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs portion us defined benefit plan assets postretirement benefit plan assets invested private market securities venture capital funds private debt private equity provide diversification higher expected returns outside us local regulations require different approaches target asset allocations leaning toward higher percentage allocation fixed income securities country local pension board decides target allocation hps corporate office plays important governance role periodically reviewing approving allocation strategy providing recommended list investment managers country plan basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix correlations among asset classes expected volatilities expected asset class returns reflected current yield us government bonds risk premiums asset class hp considered factors historical risk premiums current valuations dividend yields inflation expected earnings growth rates hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees approach used arrive expected rate return assets nonus plans apply asset allocation policy plan expected country real returns equity fixed income investments annual basis empirical data gathered local country subsidiaries determine expected longterm rates return equity fixed income expected real rates return weighted based country specific allocation mixes adjusted inflation future contributions funding policy hp expects contribute approximately 850 million pension plans 60 million postretirement plans fiscal 2005 hps funding policy contribute cash pension plans least minimum contribution requirements established local government funding taxing authorities met contributions made postretirement plans used primarily payment retiree health claims incurred fiscal year estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2004 note 16 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include escalation clauses rent expense approximately 766 million fiscal 2004 703 million fiscal 2003 566 million fiscal 2002 sublease rental income approximately 43 million fiscal 2004 46 million fiscal 2003 17 million fiscal 2002 future annual minimum lease payments sublease rental income commitments excluding future obligations included restructuring liabilities consolidated balance sheets october 31 2004 follows october 31 2004 hp unconditional purchase obligations approximately 10 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations principally related cost sales inventory items note 17 litigation contingencies pending litigation proceedings intergraph hardware technologies company v hp dell gateway lawsuit filed united states district court eastern district texas marshall county december 16 2002 gateway dell longer defendants matter suit accuses hp infringement three patents related cache memory clipper patents intergraph hardware technologies company intergraph seeks damages constituting reasonable royalty well enhanced damages injunction prejudgment interest costs attorneys fees complaint served hp april 1 2003 may 21 2003 hp answered counterclaimed declaratory judgment patents infringed hp patents invalid unenforceable fact discovery closed october 27 2004 claim construction hearing held may 7 2004 court issued ruling claim construction hearing july 1 2004 jury selection scheduled begin february 7 2005 trial scheduled begin february 21 2005 expert discovery ongoing may 7 2004 intergraph sued hp united states district court eastern district texas tyler county infringement another patent related cache memory management intergraph seeks injunction declaratory relief attorneys fees damages hp answered counterclaimed asserting intergraphs infringement two hp software patents hp seeks damages injunction trial matter scheduled begin april 11 2005 intergraphs claims october 24 2005 hps claims intergraph obtained significant settlements defendants ranging 10 million advanced micro devices 300 million intel corporation relating defendants direct use clipper patents however ultimate resolution proceedings financial impact hp depend part determinations useful life patents would constitute reasonable royalty rates allocation amounts paid accounting purposes timing payments units impacted remains uncertain may 28 2003 hp sued intergraph corporation parent intergraph united states district court northern district california san francisco division accusing intergraph corporation infringement four hp patents related computeraided design video display technology information retrieval technology intergraph answered counterclaimed declaratory relief october 14 2003 claim construction hearing held october 22 2004 court subsequently issued claim construction rulings hp expects trial begin mid2005 hp seeks damages injunction prejudgment interest costs attorneys fees april 1 2004 hp sued intergraph corporation mannheim state court mannheim germany related proceedings germany pending infringement two european union patents related computeraided design hp seeks damages injunction costs trial took place november 2004 court subsequently dismissed hps action based determination intergraphs noninfringement april 19 2004 hp sued zi imaging subsidiary intergraph corporation intergraph corporation united states district court district delaware accusing zi imaging infringement two patents related image scanning technology intergraph answered counterclaimed declaratory relief may 28 2004 trial scheduled begin december 4 2005 also april 19 2004 hp sued intergraph corporation united states district court eastern district texas infringement one patent relating computeraided design intergraph answered counterclaimed declaratory relief may 13 2004 jury selection expected begin december 2005 cases hp seeks damages injunction prejudgment interest costs attorneys fees copyright levies proceedings pursued hp certain european union eu member countries seeking impose levies upon equipment printers multifunction devices alleging devices enable producing private copies copyrighted materials two nonbinding arbitration proceedings instituted june 2001 june 2002 respectively brought germany arbitration board patent trademark office verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders brought proceedings hp relate whether extent copyright levies imposed accordance copyright laws implemented germany relating multifunction devices printers allegedly enable production copies private persons published tariffs devices germany range 10 61356 euros per unit nonbinding proposals presented proceedings hp rejected may 2004 vg wort filed lawsuit hp stuttgart civil court stuttgart germany seeking levies multifunction devices mfds decision matter subsequently issued court held hp liable payments regarding photocopiers sold germany determine exact amount payable per unit court stated hp furnish information regarding number mfds sold germany december 2001 number copies per minute various mfds produce finally court held levy maximum 15 price due bundle lj8150 mfp plus scannermodule c4166b individual elements bundle part claim deadline filing appeal decision january 31 2005 july 2004 vg wort filed separate lawsuit hp stuttgart civil court seeking levies printers decision matter subsequently issued court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit court stated hp furnish information regarding number printers sold germany since april 2001 number copies per minute various printers produce deadline filing appeal decision january 27 2005 september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich state court seeking levies pcs industry test case germany hp undertaken bound final decision matter subsequently issued stating pcs subject levy fsc furnish information number pcs sold germany since january 1 2001 fsc must pay 12 euros plus compound interest pc sold germany march 24 2001 fsc indicated appeal decision april 2001 organization collective management works literature organization collective management works plastic arts applications organization collective management protection intellectual property photographers brought five proceedings hp hellas compaq computer epe greece relating whether levy 2 payable upon computer products including central processing units monitors keyboards mice diskettes printers scanners related items accordance greek copyright law amendment september 2002 proceedings pending court first instance athens court appeal athens april 1998 auvibel scrl belgian collection agency filed appeal judgment hps favor court appeal brussels relating dispute whether extent copyright levies imposed upon cdwriters cd media case removed courts list pending cases without prejudice parties right reinstate matter total levies due imposed would based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposing extension levies digital environment advocating compensation rights holders digital rights management systems based opposition hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address matters described however ultimate resolution matters including number units impacted amount levies imposed various jurisdictions availability hp recover amounts increased prices remains uncertain alvis v hp nationwide defective product consumer class action filed state court jefferson county texas resident eastern texas april 2001 february 2000 similar suit captioned lapray v compaq filed state court jefferson county texas basic allegation hp compaq sold computers containing floppy disk controllers fail alert user certain floppy disk controller errors failure alleged result data loss data corruption complaints alvis lapray seek injunctive relief declaratory relief unspecified damages attorneys fees july 2001 nationwide class certified lapray case beaumont court appeals affirmed june 2002 may 2004 texas supreme court reversed certification nationwide class lapray case remanded case trial court trial court set new class certification hearing class certification hearing held july 1 2003 alvis case court granted plaintiffs motion certify nationwide class action hp filed appeal certification 9th court appeals beaumont texas heard oral arguments hps appeal received supplemental briefing based upon lapray opinion texas supreme court august 31 2004 9th court appeals texas reversed lower courts decision certifying nationwide class remanded case trial court class certification hearing held court notified parties certify texaswide class action injunctive relief june 4 2003 barrett v hp grider v compaq filed state court cleveland county oklahoma factual allegations similar alvis lapray complaints barrett grider seek among things specific performance declaratory relief unspecified damages attorneys fees november 5 2003 court heard hps motion dismiss barrett v hp grider v compaq motion subsequently denied december 22 2003 court entered order staying barrett grider cases conclusions alvis lapray actions july 28 2004 court lifted stay grider took advisement plaintiffs motion lift stay barrett november 5 2004 scott v hp filed state court san joaquin county california factual allegations similar alvis lapray complaint scott seeks class certification injunctive relief unspecified damages including punitive damages restitution costs attorneys fees addition civil division department justice general services administration office inspector general federal agencies conducting investigation allegations hp compaq made caused made false claims payment united states computers known hp compaq contain defective parts otherwise perform defective manner relating alleged floppy disk controller errors hp agreed department justice extend statute limitations investigation june 6 2005 hp cooperating fully investigation december 27 2001 cornell university cornell research foundation inc filed action hp united states district court northern district new york alleging hps parisc 8000 family microprocessors servers workstations incorporating processors infringes patent assigned cornell research foundation inc describes way executing microprocessor instructions hp answered counterclaimed action seeks declaratory injunctive relief unspecified damages march 26 2004 court issued ruling interpreting disputed claims terms patent issue discovery ongoing trial date set hp v emc corporation emc lawsuit filed united states district court northern district california september 30 2002 hp accuses emc infringing seven hp patents hp seeks damages injunction prejudgment interest costs attorneys fees july 21 2003 emc filed answer crossclaim asserting among things numerous hp storage server printer products infringe six emc patents emc seeks permanent injunction well unspecified monetary damages costs attorneys fees patent infringement court issued order construing disputed claim terms june 23 2004 discovery ongoing trial expected late 2005 early 2006 subsequently hp filed second lawsuit united states district court northern district california hp accuses additional models certain emc products infringing seven hp patents hp seeks damages injunction prejudgment interest costs attorneys fees emc also filed suit storageapps company acquired hp fiscal 2001 united states district court worcester massachusetts october 20 2000 suit accused storageapps infringement emc patents relating storage devices sought permanent injunction well unspecified monetary damages patent infringement court held hearing construe disputed claims terms emcs three patents suit july 2122 2003 issued claim construction ruling september 12 2003 following trial may 2004 jury found three emcs patents valid infringed damages phase litigation commenced trial issue damages scheduled begin february 17 2005 hp appealing judgment liability neubauer et al v intel corporation hewlettpackard company et al neubauer et al v compaq computer corporation separate lawsuits filed june 3 2002 state court madison county illinois alleging hp compaq along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel court hp action certified illinois class intel denied nationwide class plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class hp compaq class action certification hearings hp compaq scheduled action hp compaq filed motions dismiss cases court denied hp compaq also filed forum non conveniens motions pending skold et al v intel corporation hewlettpackard company lawsuit state court alameda county california hp joined june 14 2004 based upon factual allegations similar neubauer cases plaintiffs seek unspecified damages restitution attorneys fees cost certification nationwide class forgent networks v hp et al lawsuit filed april 22 2004 hp well 30 companies united states district court eastern district texas complaint accuses hp patent infringement respect hps products implement jpeg compression jpeg standard data compression used hps pcs scanners digital cameras pdas nonphotoprinters forgent seeks unspecified damages injunction interest costs attorneys fees separately hp alerted government regulators forgents participation jpeg standardization process current licensing activities trial set october 2005 hewlettpackard development company lp v gateway inc lawsuit filed march 24 2004 hps whollyowned subsidiary hewlettpackard development company lp hpdc gateway inc us district court southern district california alleging infringement six patents relating various notebook desktop enterprise computer technologies april 2 2004 hpdc filed amended complaint adding infringement allegations four additional patents hpdc seeks injunction unspecified monetary damages interest attorneys fees may 10 2004 gateway filed answer counterclaim alleging infringement five gateway patents relating computerized television wireless computer monitoring computer expansion card technologies gateway seeks injunction unspecified monetary damages interest attorneys fees claim construction scheduled begin january 2425 2005 may 6 2004 hpdc hp filed complaint us international trade commission itc gateway alleging infringement seven additional computer technology patents hp seeks injunction october 21 2004 hpdc filed suit united states district court western district wisconsin emachines whollyowned subsidiary gateway alleging infringement five hpdc patents relating personal desktop computers three patents remain suit hpdc seeks injunction unspecified monetary damages interest attorneys fees july 2 2004 gateway filed complaint itc hp alleging infringement three patents relating audio control imaging computerized television technologies gateway seeks injunction also july 2 2004 amiga development llc amiga entity affiliated gateway filed lawsuit hp eastern district texas alleging infringement three patents relating computer monitoring imaging decoder technologies gateway seeks injunction unspecified monetary damages interest attorneys fees hp hpdc answered counterclaimed alleging infringement amiga gateway four hpdc patents related personal computer technology august 18 2004 gateway filed declaratory relief action hpdc united states district court southern district california seeking declaration noninfringement invalidity abovereferenced four hpdc patents relating personal computer technology hpdc answered counterclaimed alleged infringement four patents hp seeks injunction unspecified monetary damages interest attorneys fees claim construction scheduled begin january 2005 hanrahan v hewlettpackard company carleton fiorina lawsuit filed november 3 2003 united states district court district connecticut behalf putative class persons sold common stock hp period september 4 2001 november 5 2001 lawsuit seeks unspecified damages generally alleges hp ms fiorina violated federal securities laws making statements period misleading failing disclose walter b hewlett would oppose proposed acquisition compaq hp prior mr hewletts disclosure opposition proposed transaction motion transfer action federal court california pending lead plaintiff yet appointed stevens v hp renamed erickson v hp unfair business practices consumer class action filed superior court california riverside county july 31 2000 consumer class action lawsuits filed coordination original plaintiffs 33 additional jurisdictions various plaintiffs throughout country claim purchased different models hp inkjet printers basic factual allegation actions affected consumers purchased hp printers received halffull economy ink cartridges instead full cartridges plaintiffs claim hps advertising packaging marketing representations printers led consumers believe would receive full cartridges actions seek injunctive relief disgorgement profits compensatory damages punitive damages attorneys fees various state unfair business practices statutes common law claims fraud negligent misrepresentation initial california matter court granted summary judgment hps favor denied class certification october 2003 california appellate court affirmed lower courts decisions dismissed plaintiffs appeal matter certified class action north carolina state court filed hughes v hewlettpackard company hp prevailed trial case concluded september 2003 litigation trial jurisdictions cases certified class actions plaintiffs counsel 33 jurisdictions signed dismissal agreement provides cases dismissed thus far twentyone actions dismissed digwamaje et al v bank america et al purported class action lawsuit names hp numerous multinational corporations defendants filed september 27 2002 united states district court southern district new york behalf current former south african citizens survivors suffered violence oppression apartheid regime lawsuit alleges hp companies helped perpetuate profited apartheid regime period 19481994 selling products services agencies south african government claims based alien tort claims act torture protection act racketeer influenced corrupt organizations act state law complaint seeks among things accounting creation historic commission compensatory damages excess 200 billion punitive damages excess 200 billion costs attorneys fees court subsequently dismissed plaintiffs complaint plaintiffs appealed decision united states court appeals second circuit may 2002 european commission eu publicly stated considering conducting investigation oem activities concerning sales printers supplies consumers within eu european commission contacted hp requesting information printing systems businesses hp cooperating fully inquiry march 2003 korea fair trade commission commenced investigation korean printing supplies market korea fair trade commission contacted hp requesting information printing systems business hearing expected held 2005 hp cooperating fully inquiry government canada conducted cost audits certain contracts public works government services canada pwgsc compaq canada corp hewlettpackard canada co relating services provided canadian department national defence dnd compaq canada corp combined hewlettpackard canada co following hps acquisition compaq hp cooperated fully audit conducted inquiry sharing results investigation pwgsc dnd may 14 2004 hp announced resolved dispute government canada hp canada agreed reimburse government canada sum cdn146 million approximately us105 million amount determined parties appropriate upon investigation hp recorded 70 million second quarter fiscal 2004 recorded 35 million prior fiscal year hp determined important hp honor contractual obligations rather engage protracted litigation government canada despite lack evidence hp employees derived improper benefit complex scheme designed exploit parties hp initiated proceedings recover funds responsible individuals continues consider proceedings others recover additional funds hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business accordance sfas 5 accounting contingencies hp makes provision liability probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impacts negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies environmental hp party otherwise involved proceedings brought united states state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies policy apply strict standards environmental protection sites inside outside united states even subject regulations imposed local governments liability environmental remediation environmental costs accrued considered probable costs reasonably estimated historically environmental costs material operations financial position note 18 segment information description segments hp leading global provider products technologies solutions services individual consumers businesses hps offerings span infrastructure storage personal computing access devices multivendor services including maintenance consulting integration outsourcing imaging printing fiscal 2004 hp organized operations seven business segments psg ipg ess hps hp financial services hpfs software corporate investments given crosssegment linkages adaptive enterprise offering order capitalize upselling crossselling opportunities ess hps software structured beneath broader technology solutions group tsg order provide supplementary view hps business hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology business segments disclosed consolidated financial statements based organizational structure information reviewed hps management evaluate business segment results beginning first quarter fiscal 2004 hp divided enterprise systems group ess segment software segment operating results fiscal 2003 2002 restated reflect organizational change well certain minor product reclassifications future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows technology solutions groups mission coordinate hps adaptive enterprise offering across organizations create solutions allow customers manage transform business environments tsg allows hp leverage resources capabilities hp portfolio applying key design principles consistently across business application infrastructure services vision standardization simplification modularity integration business segments within tsg described detail •enterprise storage servers provides storage server products business critical servers include reduced instruction set computing riscbased servers running hpux operating system itanium®1based servers running hpux windows®2 linux hp alphaserver product line running tru64 unix®3 open vms various server offerings range lowend servers highend scalable servers including superdome line additionally hp offers nonstop faulttolerant server products business critical solutions industry standard servers include primarily entrylevel midrange proliant servers run primarily windows linux novell operating systems hps bladesystem family blade servers hps storageworks offerings include entrylevel midrange enterprise arrays storage area networks sans network attached storage management software virtualization technologies well tape drives tape libraries optical archival storage 1itanium® registered trademark intel corporation 2windows® registered trademark microsoft corporation 3unix® registered trademark open group •hp services provides portfolio multivendor services including technology services consulting integration managed services hps also offers variety services tailored particular industries manufacturing network service providers collaboration ess software hps teams software networking companies local systems integrators bring solutions hps customers technology services formerly called customer support provides range technology services standalone product support high availability services complex global networked multivendor environments technology services also manages delivery product warranty support service organization well authorized resellers consulting integration services help customers measure assess maintain link business design integrate customers environments adaptive infrastructure align extend manage applications business processes consulting integration provides crossindustry solutions areas supply chain business portals messaging security managed services offers management services including comprehensive outsourcing transformational infrastructure services client computing managed services managed web services application services business process outsourcing well business continuity recovery services •software provides management software solutions including support allow enterprise customers manage infrastructure operations applications business processes hp openview brand addition software delivers suite comprehensive carriergrade platforms developing deploying nextgeneration voice data converged services network service providers hp opencall brand •personal systems group provides commercial pcs consumer pcs workstations handheld computing devices digital entertainment systems calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise small medium business customers connectivity manageability networked environments commercial pcs include hp business desktops hp compaq business series evo notebook pcs compaq tablet pcs consumer pcs targeted home user include hp pavilion compaq presario series multimedia consumer desktop pcs notebook pcs well hp media center pcs workstations individual computing products designed users demanding enhanced performance computer animation engineering design programs requiring high resolution graphics workstations provided unix windows linuxbased systems handheld computing devices include ipaq series products ranging entrylevel devices primarily used organizers advanced devices biometric security wireless capability run windows mobile software digital entertainment products include dvdrw drives hp movie writer hp digital entertainment center plasma lcd flat panel televisions apple ipod®4 hp 4ipod® registered trademark apple computer inc •imaging printing group provides home business printing imaging publishing devices systems digital imaging products printer supplies home business printing imaging publishing devices systems include color monochrome singlefunction printers shared personal use printer copierbased multifunction devices inkjet laser allinone printers wide largeformat inkjet printers digital presses digital imaging products include photosmart printers digital photography products scanners printer supplies include laser inkjet printer cartridges related printing media hpbranded vivera ink hp premium plus photo papers •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial life cycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services small mediumsized businesses education government entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments managed office strategy technology includes hp labs certain business incubation projects revenue segment attributable sale certain network infrastructure products enhance computing enterprise solutions well licensing specific hp technology third parties segment data results business segments derived directly hps internal management reporting system accounting policies used derive business segment results substantially used consolidated company management measures performance business segment based several metrics including earnings operations results used part evaluate performance assign resources business segments certain operating expenses hp manages separately corporate level allocated business segments unallocated costs include primarily amortization purchased intangible assets certain acquisitionrelated charges purchased iprd well certain corporate governance costs restructuring charges associated adjustments thereto related restructuring actions initiated prior fiscal 2004 allocated business segments selected operating results information business segment well tsg follows fiscal years ended october 31 reconciliation segment operating results information hp consolidated totals follows fiscal years ended october 31 assets allocated business segments based primary segments benefiting assets certain assets deferred tax assets cannot directly attributable segment allocated based certain drivers corporate unallocated assets composed primarily cash equivalents shortterm investments described fiscal 2004 segment asset information stated based 2004 organizational structure however practicable restate fiscal 2003 2002 segment assets changes total assets segment well tsg reconciliation segment assets hp consolidated total assets follows october 31 major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location single country outside united states represented 10 hps total net revenue period presented single country outside united states represented 10 hps total net assets period presented exception netherlands october 31 2004 belgium october 31 2003 respectively single country outside united states represented 10 hps total net property plant equipment period presented hps longlived assets goodwill purchased intangible assets allocated specific geographic locations impracticable composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows october 31 net revenue similar products services net revenue products services software hpfs corporate investments segments similar following table provides net revenue similar classes products within ipg psg ess hps segments fiscal years ended october 31 denotes net revenue class products services equaled exceeded 10 hps consolidated net revenue fiscal year case hpfs fiscal years presented hewlettpackard company subsidiaries quarterly summary unaudited 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year 3certain reclassifications made order conform fiscal 2004 presentation item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2005 2004 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2005 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2005 2004 consolidated results operations cash flows three years period ended october 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness hewlettpackard companys internal control financial reporting october 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 16 2005 expressed unqualified opinion thereon discussed note 1 consolidated financial statements november 1 2002 company changed method accounting goodwill intangible assets ernst young llp san jose california december 16 2005 report independent registered public accounting firm board directors stockholders hewlettpackard company audited managements assessment included accompanying managements report internal control financial reporting hewlettpackard company maintained effective internal control financial reporting october 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion managements assessment opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion managements assessment hewlettpackard company maintained effective internal control financial reporting october 31 2005 fairly stated material respects based coso criteria also opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2005 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2005 2004 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2005 report dated december 16 2005 expressed unqualified opinion thereon ernst young llp san jose california december 16 2005 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2005 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment hps management determined hps internal control financial reporting effective october 31 2005 hp managements assessment effectiveness hps internal control financial reporting october 31 2005 audited ernst young llp hps independent registered public accounting firm stated report appears page 69 annual report form 10k mark v hurd mark v hurd chief executive officer president december 16 2005 robert p wayman robert p wayman executive vice president chief financial officer december 16 2005 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions reclassifications segment reorganization hp made certain reclassifications prior year amounts order conform current year presentation addition hp reclassified certain information technology infrastructure costs selling general administrative expenses cost products cost services research development expenses align costs better functional areas support impact reclassifications increase cost sales offset equal reduction operating expenses impact consolidated segment level earnings operations hp revised presentation consolidated statements cash flows fiscal year ended october 31 2004 reflect gross purchases sales auction rate securities within cash flows investing activities change affect previously reported subtotals within consolidated statements cash flows previously reported results operations period presented use estimates preparation financial statements accordance us generally accepted accounting principles requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition hp recognizes revenue persuasive evidence sales arrangement exists delivery occurs services rendered sales price fee fixed determinable collectibility reasonably assured sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based relative fair value fair value software determined based vendor specific objective evidence vsoe absence vsoe elements residual method vsoe exists undelivered elements absence fair value delivered element hp first allocates revenue fair value undelivered elements residual revenue delivered elements fair value undelivered element cannot determined hp defers revenue delivered elements undelivered elements delivered hp limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecified return refund privileges hp ceases revenue recognition delinquent accounts based upon number factors including customer credit history number days past due terms customer agreement hp resumes revenue recognition recognizes associated deferred revenue appropriate customer actions taken remove accounts delinquent status products hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates offerings occur sales programs established hp directly hps distributors resellers hp recognizes revenue allocated software licenses inception license hp records revenue sale equipment salestype leases directfinancing leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcustomer support contracts ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract outsourcing contracts hp recognizes revenue ratably contractual service period fixed price contracts output consumption basis outsourcing contracts hp recognizes costs associated outsourcing contracts incurred unless costs relate transition phase outsourcing contract case hp generally amortizes costs contractual service period addition provisions emerging issues task force 0021 revenue arrangements multiple deliverables revenue delivered item recognized separable outsourcing arrangement hp also defers cost delivered item hp recognizes revenue associated cost delivered item ratably remaining contractual service period hp recognizes losses consulting outsourcing arrangements period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables hp recognizes revenue operating leases straightline basis service revenue rental period financing income salestype directfinancing leases produce financing income hp recognizes level rates return lease term shipping handling hp includes costs related shipping handling cost sales periods presented advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 11 billion fiscal 2005 12 billion fiscal 2004 11 billion fiscal 2003 taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents maturity investment three months less purchase date interest income approximately 424 million fiscal 2005 238 million fiscal 2004 240 million fiscal 2003 allowance doubtful accounts hp establishes allowance doubtful accounts ensure trade financing receivables overstated due uncollectibility hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware customers inability meet financial obligations case bankruptcy filings deterioration customers operating results financial position circumstances related customers change hp would adjust estimates recoverability receivables inventory hp values inventory lower cost market cost computed firstin firstout basis property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements major renewals hp expenses maintenance repairs minor renewals incurred hp provides depreciation using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value goodwill indefinitelived purchased intangible assets statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 effective hp beginning fiscal 2003 prohibits amortization goodwill purchased intangible assets indefinite useful lives hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value hp determines fair value reporting units based weighting income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference sfas 142 also requires fair value indefinitelived purchased intangible assets estimated compared carrying value hp estimates fair value intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value longlived assets including finitelived purchased intangible assets hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years hp evaluates longlived assets property plant equipment purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 144 accounting impairment disposal longlived assets hp assesses fair value assets based undiscounted future cash flow assets expected generate recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values capitalized software hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized costs using straightline method estimated useful lives software generally one three years derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 8 full description hps derivative financial instrument activities related accounting policies incorporated herein reference investments hps investments consist principally time deposits debt securities equity securities publiclytraded privatelyheld companies hp classifies investments maturities less one year shortterm investments hp classifies investments debt securities equity investments public companies availableforsale securities carries fair value hp determines fair values investments public companies using quoted market prices hp records unrealized gains losses availableforsale securities net taxes accumulated comprehensive loss hp carries equity investments privatelyheld companies lower cost fair value hp may estimate fair values investments privatelyheld companies based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies losses investments hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined otherthantemporary hp records impairment charge establishes new cost basis investment current fair value order determine whether decline value otherthantemporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value hp determined declines value certain investments otherthantemporary accordingly hp recorded impairments approximately 43 million fiscal 2005 26 million fiscal 2004 72 million fiscal 2003 hp includes impairments losses gains investments consolidated statements earnings depending market conditions hp may record additional impairments investment portfolio future concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively concentrated primarily north america represented approximately 22 gross accounts receivable october 31 2005 23 october 31 2004 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances hp generally experienced longer accounts receivable collection cycles emerging markets particular asia pacific latin america compared united states european markets event accounts receivable collection cycles emerging markets significantly deteriorate one hps larger resellers regions fail hps operating results could adversely affected stockbased compensation fiscal 2005 hp applied intrinsicvaluebased method prescribed accounting principles board apb opinion 25 accounting stock issued employees apb 25 accounting employee stockbased compensation accordingly hp generally recognized compensation expense granted options discounted exercise price hp recognized resulting compensation expense ratably associated service period generally option vesting term fiscal 2005 hp determined pro forma amounts fair value method required sfas 123 accounting stockbased compensation sfas 123 applied stockbased compensation fair value stock options stock purchase rights estimated date grant using blackscholes option pricing model sfas 123 revised 2004 sharebased payment sfas 123r clarifies timing recognizing compensation expense awards subject acceleration vesting retirement compensation expense must recognized period date grant date retirement eligibility met shorter vesting term upon adoption sfas 123r first quarter fiscal 2006 hps policy regarding timing expense recognition employees eligible retirement change recognize compensation cost period grant date employee first becomes eligible retire longer required provide service earn award fiscal 2005 hps policy recognize compensation costs vesting term hp applied nonsubstantive vesting provisions sfas 123r impact pro forma net earnings presented would immaterial periods presented see discussion sfas 123r recent pronouncements section note 1 weighted average fair values assumptions used calculating values follows following fiscal years light new accounting guidance sfas 123r beginning second quarter fiscal 2005 hp reevaluated assumptions used estimating fair value employee options granted based assessment management determined implied volatility better indicator expected volatility historical volatility change historical implied volatility resulted reduction pro forma expense aggregate 68 million average fouryear vesting period options granted second fourth quarters fiscal 2005 pro forma effect net earnings fair value stockbased compensation recognized compensation expense straightline basis vesting period stock option purchase right follows following fiscal years ended october 31 foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect period except net revenue cost sales expenses related previously noted balance sheet amounts hp remeasures historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive loss retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date plans september 30 fiscal 2005 fiscal 2004 see note 15 full description plans accounting funding policies incorporated herein reference recent pronouncements may 2004 financial accounting standards board fasb issued fasb staff position fsp 1062 fsp 1062 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 medicare act medicare act provides certain federal subsidies drug benefits retiree health plans third quarter fiscal 2004 hp adopted fsp 1062 retroactive december 8 2003 date enactment medicare act expected subsidy reduced hps accumulated postretirement benefit obligation apbo approximately 133 million hp recognized reduction unrecognized net actuarial loss amortizing average remaining service life hps employees eligible postretirement benefits hps adoption fsp 1062 reduced net periodic postretirement cost approximately 10 million fiscal 2004 amounts based estimated impact medicare act pending issuance final regulations january 21 2005 centers medicare medicaid services released final regulations requirements operational mechanics employers filing receive 28 federal subsidy result hp remeasured apbo considering overall effect medicare act remeasurement reduced apbo additional 39 million net periodic postretirement cost additional 10 million fiscal 2005 expense amounts shown note 15 incorporated herein reference reflect impact final regulations fsp 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 1092 provides guidance sfas 109 accounting income taxes respect recording potential impact repatriation provisions american jobs creation act 2004 jobs act income tax expense deferred tax liabilities jobs act enacted october 22 2004 fsp 1092 states enterprise allowed time beyond financial reporting period enactment evaluate effect jobs act plan reinvestment repatriation foreign earnings purposes applying sfas 109 third quarter fiscal 2005 hps ceo board directors approved domestic reinvestment plan required jobs act repatriate 145 billion foreign earnings fiscal 2005 hp repatriated 75 billion jobs act third quarter fiscal 2005 remaining 70 billion fourth quarter fiscal 2005 see discussion jobs act note 12 incorporated herein reference december 2004 fasb issued sfas 123r replaced sfas 123 superseded apb 25 sfas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based grant date fair values requires recognition begin first interim annual period june 15 2005 early adoption encouraged april 2005 securities exchange commission sec postponed effective date sfas 123r issuers first fiscal year beginning june 15 2005 hp adopt sfas 123r first quarter fiscal 2006 sfas 123r pro forma disclosures previously permitted longer alternative financial statement recognition hp apply blackscholes valuation model determining fair value sharebased payments employees amortized straightline basis requisite service period hp apply modified prospective method requires compensation expense recorded unvested stock options restricted stock upon adoption sfas 123r march 2005 sec issued staff accounting bulletin 107 sab 107 regarding secs interpretation sfas 123r valuation sharebased payments public companies hp evaluating requirements sfas 123r sab 107 expects adoption sfas 123r november 1 2005 material impact hps consolidated results operations earnings per share beginning first quarter fiscal 2006 adoption following recent accounting pronouncements material impact hps results operations financial condition •sfas 151 inventory costsan amendment arb 43 chapter 4 •sfas 153 exchanges nonmonetary assetsan amendment apb opinion 29 •fasb interpretations 47 accounting conditional asset retirement obligations interpretation fasb statement 143 may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 replaces apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statementsan amendment apb opinion 28 sfas 154 provides guidance accounting reporting accounting changes error corrections establishes retrospective application latest practicable date required method reporting change accounting principle reporting correction error sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 required adopted hp first quarter fiscal 2007 hp currently evaluating effect adoption sfas 154 consolidated results operations financial condition expect material impact june 2005 fasb issued fsp fas 1431 accounting electronic equipment waste obligations fsp 1431 provides guidance accounting certain obligations associated waste electrical electronic equipment directive adopted european union eu directive waste management obligation historical equipment products put market prior august 13 2005 remains commercial user customer replaces equipment fsp 1431 required applied later first reporting period ending june 8 2005 date directives adoption law applicable eu member countries manufacturers significant operations hp adopted fsp 1431 fourth quarter fiscal 2005 determined effect material impact consolidated results operations financial condition fiscal 2005 see note 17 discussion directive incorporated herein reference november 2005 fasb issued fsp fas 1151 fas 1241 meaning otherthantemporary impairment application certain investments fsp 1151 provides guidance determining investments certain debt equity securities considered impaired whether impairment otherthantemporary measuring impairment loss fsp 1151 also includes accounting considerations subsequent recognition otherthan temporary impairment requires certain disclosures unrealized losses recognized otherthantemporary impairments fsp 1151 required applied reporting periods beginning december 15 2005 required adopted hp second quarter fiscal 2006 hp currently evaluating effect adoption fsp 1151 consolidated results operations financial condition expect material impact note 2 net earnings per share eps hps basic eps calculated using net earnings weightedaverage number shares outstanding reporting period diluted eps includes effect potential issuance common stock issuable pursuant exercise stock options assumed conversion convertible notes reconciliation numerators denominators basic diluted eps calculations follows following fiscal years ended october 31 fiscal 2005 2004 2003 hp excluded calculation diluted eps approximately 255 million 408 million 362 million respectively shares hp stock issuable upon exercise options effect antidilutive stock options antidilutive exercise price options greater average market price common shares period addition hp excluded approximately 8 million shares hp stock issuable upon assumed conversion zerocoupon subordinated notes calculation diluted eps fiscal 2005 fiscal 2003 effect antidilutive note 3 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables hp revolving trade receivablesbased facilities permitting us sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 12 billion october 31 2005 facility largest volume one subject maximum amount 525 million euros approximately 630 million euro program trade receivables approximately 79 billion sold fiscal 2005 including approximately 54 billion euro program fees associated facilities generally differ materially cash discounts previously offered customers alternative prompt payment programs october 31 2005 approximately 571 million available programs 357 million relates euro program inventory current assets property plant equipment depreciation expense approximately 17 billion fiscal 2005 18 billion fiscal 2004 20 billion fiscal 2003 longterm financing receivables assets accrued liabilities note 4 supplemental cash flow information supplemental cash flow information follows following fiscal years ended october 31 note 5 acquisitions hp recorded acquisitions using purchase method accounting accordingly included results operations hps consolidated results date acquisition hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill fair value assigned assets acquired based valuations using managements estimates assumptions hp expect goodwill recorded majority acquisitions deductible tax purposes fiscal 2005 hp acquired five companies aggregate purchase price approximately 648 million includes direct transaction costs certain liabilities recorded connection acquisitions largest transactions acquisitions sac llc business snapfish appiq inc appiq hp completed april 15 2005 october 24 2005 respectively snapfish leading online photo service acquisition snapfish intended enable hp capitalize growing market online photo printing customers benefiting affordable simpler comprehensive digital photography experience appiq leading provider open storage area network management storage resource management solutions acquisition appiq intended strengthen hps ability give customers single integrated console controls better manages storage server infrastructure hp recorded approximately 537 million goodwill 108 million amortizable purchased intangible assets connection five acquisitions hp also recorded approximately 2 million iprd charges related five acquisitions fiscal 2005 hp paid approximately 8 million cash additional shares digital globalsoft limited consolidated subsidiary hp dgs increase hps ownership approximately 972 approximately 985 fiscal 2004 hp paid approximately 315 million cash shares dgs increase hps ownership 501 approximately 972 dgs globallyfocused software development services company subsidiary enhanced hps capability services including expertise life cycle services migration technical application services hp recorded approximately 7 million 281 million goodwill connection share purchases fiscal 2005 2004 respectively november 1 2005 hp acquired substantially assets scitex vision ltd market leader superwide digital imaging 230 million cash acquisition expected expand hps leadership printing industrial wideformat market september 19 2005 hp announced signed definitive agreement acquire peregrine systems inc peregrine cash merger 2608 per share representing aggregate equity value 425 million acquisition peregrine intended add key asset service management components hp openview portfolio distributed management software suite business operations synstar october 2004 hp acquired approximately 997 outstanding stock ukbased synstar plc synstar purchase price approximately 343 million included 298 million cash paid well direct transaction costs certain liabilities recorded connection transaction synstar leading independent provider information technology services across europe acquisition intended strengthen hps offering primarily area multitechnology support services hp recorded approximately 172 million goodwill 122 million amortizable purchased intangible assets connection acquisition hp amortizing purchased intangibles principally customer contracts relationships straightline basis estimated useful lives ranging three seven years triaton april 2004 hp acquired outstanding stock triaton gmbh subsidiaries singapore china brazil triaton france sas triaton na inc usa collectively triaton purchase price approximately 464 million included 306 million cash paid well direct transaction costs certain liabilities recorded connection transaction triaton one germanys largest independent service providers acquisition intended increase hps capacity deliver adaptive enterprise offerings customers benefiting added managed services technology services consulting integration capabilities hp recorded approximately 285 million goodwill 179 million amortizable purchased intangible assets connection acquisition hp amortizing purchased intangibles principally customer contracts relationships straightline basis estimated useful lives ranging two eight years acquisitions hp also acquired companies fiscal 2004 2003 significant financial position results operations total consideration acquisitions approximately 250 million 185 million fiscal 2004 2003 respectively hp recorded approximately 181 million goodwill 49 million purchased intangibles fiscal 2004 91 million goodwill 53 million purchased intangibles fiscal 2003 connection acquisitions hp also recorded approximately 37 million 1 million iprd related acquisitions fiscal 2004 2003 respectively hp included results operations transactions prospectively respective date transaction hp presented pro forma results operations acquired businesses results material hps consolidated results operations either individual aggregate basis acquisitionrelated charges acquisitionrelated charges approximately 54 million fiscal 2004 consisted deferred compensation mergerrelated inventory adjustments professional fees charges approximately 280 million fiscal 2003 attributable primarily costs incurred employee retention bonuses connection hps acquisition compaq computer corporation compaq well professional fees consulting services note 6 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2004 2005 changes carrying amount goodwill fiscal year ended october 31 2005 follows goodwill adjustments acquisitions made prior fiscal 2005 shown relate primarily revisions acquisitionrelated tax estimates resulted net additions goodwill offset partially reduction restructuring liability asset impairments associated fiscal 2002 2001 restructuring plans compaq prior acquisition hp reductions resulted adjusting original estimates actual costs incurred various locations throughout world based results annual impairment tests hp determined impairment goodwill existed august 1 2005 august 1 2004 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed amortization expense related finitelived purchased intangible assets approximately 622 million fiscal 2005 603 million fiscal 2004 563 million fiscal 2003 based results annual impairment tests hp determined impairment compaq trade name existed august 1 2005 august 1 2004 however future impairment tests could result charge earnings hp continue evaluate purchased intangible asset indefinite life annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weighted average useful lives approximately eight years developed core technology patents product trademarks weighted average useful lives approximately six years estimated future amortization expense related finitelived purchased intangible assets october 31 2005 follows note 7 restructuring charges fiscal 2005 restructuring plans fourth quarter fiscal 2005 hps board directors approved restructuring plan recommended chief executive officer senior management designed simplify hps structure reduce costs place greater focus customers plan approximately 15300 employees left expected leave hp first quarter fiscal 2007 fourth quarter fiscal year 2005 hp recorded pretax restructuring charge 157 billion hp expects record additional charge 30 million connection plan fourth quarter charge includes approximately 400 million related employee severance benefits associated early retirement 3200 us employees left hp october 31 2005 majority costs funded hps pension plan assets remaining charges approximately 12 billion include approximately 100 million noncash stock compensation related severance benefits 11700 employees pursuant plan approximately 4700 employees left hp october 31 2005 remaining 10200 employees well additional 400 employees accrual criteria met october 31 2005 expected leave first quarter fiscal 2007 hp expects pay majority costs relating severance employee benefits fiscal 2006 third quarter fiscal 2005 hps management approved restructuring plan hp recorded restructuring charges 109 million related severance related costs associated termination approximately 1450 employees left hp october 31 2005 initial restructuring amount hp paid 87 million october 31 2005 hp expects pay remainder end fiscal 2006 fiscal 2005 workforce rebalancing addition restructuring activities described hp incurred approximately 236 million workforce rebalancing charges resulting actions taken certain business segments severance related costs workforce rebalancing costs included segment results hp recorded costs six months ended april 30 2005 result workforce rebalancing actions approximately 3000 employees left hp october 31 2005 workforce rebalancing charges hp paid 209 million october 31 2005 expects pay remainder end fiscal 2006 fiscal 2003 restructuring plans fiscal 2003 hps management approved implemented plans restructure certain operations intent better managing hps cost structure aligning certain operations effectively current business conditions initial charge actions totaled 752 million included 639 million related severance employee benefits workforce reductions 42 million vacating duplicative facilities leased owned contract termination costs asset impairments 71 million associated identification duplicative assets facilities leased owned related acquisition compaq hp included original estimates 9000 employees across many regions job classes fiscal 2003 workforce reduction plans subsequent initial estimate hp reduced number employees terminated fiscal 2003 restructuring plans 600 employees october 31 2005 substantially 8400 employees terminated placed workforce reduction programs retired hp expects pay majority remaining severance employee benefits fiscal 2006 hp anticipates remaining costs vacating duplicative facilities substantially settled end fiscal 2006 fiscal 2002 2001 restructuring plans may 3 2002 hp acquired compaq time hp compaq restructuring liabilities 2001 restructuring plans 3 million 52 million respectively remained october 31 2005 restructuring plans established 2002 connection compaq acquisition resulted additional restructuring liabilities aggregating 28 billion amount hp recorded aggregate 19 billion restructuring charges fiscal 2002 2003 2004 hp recorded 960 million acquisition date part compaq purchase price allocation october 31 2005 remaining restructuring liabilities hp compaqrelated 2002 restructuring plans 8 million 61 million respectively 2001 2002 restructuring plans substantially complete although hp records minor revisions previous estimates necessary fiscal 2005 hp recorded adjustments 20 million adjustments pertained severance related restructuring trueups fiscal 2002 restructuring plans addition adjustment fiscal 2005 includes 44 million reduction goodwill 2001 2002 compaqrelated restructuring plans 25 million related asset trueups previously estimated fair value adjustments asset disposal aggregate 124 million restructuring liability plans october 31 2005 related primarily facility lease obligations hp expects pay obligations life related obligations extend end fiscal 2010 summary restructuring plans activity accrued restructuring balances related plans described follows fiscal 2005 october 31 2005 october 31 2004 hp included longterm portion restructuring liability 73 million 95 million respectively liabilities accompanying consolidated balance sheets note 8 financial instruments investments debt equity securities investments availableforsale debt equity securities fair value follows following fiscal years ended october 31 corporate debt consist primarily loans companies guaranteed standby letters credit issued third party banks equity securities public companies primarily common stock hp estimated fair values based quoted market prices pricing models using current market rates estimated fair values may representative actual values could realized yearend realized future gross unrealized losses october 31 2005 2004 associated investments public equity securities fair value 10 million 9 million respectively continuous loss position fewer 12 months contractual maturities availableforsale debt securities follows october 31 2005 proceeds sales maturities availableforsale securities 21 billion fiscal 2005 43 billion fiscal 2004 875 million fiscal 2003 gross realized gains losses totaled 31 million 1 million respectively fiscal 2005 gross realized gains losses totaled 27 million 4 million respectively fiscal 2004 gross realized gains losses totaled 36 million 8 million respectively fiscal 2003 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity securities follows following fiscal years ended october 31 investments consist primarily marketable securities held generate returns hp expects offset changes certain liabilities related deferred compensation arrangements hp includes gains losses changes fair value securities offset losses gains related liabilities interest net hps consolidated statements earnings derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts swaps options hedge certain foreign currency interest rate exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp use derivative contracts speculative purposes hp applies hedge accounting based upon criteria established sfas 133 accounting derivative instruments hedging activities whereby hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges hp recognizes derivatives consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs cash flows operating activities consolidated statement cash flows fair value hedges hp enters fair value hedges reduce exposure debt portfolio interest rate risk foreign currency exchange rate risk hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp may use interest rate cross currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payments underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap fixed rate liability offset fixed rate assets similarly hp may choose hedge foreign currency risk associated foreign currencydenominated debt acts natural foreign currency hedge assets denominated currency investing fixed rate instruments hp may enter interest rate swaps convert fixed interest returns variable interest returns would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period hp terminates interest rate swap maturity resulting gain loss termination amortized remaining life underlying hedged item cash flow hedges hp may use cash flow hedges hedge variability liborbased interest income hp receives certain variablerate investments hp may enter interest rate swaps convert variable rate interest returns fixedrate interest returns interest rate swaps hp designates qualify cash flow hedges hp records changes fair values accumulated comprehensive income separate component stockholders equity subsequently reclassifies changes earnings period hedged transaction recognized earnings hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six months however certain leasing revenuerelated forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portions gain loss derivative instrument accumulated comprehensive loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item october 31 2005 amounts related derivatives qualifying cash flow hedges amounted reduction accumulated comprehensive loss 46 million net tax 44 million expected reclassified earnings next 12 months along earnings effects related forecasted transactions addition fiscal 2005 2004 hp discontinue cash flow hedges probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument cumulative translation adjustment separate component stockholders equity cumulative translation adjustment increased result unrecognized net loss net investment hedges 56 million 61 million fiscal years ended october 31 2005 2004 respectively hp reports effective portion net investment hedges financial statement line item changes value hedged item derivatives designated hedging instruments sfas 133 consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures derivative instruments designated hedging instruments sfas 133 hp recognizes changes fair values earnings period change hp recognizes gains losses foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities interest net included foreign currency exchange gains approximately 70 million fiscal 2005 losses approximately 142 million fiscal 2004 125 million fiscal 2003 hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt investment change fair value derivative interest rate swaps designated cash flow hedges hp measures effectiveness offsetting change variable portion interest rate swaps changes expected interest income received due fluctuations libor based interest rate foreign currency option forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness income statement line item hedged exposure october 31 2005 portion hedging instruments gains losses excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years ended october 31 2005 2004 2003 hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value gross notional fair market value derivative financial instruments respective sfas 133 classification consolidated balance sheets follows following fiscal years ended october 31 fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps shortand longterm debt approximately 51 billion october 31 2005 compared carrying value 52 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 9 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting marketing hps complementary thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 2005 equipment leased customers operating leases 19 billion october 31 2005 23 billion october 31 2004 included machinery equipment accumulated depreciation equipment lease 06 billion october 31 2005 09 billion october 31 2004 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 2005 note 10 guarantees indemnifications ordinary course business hp enters contractual arrangements may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates material usage service delivery costs differ estimates revisions estimated warranty liability would required information regarding changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 deferred revenue components deferred revenue follows following fiscal years ended october 31 deferred support contract services revenue represents amounts received billed advance primarily fixedprice support maintenance contracts services include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments hp defers service amounts time bills customer recognizes ratably contract life hp renders services deferred revenue represents amounts received billed advance contracts related primarily consulting integration projects managed services startup transition work well minor amounts training product sales note 11 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 notes payable banks lines credit includes deposits associated bankingrelated activities approximately 385 million 241 million october 31 2005 2004 respectively longterm debt longterm debt follows following fiscal years ended october 31 hp may redeem global notes series mediumterm notes euro mediumterm notes collectively notes set forth table time redemption prices described prospectus supplements relating thereto notes senior unsecured debt lyons convertible holders adjusted rate 1509 shares hp common stock 1000 face value lyons payable either cash common stock hps election time hp may redeem lyons book value payable cash december 2000 board directors authorized repurchase program lyons allowed hp repurchase lyons time varying prices hp repurchase lyons fiscal 2005 2004 2003 march 2005 hps board authorized increase hps us commercial paper program 60 billion amount authorized hp subsidiaries issue amount 10 billion commercial paper april 2005 hp increased available borrowings commercial paper program 60 billion hewlettpackard international bank plc whollyowned subsidiary hp established 500 million euro commercial papercertificate deposit programme may 2001 december 15 2005 hp two us credit facilities consisting 15 billion 364day credit facility expiring march 2006 15 billion 5year credit facility expiring march 2009 credit facilities subject weighted average commitment fee 725 basis points per annum december 15 2005 hp replaced two credit facilities 30 billion 5year credit facility subject commitment fee 65 basis points per annum interest rates terms borrowing credit facility vary based hps external credit ratings credit facility senior unsecured committed borrowing arrangement available general corporate purposes including supporting issuance commercial paper amounts outstanding credit facility hp also maintains lines credit approximately 23 billion number financial institutions uncommitted available various foreign subsidiaries hp registered sale 30 billion debt global securities common stock preferred stock depositary shares warrants shelf registration statement march 2002 shelf registration statement december 2002 hp filed supplement 2002 shelf registration statement allows hp offer time 15 billion mediumterm notes series b due nine months date issuance series b mediumterm note program october 31 2005 hp issued mediumterm notes pursuant series b mediumterm note program hp registered sale 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange offered notes set forth table hp denominate notes currency including euro however notes registered united states october 31 2005 hp 146 billion available borrowing resources 2002 shelf registration statement credit facilities programs described aggregate future maturities debt face value excluding fair value adjustment related sfas 133 75 million discount debt issuance 168 million follows october 31 2005 interest expense borrowings 334 million fiscal 2005 247 million fiscal 2004 277 million fiscal 2003 note 12 taxes earnings provision benefit taxes earnings follows following fiscal years ended october 31 significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 october 31 2005 hp deferred tax asset 565 million related loss carryforwards 337 million relates foreign net operating losses hp provided valuation allowance 310 million foreign net operating loss carryforwards hp expect utilize hp recorded deferred tax asset 118 million result current year us net operating loss expire fiscal 2026 remaining 110 million deferred tax asset relates various state net operating losses acquired companies hp provided 97 million valuation allowance losses total tax credit carryforwards 29 billion hp foreign tax credit carryforwards 193 billion expire fiscal 2016 hp alternative minimum tax credit carryforwards 107 million expire research development credit carryforwards 334 million 19 million expire fiscal 2013 remainder expire fiscal 2018 hp also tax credit carryforwards 551 million various states foreign countries hp provided valuation allowance 401 million gross deferred tax assets october 31 2005 2004 reduced valuation allowances 894 million 447 million respectively total valuation allowance increased 447 million 262 million attributable net operating losses tax credits various states 175 million provided tax credits foreign countries 28 million provided losses acquired companies net reduction 18 million relates adjustments 447 million valuation allowance increase offset corresponding increases previously unrecognized deferred tax assets 325 million remaining 122 million related deferred tax assets generated current year recorded increase provision taxes october 31 2005 addition 808 million valuation allowances foreign net operating losses tax credits hp valuation allowances 86 million unrealized capital losses 894 million valuation allowances october 31 2005 151 million related deferred tax assets compaq acquired companies existed time acquisition future hp determines realization deferred tax assets likely reversal related valuation allowance reduce goodwill instead provision taxes total tax benefits resulting exercise employee stock options employee stock programs amounts booked stockholders equity approximately 30 million fiscal 2005 35 million fiscal 2004 24 million fiscal 2003 differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 fiscal 2005 hp recorded 697 million net income tax expense related items unique year tax expense result primarily 792 million associated repatriation 145 billion jobs act 76 million related additional distributions received foreign subsidiaries tax expenses offset part tax benefits 177 million resulting agreements us internal revenue service irs governmental authorities reflected lower rates jurisdictions net fiscal 2004 tax rate benefited net favorable adjustments previously estimated tax liabilities 207 million decreased provision taxes approximately 007 per share significant favorable adjustments related resolution california state income tax audit net favorable revision estimated tax accruals upon filing 2003 us income tax return reduction taxes foreign earnings due change regulatory policy favorable adjustments offset part net effect smaller adjustments income tax liabilities various jurisdictions fiscal 2003 tax rate benefited primarily lower tax rates nonus jurisdictions domestic foreign components earnings losses follows following fiscal years ended october 31 result certain employment actions capital investments hp undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes fiscal 2018 gross income tax benefits attributable tax status subsidiaries estimated approximately 1051 million 036 per share fiscal 2005 947 million 031 per share fiscal 2004 705 million 023 per share fiscal 2003 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors irs completed examination income tax returns hp years 1998 compaq years 1997 hps tax years 1993 1998 currently irss appeals division october 31 2005 irs process examining hps income tax returns years 1999 2003 compaqs income tax returns years 1998 2002 addition hp subject numerous ongoing audits state foreign tax authorities hp believes adequate accruals hp compaq provided years hp provided us federal income foreign withholding taxes 12 billion undistributed earnings nonus operations october 31 2005 hp intends reinvest earnings indefinitely outside united states hp distributes earnings foreign tax credits may become available current law reduce eliminate resulting us income tax liability excess cash accumulated hps nonus subsidiaries advantageous business operations tax cash reasons hp remits subsidiary earnings american jobs creation act 2004repatriation foreign earnings jobs act enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction results approximate 525 federal tax rate repatriated earnings third quarter fiscal 2005 hps ceo board directors approved domestic reinvestment plan required jobs act repatriate 145 billion foreign earnings fiscal 2005 hp recorded tax expense fiscal 2005 792 million 027 per share related 145 billion dividend jobs act additional tax expense consists federal taxes 744 million state taxes net federal benefits 73 million net tax benefit 25 million related adjustment deferred tax liabilities repatriated unrepatriated foreign earnings hp repatriated 75 billion jobs act third quarter remaining 70 billion fourth quarter fiscal 2005 note 13 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per common share fiscal 2005 2004 2003 employee stock purchase plan hp sponsors hewlettpackard company 2000 employee stock purchase plan also known share ownership plan espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock employees purchase stock semiannually price equal 85 fair market value certain plandefined dates november 1 2005 espp changed employees purchase stock semiannually price equal 85 fair market value purchase date october 31 2005 approximately 140000 employees eligible participate approximately 57000 employees participants espp fiscal 2005 participants purchased 20673000 shares hp common stock weightedaverage price 17 per share fiscal 2004 participants purchased 25868000 shares hp common stock weightedaverage price 14 per share fiscal 2003 participants purchased 23884000 shares hp common stock weightedaverage price 14 per share incentive compensation plans hp stock option plans including principal plans adopted 2004 2000 1995 1990 principal option plans well various stock option plans assumed acquisitions stock options outstanding regular employees eligible receive stock options fiscal 2005 approximately 127000 employees holding options one option plans october 31 2005 principal option plans permit options granted qualify incentive stock options us internal revenue code exercise price stock option generally equal fair market value hps common stock date option granted term options granted fiscal 2005 2004 2003 generally eight years options granted prior fiscal 2003 generally tenyear term principal option plans hp may choose certain cases establish discounted exercise price less 75 fair market value grant date hp grant discounted options fiscal 2005 2004 2003 option activity follows following fiscal years ended october 31 information options outstanding follows october 31 2005 principal option plans hp granted certain employees cash restricted stock awards restricted stock awards include grants restricted stock restricted stock units cash restricted stock awards independent option grants generally subject forfeiture employment terminates prior release restrictions generally one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock considered issued outstanding hp expenses cost restricted stock awards determined fair market value shares date grant ratably period restrictions lapse fiscal 2005 hp granted 6773000 shares restricted stock weightedaverage grant date fair value 21 hp 7099000 shares restricted stock outstanding october 31 2005 1533000 shares restricted stock outstanding october 31 2004 1008000 shares restricted stock outstanding october 31 2003 fiscal 2005 hp granted 1820000 shares restricted stock units weightedaverage grant date fair value 21 hp restricted stock units covering 1780000 shares outstanding october 31 2005 shares outstanding october 31 2004 shares outstanding october 31 2003 part fiscal 2005 restructuring plans hp accelerated vesting options held terminated employees included oneyear posttermination exercise period options modification resulted compensation expense 107 million hp included restructuring charges compensation expense recognized incentive compensation plans approximately 211 million fiscal 2005 including 107 million restructuring charges referred 48 million fiscal 2004 45 million fiscal 2003 shares reserved shares available espp incentive compensation plans 260669000 october 31 2005 including 32449000 shares assumed compaq plans 257554000 october 31 2004 including 29123000 shares assumed compaq plans 168951000 october 31 2003 including 42967000 shares assumed compaq plans hp 794750000 shares common stock reserved october 31 2005 808855000 shares common stock reserved october 31 2004 670929000 shares common stock reserved october 31 2003 future issuance stockrelated benefit plans additionally hp 21494000 shares common stock reserved october 31 2005 2004 2003 future issuances related conversion outstanding zerocoupon subordinated notes stock repurchase program hp repurchases shares common stock ongoing program manage dilution created shares issued employee stock plans well repurchase shares opportunistically program authorizes purchases open market private transactions hps board directors authorized additional 40 billion 50 billion future repurchases outstanding common stock fiscal 2005 2004 respectively fiscal 2005 hp completed share repurchases approximately 150 million shares approximately 148 million shares settled 35 billion fiscal 2004 2003 hp completed share repurchases approximately 172 million shares 33 billion 40 million shares 751 million respectively shares repurchased included open market repurchases fiscal 2005 37 million shares 10 billion shares repurchased settled fiscal 2004 included open market repurchases 66 million shares 13 billion 72 million shares 13 billion accelerated share repurchase program investment bank accelerated purchase 34 million shares 679 million david lucile packard foundation packard foundation shares repurchased packard foundation fiscal years 2005 2004 2003 111 million shares 34 million shares 13 million shares 25 billion 679 million 241 million respectively accelerated purchase began september 2004 completed november 2004 upon completion accelerated purchase hp paid 51 million price adjustment based difference 1882 weighted average price open market stock purchases investment bank initial purchase price 1811 per share price adjustment also included certain amounts reflecting investment banks carrying costs benefits purchasing shares prices initial price benefits receiving 13 billion payment advance purchases hp accounted accelerated purchase equity transaction cash settlement dates hp repurchased shares packard foundation memorandum understanding dated september 9 2002 amended restated september 17 2004 among things priced repurchases reference volume weightedaverage price composite new york stock exchange transactions trading days repurchase occurred either hp packard foundation may suspend terminate sales amended restated memorandum understanding time october 31 2005 hp authorization remaining future repurchases approximately 34 billion note 14 comprehensive income changes components comprehensive income net taxes follows following fiscal years ended october 31 components accumulated comprehensive loss net taxes follows following fiscal years ended october 31 note 15 retirement postretirement benefit plans plan design changes fiscal 2005 substantially hps employees covered various defined benefit pension plans defined contribution plans met eligibility requirements plans addition hp sponsors medical life insurance plans provide benefits retired us employees meet plan eligibility requirements conjunction managements plan restructure certain operations discussed note 7 consolidated financial statements hp modified us retirement programs closely align industry practice effective january 1 2006 hp offer us defined benefit pension plans subsidized retiree medical programs new us hires addition hp cease pension accruals eliminate eligibility subsidized retiree medical program current employees meet defined criteria based age years service calculated december 31 2005 additionally hp subsidy retiree medical program capped upon reaching two times 2003 subsidy levels actions resulted reductions us defined benefit postretirement plan obligations 526 million 556 million respectively hp recognized reduction defined benefit obligation curtailment event resulted gain 199 million fourth quarter fiscal 2005 hp recognized reduction postretirement plan obligation negative plan amendment addition hp recognized special termination benefit 352 million fourth quarter fiscal 2005 reflects aggregate additional lumpsum benefits paid hp expects pay individuals participating 2005 us enhanced early retirement program hp distribute amount plan assets hp recognized special termination benefit 55 million hp retiree medical plans employees participating us enhanced early retirement program expense amount reflects present value approximately two years added medical coverage hp expects pay distributed plan assets hp assets benefits paid hp expects pay majority added retiree medical benefits next two years defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan defined benefit pension plan us employees hired december 31 2002 benefits retirement plan generally based pay years service except eligible preacquisition compaq employees receive credit years service prior january 1 2003 effective december 31 2005 participants whose combination age plus years service less 62 cease accruing benefits retirement plan us employees hired rehired january 1 2003 hp sponsors hewlettpackard company cash account pension plan cash account pension plan benefits accrue pursuant cash accumulation account formula based upon percentage pay plus interest effective december 31 2005 cash account pension plan closed new participants whose combination age plus years service less 62 cease accruing benefits effective november 30 2005 hp merged cash account pension plan retirement plan merged plan treated one plan certain legal financial purposes including funding requirements merger impact separate benefit structures plans hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset retirement plan hp calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp september 30 measurement date follows following fiscal years ended october 31 postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required participation hp retiree medical program medicare act reduced hps postretirement medical plan obligations expense fiscal 2005 2004 see note 1 full description impact medicare act adopted hp incorporated herein reference defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 422 million fiscal 2005 405 million fiscal 2004 377 million fiscal 2003 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation may 3 2002 hp assumed sponsorship compaq computer corporation 401k investment plan compaq 401k plan effective january 1 2004 hp merged compaq 401k plan hp 401k plan fiscal 2005 hp matched employee contributions hp 401k plan cash contributions maximum 4 eligible compensation last eight months calendar 2002 compaq 401k plan hp matched maximum 6 eligible compensation effective january 1 2006 newlyhired employees rehired employees whose combination age plus years service less 62 eligible 6 hp matching contribution effective january 31 2004 hp desginated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 12 million 13 million dividends hp common shares held hp stock fund fiscal 2005 2004 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 34 million shares hp common stock october 31 2005 pension postretirement benefit expense hps net pension postretirement benefit costs follows following fiscal years ended october 31 weighted average assumptions used calculate net benefit cost follows following fiscal years ended october 31 result plan design changes made us retirement programs well release final regulations centers medicare medicaid services covered medicare act hp remeasured us defined benefit plan postretirement benefit plan obligations 2005 discount rates outlined table rates used hp conducting respective plan remeasurements reflect weighted average rate across measurement periods medical cost related assumptions used calculate net postretirement benefit cost following fiscal years ended october 31 follows 10 percentage point increase medical cost trend rate would increased fiscal 2005 service interest components postretirement benefit costs 06 million 10 percentage point decrease would resulted decrease 07 million period funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 weighted average assumptions used calculate benefit obligation september 30 measurement date follows 10 percentage point increase medical cost trend rate would increased total postretirement benefit obligation reported october 31 2005 11 million 10 percentage point decrease would resulted decrease 13 million net amount recognized hps defined benefit postretirement benefit plans follows following fiscal years ended october 31 defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows plan asset allocations hps weightedaverage target asset allocations september 30 measurement date follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment purposes hp occasionally utilizes derivatives effect asset allocation changes hedge certain investment exposures target asset allocation selected plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp regularly conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds private debt private equity provide diversification higher expected returns september 30 2005 measurement date hp held higher targeted portion us defined benefit plan assets shortterm investments anticipation nearterm benefit payments connection special termination benefits associated 2005 us enhanced early retirement program outside united states local regulations require different approaches target asset allocations resulting higher percentage allocation fixed income securities country outside us local pension board decides target allocation consideration local regulations hps corporate office acts governance role periodically reviewing investment strategy providing recommended list investment managers country plan basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix correlations among asset classes expected volatilities expected asset class returns reflect current yield us government bonds risk premiums asset class evaluating expected longterm rate return plan assets united states hp considers factors historical risk premiums current valuations dividend yields inflation expected earnings growth rates hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation future contributions funding policy fiscal 2006 hp expects contribute approximately 245 million pension plans approximately 40 million cover benefit payments us nonqualified plan participants hp expects pay approximately 80 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2005 estimated future benefits payable postretirement plans reflected net expected medicare part subsidy note 16 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include escalation clauses rent expense approximately 770 million fiscal 2005 766 million fiscal 2004 703 million fiscal 2003 sublease rental income approximately 43 million fiscal 2005 43 million fiscal 2004 46 million fiscal 2003 future annual minimum lease payments sublease rental income commitments excluding future obligations included restructuring liabilities consolidated balance sheets october 31 2005 follows october 31 2005 hp unconditional purchase obligations approximately 21 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally cost sales inventory items future unconditional purchase obligations october 31 2005 follows note 17 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business accordance sfas 5 accounting contingencies hp records provision liability management believes probable liability incurred hp reasonably estimate amount loss hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies diversion managements attention creation significant expenses pending litigation proceedings copyright levies described proceedings ongoing hp certain european union eu member countries including litigation germany seeking impose levies upon equipment multifunction devices mfds printers alleging devices enable producing private copies copyrighted materials total levies due imposed would based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposing extension levies digital environment advocating compensation rights holders digital rights management systems verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted nonbinding arbitration proceedings hp june 2001 germany arbitration board patent trademark office proceedings relate whether extent copyright levies photocopiers imposed accordance copyright laws implemented germany mfds allegedly enable production copies private persons may 2004 vg wort filed lawsuit hp stuttgart civil court stuttgart germany seeking levies mfds sold 1997 2001 december 22 2004 court held hp liable payments regarding mfds sold germany ordered hp pay vg wort amount equal 5 outstanding levies claimed plus interest mfds sold germany december 2001 vg wort appealed decision july 6 2005 stuttgart court appeals ordered hp pay vg wort levies based published tariffs photocopiers germany range eur 3835 eur 61356 per unit plus interest mfds sold germany december 2001 hp appealed stuttgart court appeals decision bundesgerichtshof german federal supreme court september 26 2005 vg wort filed additional lawsuit hp stuttgart civil court stuttgart germany seeking levies mfds sold germany 1997 2001 well products sold 2002 onwards july 2004 vg wort filed separate lawsuit hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 higher regional court badenwuerttemberg may 11 2005 higher regional court issued decision confirming levies due june 6 2005 hp filed appeal german supreme court karlsruhe september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich state court seeking levies pcs industry test case germany hp undertaken bound final decision december 23 2004 munich state court held pcs subject levy fsc must pay 12 euros plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 higher regional court bavaria december 15 2005 higher regional court affirmed munich state court decision fsc right appeal decision german supreme court based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address liabilities matters described however ultimate resolution matters including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain alvis v hp nationwide defective product consumer class action filed district court jefferson county texas april 2001 february 2000 similar suit captioned lapray v compaq filed district court jefferson county texas basic allegation hp compaq sold computers containing floppy disk controllers fail alert user certain floppy disk controller errors failure alleged result data loss data corruption complaints alvis lapray seek injunctive relief declaratory relief unspecified damages attorneys fees july 2001 nationwide class certified lapray case beaumont court appeals affirmed june 2002 texas supreme court reversed certification remanded trial court may 2004 march 29 2005 alvis court certified texaswide class action injunctive relief hp appealed april 15 2005 june 4 2003 barrett v hp grider v compaq filed district court cleveland county oklahoma factual allegations similar alvis lapray complaints barrett grider seek among things specific performance declaratory relief unspecified damages attorneys fees december 22 2003 court entered order staying barrett case conclusion alvis september 23 2005 court granted grider plaintiffs motion certify nationwide class action hp appealed oklahoma supreme court november 5 2004 scott v hp january 27 2005 jurado v hp filed state court san joaquin county california factual allegations similar lapray alvis seeking californiaonly class certification injunctive relief unspecified damages including punitive damages restitution costs attorneys fees addition civil division department justice general services administration office inspector general federal agencies conducting investigation allegations hp compaq made caused made false claims payment united states computers known hp compaq contain defective parts otherwise perform defective manner relating alleged floppy disk controller errors hp agreed department justice extend statute limitations investigation june 6 2006 hp cooperating fully investigation hanrahan v hewlettpackard company carleton fiorina lawsuit filed november 3 2003 united states district court district connecticut behalf putative class persons sold common stock hp period september 4 2001 november 5 2001 lawsuit seeks unspecified damages generally alleges hp carleton fiorina hps former ceo violated federal securities laws making statements period misleading failing disclose walter b hewlett former hp board member would oppose proposed acquisition compaq hp prior mr hewletts disclosure opposition proposed transaction case transferred united states district court northern district california neubauer et al v intel corporation hewlettpackard company et al neubauer et al v compaq computer corporation separate lawsuits filed june 3 2002 circuit court third judicial district madison county illinois alleging hp compaq along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel court hp action certified illinois class intel denied nationwide class proceedings stayed pending resolution plaintiffs appeal decision plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class action certification compaq stayed pending resolution plaintiffs appeal hp action skold et al v intel corporation hewlettpackard company lawsuit initially filed state court alameda county california hp joined june 14 2004 based upon factual allegations similar neubauer cases skold case since transferred state court santa clara county california plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class tyler v hp lawsuit filed state court santa clara california february 17 2005 alleging hp engaged wrongful business practices including unfair competition deceptive advertising fraud deceit breach express implied warranty breach covenants good faith fair dealing among things plaintiffs alleged hp engineered smart chip inkjet cartridges use certain inkjet printers register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contend consumers received false ink depletion warnings design smart chip cartridge limits ability consumers use cartridge full capacity choose competitive products february 17 2005 march 18 2005 lawsuits captioned obi v hp weingart v hp respectively filed state court los angeles california similar allegations feder v hp ciolino v hewlettpackard company filed united states district court northern district california june 16 2005 september 6 2005 respectively similar allegations seeking restitution damages injunctive relief interest costs attorneys fees class certification feder ciolino cases formally consolidated single proceeding district court northern district california caption hp inkjet printer litigation tyler obi weingart cases dismissed without prejudice plaintiffs grabell v hp filed united states district court district new jersey march 18 2005 asserted causes action new jersey consumer fraud act unjust enrichment breach implied covenant good faith fair dealing similar allegations cases v hp filed united states district court eastern district new york april 20 2005 asserted causes action new york general business law 349350 unjust enrichment breach implied covenants good faith fair dealing allegations cases similar allegations described agreement parties grabell dismissed without prejudice plaintiffs december 27 2001 cornell university cornell research foundation inc filed complaint amended september 6 2002 hp united states district court northern district new york alleging hps parisc 8000 family microprocessors servers workstations incorporating processors infringe patent assigned cornell research foundation inc describes way executing microprocessor instructions action seeks declaratory injunctive relief unspecified damages march 26 2004 court issued ruling interpreting disputed claim terms patent issue trial expected commence mid late 2007 hp gateway inc gateway certain affiliated entities involved various patent infringement related lawsuits california texas proceedings united states international trade commission described hewlettpackard development company lp v gateway inc lawsuit filed march 24 2004 hps whollyowned subsidiary hewlettpackard development company lp hpdc gateway united states district court southern district california alleging infringement patents relating various notebook desktop enterprise computer technologies seeking injunction unspecified monetary damages interest attorneys fees may 10 2004 gateway filed answer counterclaim alleging infringement various patents relating computerized television wireless communication computer monitoring computer expansion card technologies seeking injunction unspecified monetary damages interest attorneys fees may 6 2004 hp hpdc filed complaint united states international trade commission itc alleging gateway infringes various computer technology patents seeking injunction following trial march 2005 administrative law judge issued initial determination gateway violated section 337 tariff act 1930 amended importing certain personal computers found infringe two hpdc patents related parallel ports issued limited exclusion order barring importation gateways accused products court also held two hpdc patents issue invalid infringed december 8 2005 itc issued notice decision vacate portions initial determination including literal infringement finding respect parallel port patents related exclusion order itc also remanded investigation administrative law judge among things determination whether certain claims parallel port patents infringed doctrine equivalents administrative law judge set new date conclude investigation october 21 2004 hpdc filed suit united states district court western district wisconsin emachines whollyowned subsidiary gateway alleging infringement various hpdc patents relating personal desktop computers february 17 2005 action transferred southern district texas houston division hpdc seeks injunction unspecified monetary damages interest attorneys fees september 7 2005 court stayed action two three patents remaining suit related proceedings itc june 6 2005 hp hpdc filed suit superior court california county santa clara emachines complaint alleges emachines failed observe contractual obligation permit audit emachines compliance terms royaltybearing license hp hpdc hp hpdc seek specific performance specified costs attorneys fees july 6 2005 hpdc filed complaint itc alleges infringement gateway emachines five computer technology patents seeking enjoin gateway emachines importing certain personal computers found infringe hpdc patents trial scheduled later may 1 2006 july 2 2004 gateway filed complaint itc alleging hps infringement various patents relating audio control imaging computerized television technologies patent relating computerized television technologies remains suit gateway seeks injunction hps importation media center pcs digital entertainment centers among similar multimedia products trial held may 2005 october 2005 administrative law judge ruled gateway patent asserted unenforceable asserted claim invalid administrative law judge also found asserted patent procured inequitable conduct october 17 2005 gateway filed petition review itc hp filed conditional petition review itc decides review initial determination final determination expected itc february 2006 also july 2 2004 amiga development llc renamed ad technologies ad entity affiliated gateway filed lawsuit hp united states district court eastern district texas alleging infringement patents relating computer monitoring imaging decoder technologies october 2005 united states patent trademark office granted hps request reexamine one patents suit hp filed motion stay action light reexamination ad technologies seeks injunction unspecified monetary damages interest attorneys fees hp hpdc answered counterclaimed alleging infringement amiga gateway hpdc patents related personal computer technology trial scheduled april 3 2006 august 18 2004 gateway filed declaratory relief action hpdc united states district court southern district california seeking declaration noninfringement invalidity hpdc patents relating personal computer technology hpdc answered counterclaimed alleged infringement patents claims consolidated litigation pending southern district california commenced march 2004 hp seeks injunction unspecified monetary damages interest attorneys fees february 22 2005 emachines filed declaratory judgment action hpdc southern district texas patents relating personal desktop computers issue hpdcs suit emachines subsequently dismissed declaratory judgment action compression labs inc v hp et al lawsuit filed compression labs inc subsidiary forgent networks cli april 22 2004 hp 27 companies united states district court eastern district texas complaint accuses hp patent infringement respect hps products implement jpeg compression jpeg standard data compression used hps computers scanners digital cameras pdas printers plotters software cli seeks unspecified damages injunction interest costs attorneys fees judicial panel multidistrict litigation transferred lawsuit northern district california coordinated consolidated pretrial proceedings separately hp alerted government regulators clis participation jpeg standardization process current licensing activities miller et al v hewlettpackard company lawsuit filed march 21 2005 united states district court district idaho behalf putative class persons employed thirdparty temporary service agencies performed work hp facilities united states plaintiffs claim incorrectly classified contractors contingent workers result wrongfully denied employee benefits covered employment retirement income security act 1974 erisa benefits covered erisa may 22 2005 plaintiffs filed first amended complaint added worker adjustment retraining notification act warn claim defined class include persons hired hp agencies work hp facilities united states march 21 2000 present deprived full benefit employee status misclassified contractors contingent workers temporary workers otherwise misclassified plaintiffs seek declaratory relief injunction retroactive prospective benefits compensation unspecified damages enhanced damages interest costs attorneys fees digwamaje et al v bank america et al purported class action lawsuit names hp numerous multinational corporations defendants filed september 27 2002 united states district court southern district new york behalf current former south african citizens survivors suffered violence oppression apartheid regime lawsuit alleges hp companies helped perpetuate profited otherwise aided abetted apartheid regime period 19481994 selling products services agencies south african government claims based alien tort claims act torture victims protection act racketeer influenced corrupt organizations act state law complaint seeks among things accounting creation historic commission compensatory damages excess 200 billion punitive damages excess 200 billion costs attorneys fees november 29 2004 court dismissed prejudice plaintiffs complaint may 2005 plaintiffs filed amended notice appeal united states court appeals second circuit investigation may 2002 european commission eu publicly stated considering conducting investigation original equipment manufacturer oem activities concerning sales printers supplies consumers within eu european commission contacted hp requesting information printing systems businesses hp cooperated fully inquiry settled litigation proceedings march 2003 korea fair trade commission commenced investigation korean printing supplies market contacted hp requesting information printing systems business hearing held august 10 2005 matter concluded without imposition fine hp emc litigation hp emc corporation emc announced may 2 2005 agreed dismiss claims counterclaims findings admissions liability settlement longstanding patent dispute involving patent infringement allegations two companies described part settlement agreement hp agreed pay 325 million net amount valuation emcs claims hp less valuation hps claims emc hp satisfy purchase resale internal use complementary emc products vmware product line equal installments next five years addition emc purchases hp products fiveyear period hp required purchase equivalent amount additional product services emc aggregate 108 million emc hp also signed fiveyear patent crosslicense agreement hp incur charge respect settlement hp expected meet minimum future purchase commitments settlement agreement hp v emc corporation lawsuit filed united states district court northern district california september 30 2002 hp accused emc infringing seven hp patents hp sought damages injunction prejudgment interest costs attorneys fees july 21 2003 emc filed answer crossclaim asserted among things numerous hp storage server printer products infringed six emc patents emc sought permanent injunction well unspecified monetary damages costs attorneys fees patent infringement november 27 2004 hp filed second lawsuit emc united states district court northern district california hp accused additional models certain emc products infringing seven hp patents hp sought damages injunction prejudgment interest costs attorneys fees emc also filed suit storageapps company acquired hp fiscal 2001 united states district court worcester massachusetts october 20 2000 suit accused storageapps infringement emc patents relating storage devices sought permanent injunction well unspecified monetary damages patent infringement following trial may 2004 jury found three emcs patents valid infringed parties agreed binding arbitration issue damages hp appealed judgment liability foregoing litigation resolved connection settlement agreement discussed intergraph litigation january 21 2005 hp announced settled ongoing patent litigation intergraph corporation described companies entered patent crosslicense agreement resolved legal claims two companies subsidiaries terms agreement hp agreed pay intergraph 141 million 116 million recorded charge first quarter fiscal 2005 since related crosslicense agreement products shipped prior years hp intergraph since dismissed withdrawn terminated prejudice pending lawsuits neither company financial obligations stemming disputes according terms crosslicense agreement hp granted license intergraph patents fields use intergraph granted license hp patents specific fields covered intergraphs current product categories intergraph hardware technologies company v hp dell gateway lawsuit filed united states district court eastern district texas marshall county december 16 2002 suit accused hp infringement three patents related cache memory known clipper patents intergraph sought damages constituting reasonable royalty well enhanced damages injunction prejudgment interest costs attorneys fees may 7 2004 intergraph sued hp united states district court eastern district texas tyler county infringement patent related cache memory management intergraph sought injunction declaratory relief attorneys fees damages hp answered counterclaimed asserting intergraphs infringement two hp software patents hp sought damages injunction may 28 2003 hp sued intergraph corporation parent intergraph united states district court northern district california san francisco division accusing intergraph corporation infringement four hp patents related computeraided design video display technology information retrieval technology hp sought damages injunction prejudgment interest costs attorneys fees april 1 2004 hp sued intergraph corporation mannheim state court mannheim germany instituted related proceedings germany infringement two european union patents related computeraided design hp sought damages injunction costs trial took place november 2004 court dismissed hps action based determination intergraphs noninfringement january 7 2005 april 19 2004 hp sued zi imaging subsidiary intergraph corporation intergraph corporation united states district court district delaware accusing zi imaging infringement two patents related image scanning technology also april 19 2004 hp sued intergraph corporation united states district court eastern district texas infringement one patent relating computeraided design cases hp sought damages injunction prejudgment interest costs attorneys fees foregoing litigation resolved connection settlement agreement discussed stevens v hp renamed erickson v hp unfair business practices consumer class action filed superior court california riverside county july 31 2000 alleged various violations california state law including unfair competition fraud negligent misrepresentation consumer class action lawsuits filed coordination original plaintiffs 33 additional jurisdictions alleged similar claims based set facts various plaintiffs throughout country claimed purchased different models hp inkjet printers basic factual allegation actions affected consumers purchased hp printers received halffull economy ink cartridges instead full cartridges plaintiffs claimed hps advertising packaging marketing representations printers led consumers believe would receive full cartridges actions sought injunctive relief disgorgement profits compensatory damages punitive damages attorneys fees various state unfair business practices statutes common law claims fraud negligent misrepresentation initial california matter erickson v hp court granted summary judgment hps favor denied class certification october 2003 california appellate court tentatively affirmed lower courts decisions plaintiffs subsequently dismissed appeal prior time appellate court could enter ruling matter certified class action north carolina state court filed hughes v hewlettpackard company hp prevailed trial case concluded september 2003 pursuant dismissal agreement signed hp plaintiffs counsel jurisdiction remaining actions dismissed canada dispute government canada conducted cost audits certain contracts public works government services canada pwgsc compaq canada corp hewlettpackard canada co relating services provided canadian department national defence dnd compaq canada corp combined hewlettpackard canada co following hps acquisition compaq hp cooperated fully audit conducted inquiry sharing results investigation pwgsc dnd may 14 2004 hp announced resolved dispute government canada hp canada agreed reimburse government canada sum cdn146 million approximately us 105 million amount determined parties appropriate upon investigation hp recorded 70 million second quarter fiscal 2004 recorded 35 million fiscal 2003 hp determined important hp honor contractual obligations rather engage protracted litigation government canada despite lack evidence hp employees derived improper benefit complex scheme designed exploit parties hp entered agreements recover recovered approximately 10 million funds certain responsible individuals continues consider proceedings others recover additional funds environmental hp party otherwise involved proceedings brought united states state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies policy apply strict standards environmental protection sites inside outside united states even subject regulations imposed local governments european union eu enacted waste electrical electronic equipment directive makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products deadline individual member states eu enact directive respective countries august 13 2004 legislation together directive weee legislation producers participating market financially responsible implementing responsibilities weee legislation beginning august 2005 implementation certain member states potentially may delayed 2006 similar legislation may enacted jurisdictions including united states canada mexico china japan hp continuing evaluate impact weee legislation similar legislation jurisdictions individual countries issue implementation guidance liability environmental remediation environmental costs accrued considered probable costs reasonably estimated accrued amounts conjunction foregoing environmental issues believe adequate october 31 2005 accruals material operations financial position currently anticipate material capital expenditures environmental control facilities note 18 segment information description segments hp leading global provider products technologies solutions services individual consumers small medium sized businesses smbs large enterprises hps offerings span enterprise storage servers multivendor services including technology support maintenance consulting integration managed services personal computing access devices imaging printing related products services fiscal 2005 hp operations organized seven business segments enterprise storage servers ess hp services hps software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology business segments disclosed consolidated financial statements based organizational structure information reviewed hps management evaluate business segment results ess hps software structured beneath broader technology solutions group tsg order provide supplementary view hps business aggregated financial data tsg presented herein hp reclassified segment operating results fiscal 2004 2003 conform certain minor fiscal 2005 organizational realignments future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows technology solutions group business segments within tsg described detail •enterprise storage servers provides storage server products various server offerings range lowend servers highend scalable servers including superdome line industry standard servers include primarily entrylevel midrange proliant servers run primarily windows®1 linux novell operating systems hps bladesystem family blade servers business critical servers include itanium®2based integrity servers running hpux windows® linux open vms operating systems reduced instruction set computing riscbased servers running hpux operating system hp alphaserver product line running tru64 unix®3 open vms additionally hp offers itanium®based integrity nonstop mips based nonstop faulttolerant server products business critical solutions hps storageworks offerings include entry level midrange enterprise arrays storage area networks sans network attached storage nas storage management software well tape drives tape libraries optical archival storage 1windows® registered trademark microsoft corporation 2itanium® registered trademark intel corporation 3unix® registered trademark open group •hp services provides portfolio multivendor services including technology services consulting integration managed services hps also offers variety services tailored particular industries manufacturing network service providers collaboration ess software hps teams software networking companies systems integrators bring solutions hps customers technology services formerly called customer support provides range technology services standalone product support high availability services complex global networked multivendor environments well business continuity recovery services technology services also manages delivery product warranty support service organization well authorized resellers consulting integration services help customers measure assess maintain link business design integrate customers environments adaptive infrastructure align extend manage applications business processes consulting integration provides crossindustry solutions areas supply chain business portals messaging security managed services offers management services including comprehensive outsourcing transformational infrastructure services client computing managed services managed web services application services business process outsourcing well business continuity recovery services •software provides management software solutions including support allow enterprise customers manage infrastructure operations applications services business processes hp openview brand addition software delivers suite comprehensive carriergrade software platforms developing deploying nextgeneration voice data converged services network service providers hp opencall brand hps business segments described •personal systems group provides commercial pcs consumer pcs workstations handheld computing devices digital entertainment systems calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise smb customers connectivity manageability networked environments commercial pcs include hp compaq business desktops notebooks well hp compaq tablet pcs consumer pcs targeted home user include hp pavilion compaq presario series multimedia consumer desktop pcs notebook pcs well hp media center pcs workstations individual computing products designed users demanding enhanced performance programs computer animation engineering design programs requiring high resolution graphics workstations provided unix® windows® linuxbased systems handheld computing devices include series ipaq pocket pc products ranging entrylevel devices primarily used organizers advanced devices biometric security wireless capability run windows® mobile software digital entertainment products include plasma lcd flat panel televisions hp digital entertainment center dvd rw drives cd writers dvd writers •imaging printing group provides consumer commercial printing digital photography entertainment graphics imaging devices systems printer supplies consumer commercial printing graphics imaging devices systems include color monochrome singlefunction printers shared personal use printer copierbased multifunction devices inkjet laserjet allinone printers wide largeformat inkjet printers photo printers digital photography products services scanners digital presses printer supplies include laserjet toner inkjet printer cartridges related printing media hpbranded vivera ink hp premium plus photo papers •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial life cycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments managed office strategy technology includes hp labs certain business incubation projects revenue segment attributable sale certain network infrastructure products enhance computing enterprise solutions well licensing specific hp technology third parties segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include primarily amortization purchased intangible assets certain acquisitionrelated charges purchased inprocess research development well certain corporate governance costs hp allocate business segments restructuring charges associated adjustments related restructuring actions workforce rebalancing charges include involuntary workforce reductions voluntary severance incentives recorded six months ended april 30 2005 included business segment results selected operating results information business segment follows following fiscal years ended october 31 reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hp allocates assets business segments based primary segments benefiting assets corporate unallocated assets composed primarily cash equivalents described fiscal 2005 segment asset information stated based fiscal 2005 organizational structure however practicable hp reclassify fiscal 2003 segment assets changes total assets segment well tsg reconciliation segment assets hp consolidated total assets follows october 31 major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location single country outside united states represented 10 hps total consolidated net revenue period presented single country outside united states represented 10 hps total consolidated net assets period presented exception netherlands october 31 2004 single country outside united states represented 10 hps total consolidated net property plant equipment period presented hps longlived assets goodwill purchased intangible assets hp allocate specific geographic locations impracticable hp composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 hewlettpackard company subsidiaries quarterly summary unaudited 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year 3certain reclassifications made order conform fiscal 2005 presentation item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2006 2005 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2006 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2006 2005 consolidated results operations cash flows three years period ended october 31 2006 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness hewlettpackard companys internal control financial reporting october 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 15 2006 expressed unqualified opinion thereon discussed note 1 consolidated financial statements fiscal year 2006 hewlettpackard company changed method accounting stockbased compensation accordance guidance provided statement financial accounting standards 123r sharebased payment ernst young llp san jose california december 15 2006 report independent registered public accounting firm board directors stockholders hewlettpackard company audited managements assessment included accompanying managements report internal control financial reporting hewlettpackard company maintained effective internal control financial reporting october 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion managements assessment opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion managements assessment hewlettpackard company maintained effective internal control financial reporting october 31 2006 fairly stated material respects based coso criteria also opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2006 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2006 2005 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2006 report dated december 15 2006 expressed unqualified opinion thereon ernst young llp san jose california december 15 2006 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2006 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment hps management determined hps internal control financial reporting effective october 31 2006 hp managements assessment effectiveness hps internal control financial reporting october 31 2006 audited ernst young llp hps independent registered public accounting firm stated report appears page 72 annual report form 10k mark v hurd mark v hurd chairman chief executive officer president december 15 2006 robert p wayman robert p wayman executive vice president chief financial officer december 15 2006 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions reclassifications segment reorganization hp made certain organizational realignments order closely align financial reporting business structure realignments immaterial size reflect primarily revenue shifts among business units within business segment none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share hp revised presentation consolidated statements cash flows fiscal years ended october 31 2005 2004 provide improved visibility comparability current year presentation change affect previously reported subtotals within consolidated statements cash flows previously reported results operations period presented use estimates preparation financial statements accordance us generally accepted accounting principles requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition hp recognizes revenue persuasive evidence sales arrangement exists delivery occurs services rendered sales price fee fixed determinable collectibility reasonably assured sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based relative fair value software based vendor specific objective evidence vsoe fair value absence fair value delivered element hp first allocates revenue fair value undelivered elements residual revenue delivered elements fair value undelivered element cannot determined hp defers revenue delivered elements undelivered elements delivered hp limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecified return refund privileges hp ceases revenue recognition delinquent accounts based upon number factors including customer credit history number days past due terms customer agreement hp resumes revenue recognition recognizes associated deferred revenue appropriate customer actions taken remove accounts delinquent status products hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates offerings occur sales programs established hp directly hps distributors resellers hp uses residual method allocate revenue software licenses inception license term vsoe undelivered elements post contract support exists revenue recognition criteria satisfied hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcustomer support contracts ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract outsourcing contracts hp recognizes revenue ratably contractual service period fixed price contracts output consumption basis outsourcing contracts hp recognizes costs associated outsourcing contracts incurred unless costs relate transition phase outsourcing contract case hp generally amortizes costs contractual service period addition provisions emerging issues task force 0021 revenue arrangements multiple deliverables revenue delivered item recognized separable outsourcing arrangement hp also defers cost delivered item hp recognizes revenue associated cost delivered item ratably remaining contractual service period hp recognizes losses consulting outsourcing arrangements period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables hp recognizes revenue operating leases straightline basis service revenue rental period financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term shipping handling hp includes costs related shipping handling cost sales periods presented advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 11 billion fiscal 2006 11 billion fiscal 2005 12 billion fiscal 2004 taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents maturity investment three months less purchase date interest income approximately 623 million fiscal 2006 424 million fiscal 2005 238 million fiscal 2004 allowance doubtful accounts hp establishes allowance doubtful accounts ensure trade financing receivables overstated due uncollectibility hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weighted average risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware customers inability meet financial obligations case bankruptcy filings deterioration customers operating results financial position circumstances related customers change hp would adjust estimates recoverability receivables inventory hp values inventory lower cost market cost computed firstin firstout basis property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements major renewals hp expenses maintenance repairs minor renewals incurred hp provides depreciation using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value goodwill indefinitelived purchased intangible assets statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 prohibits amortization goodwill purchased intangible assets indefinite useful lives hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value hp determines fair value reporting units based weighting income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference sfas 142 also requires fair value indefinitelived purchased intangible assets estimated compared carrying value hp estimates fair value intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value longlived assets including finitelived purchased intangible assets hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years hp evaluates longlived assets property plant equipment purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 144 accounting impairment disposal longlived assets hp assesses fair value assets based undiscounted future cash flow assets expected generate recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values capitalized software hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized costs using straightline method estimated useful lives software generally one three years derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 9 full description hps derivative financial instrument activities related accounting policies incorporated herein reference investments hps investments consist principally time deposits debt securities money market securities equity securities publiclytraded privatelyheld companies hp classifies investments maturities less one year shortterm investments hp classifies investments debt securities equity investments public companies availableforsale securities carries fair value hp determines fair values investments public companies using quoted market prices hp records unrealized gains losses availableforsale securities net taxes accumulated comprehensive income loss hp carries equity investments privatelyheld companies lower cost fair value hp may estimate fair values investments privatelyheld companies based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies losses investments hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined otherthantemporary hp records impairment charge establishes new cost basis investment current fair value order determine whether decline value otherthantemporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company including key operational cash flow metrics current market conditions future trends companys industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value hp determined declines value certain investments otherthantemporary accordingly hp recorded impairments approximately 8 million fiscal 2006 43 million fiscal 2005 26 million fiscal 2004 hp includes impairments gainslosses investments consolidated statements earnings depending market conditions hp may record additional impairments investment portfolio future concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively concentrated primarily north america represented approximately 21 gross accounts receivable october 31 2006 22 october 31 2005 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances hp generally experienced longer accounts receivable collection cycles emerging markets particular asia pacific latin america compared united states european markets event accounts receivable collection cycles emerging markets significantly deteriorate one hps larger resellers regions fail hps operating results could adversely affected concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely effect hps revenue gross margins stockbased compensation effective november 1 2005 hp adopted fair value recognition provisions sfas 123 revised 2004 sharebased payment sfas 123r using modified prospective transition method therefore restated results prior periods transition method stockbased compensation expense fiscal 2006 included stockbased compensation expense sharebased payment awards granted prior yet vested november 1 2005 based grantdate fair value estimated accordance original provision sfas 123 accounting stockbased compensation sfas 123 stockbased compensation expense sharebased payment awards granted november 1 2005 based grantdate fair value estimated accordance provisions sfas 123r hp recognizes compensation costs straightline basis requisite service period award generally option vesting term four years prior adoption sfas 123r hp recognized stockbased compensation expense accordance accounting principles board apb opinion 25 accounting stock issued employees apb 25 march 2005 securities exchange commission sec issued staff accounting bulletin 107 sab 107 regarding secs interpretation sfas 123r valuation sharebased payments public companies hp applied provisions sab 107 adoption sfas 123r november 2005 financial accounting standards board fasb issued fasb staff position fsp fas 123r3 transition election related accounting tax effects sharebased payment awards fsp 123r3 hp elected adopt alternative transition method provided fsp 123r3 calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establish beginning balance additional paidin capital pool apic pool related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r see note 2 consolidated financial statements discussion stockbased compensation foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect period except net revenue cost sales expenses related previously noted balance sheet amounts hp remeasures historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive income loss retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date plans september 30 fiscal 2006 fiscal 2005 see note 15 full description plans accounting funding policies incorporated herein reference recent pronouncements may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 replaces apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statementsan amendment apb opinion 28 sfas 154 provides guidance accounting reporting accounting changes error corrections establishes retrospective application latest practicable date required method reporting change accounting principle reporting correction error sfas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 required adopted hp first quarter fiscal 2007 hp currently evaluating effect adoption sfas 154 consolidated results operations financial condition expect material impact july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 fin 48 clarifies accounting uncertainty income taxes prescribing recognition threshold tax position required meet recognized financial statements also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 required adopted hp first quarter fiscal 2008 cumulative effects applying fin 48 recorded adjustment retained earnings beginning period adoption hp currently evaluating effect adoption fin 48 consolidated results operations financial condition yet position determine effects september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 provides guidance using fair value measure assets liabilities also responds investors requests expanded information extent companies measure assets liabilities fair value information used measure fair value effect fair value measurements earnings sfas 157 applies whenever standards require permit assets liabilities measured fair value expand use fair value new circumstances sfas 157 effective financial statements issued fiscal years beginning november 15 2007 required adopted hp first quarter fiscal 2009 hp currently evaluating effect adoption sfas 157 consolidated results operations financial condition yet position determine effects september 2006 fasb issued sfas 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r sfas 158 sfas 158 requires funded status defined benefit postretirement plans recognized companys balance sheet changes funded status reflected comprehensive income effective fiscal years ending december 15 2006 hp expects adopt effective october 31 2007 sfas also requires companies measure funded status plan date fiscal yearend effective fiscal years ending december 15 2008 hp expects adopt measurement provisions sfas 158 effective october 31 2009 based upon october 31 2006 balance sheet pension disclosures impact adopting sfas 158 estimated decrease assets 821 million decrease liabilities 4 million pretax increase accumulated comprehensive loss 817 million effect adoption differ estimate due actual plan asset liability experience fiscal 2007 september 2006 sec issued sab 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 sab 108 provides guidance consideration effects prior year misstatements quantifying current year misstatements purpose materiality assessment sab 108 establishes approach requires quantification financial statement errors based effects companys balance sheet statement operations related financial statement disclosures early application guidance sab 108 encouraged report interim period first fiscal year ending november 15 2006 adopted hp first quarter fiscal 2007 hp expect adoption sab 108 material impact consolidated results operations financial condition addition hp reviewing following emerging issues task force eitf consensuses currently expect adoption material impact consolidated results operations financial condition •eitf 055 accounting early retirement postemployment programs specific features terms specified altersteilzeit early retirement arrangements issued june 2005 effective hp first quarter fiscal 2007 eitf applies early retirement programs create incentives employees within specific age group transition full parttime employment retirement legal retirement age •eitf 062 accounting sabbatical leave similar benefits issued june 2006 effective hp first quarter fiscal 2008 eitf applies compensated absences require minimum service period increase benefit even additional years service •eitf 069 reporting change elimination previously existing difference fiscal year end parent company consolidated entity reporting period investor equity method investee issued november 2006 effective hp second quarter fiscal 2008 eitf requires certain disclosures whenever change made modify eliminate time lag usually three months less used recording results consolidated entities equity method investees different fiscal year end hps fiscal 2006 hp adopted fsp fas 1151 fas 1241 meaning otherthantemporary impairment application certain investments fsp 1151 adoption material impact hps consolidated results operations financial condition note 2 stockbased compensation october 31 2006 hp stockbased employee compensation plans described total compensation expense taxes related plans 536 million fiscal 2006 excluding 14 million credit adjustment restructuring charges disclosed prior november 1 2005 hp accounted plans recognition measurement provisions apb 25 accordingly hp generally recognized compensation expense granted options discounted exercise price resulting compensation expense recognized ratably associated service period generally option vesting term prior november 1 2005 hp provided pro forma disclosure amounts accordance sfas 148 accounting stockbased compensationtransition disclosure sfas 148 fair value method defined sfas 123 applied stockbased compensation effective november 1 2005 hp adopted fair value recognition provisions sfas 123r using modified prospective transition method therefore restated prior periods results transition method stockbased compensation expense fiscal 2006 included compensation expense sharebased payment awards granted prior yet vested november 1 2005 based grantdate fair value estimated accordance original provisions sfas 123 stockbased compensation expense sharebased payment awards granted november 1 2005 based grantdate fair value estimated accordance provisions sfas 123r hp recognizes compensation costs net estimated forfeiture rate recognizes compensation costs shares expected vest straightline basis requisite service period award generally option vesting term four years hp estimated forfeiture rate fiscal 2006 based historical experience fiscal grant years majority vesting terms satisfied result adopting sfas 123r earnings income taxes fiscal 2006 net earnings fiscal 2006 lower 448 million 318 million respectively continued account stockbased compensation apb 25 impact basic diluted earnings per share fiscal 2006 011 per share addition prior adoption sfas 123r hp presented tax benefit stock option exercises operating cash flows upon adoption sfas 123r tax benefit resulting tax deductions excess tax benefit related compensation cost recognized options classified financing cash flows pro forma table reflects net earnings basic diluted net earnings per share following fiscal years ended october 31 hp applied fair value recognition provisions sfas 123 employee stock purchase plan hp sponsors hewlettpackard company 2000 employee stock purchase plan also known share ownership plan espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock prior november 1 2005 employees able purchase stock semiannually price equal 85 fair market value certain plandefined dates november 1 2005 hp changed espp employees purchase stock semiannually price equal 85 fair market value purchase date since price shares determined purchase date longer lookback period hp recognizes expense based 15 discount purchase fiscal 2006 espp compensation expense 53 million net taxes october 31 2006 approximately 147000 employees eligible participate approximately 53000 employees participants espp fiscal 2006 participants purchased 11076000 shares hp common stock weightedaverage price 30 per share fiscal 2005 participants purchased 20673000 shares hp common stock weightedaverage price 17 per share fiscal 2004 participants purchased 25868000 shares hp common stock weightedaverage price 14 per share incentive compensation plans hp stock option plans include principal plans adopted 2004 2000 1995 1990 principal option plans well various stock option plans assumed acquisitions stock options outstanding regular employees meeting limited employment qualifications eligible receive stock options fiscal 2006 approximately 110000 employees holding options one option plans october 31 2006 options granted principal option plans generally nonqualified stock options principal option plans permit options granted qualify incentive stock options us internal revenue code exercise price stock option equal fair market value hps common stock option grant date determined average highest lowest reported sale prices hps common stock date contractual term options granted since fiscal 2003 generally eight years contractual term options granted prior fiscal 2003 generally ten years principal option plans hp may choose certain cases establish discounted exercise price less 75 fair market value grant date hp granted discounted options since fiscal 2003 principal option plans hp granted certain employees cash restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units cash restricted stock awards independent option grants generally subject forfeiture employment terminates prior release restrictions awards generally vest one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding hp expenses cost restricted stock awards hp determined fair market value shares date grant ratably period restrictions lapse fiscal 2006 hp granted 1492000 shares restricted stock weightedaverage grant date fair value 32 fiscal 2005 hp granted 6773000 shares restricted stock weightedaverage grant date fair value 21 hp 5492000 shares restricted stock outstanding october 31 2006 7099000 shares restricted stock outstanding october 31 2005 1533000 shares restricted stock outstanding october 31 2004 fiscal 2006 hp granted 33000 shares restricted stock units weightedaverage grant date fair value 30 fiscal 2005 hp granted 1820000 shares restricted stock units weightedaverage grant date fair value 21 hp restricted stock units covering 873000 shares outstanding october 31 2006 1780000 shares outstanding october 31 2005 shares outstanding october 31 2004 light new accounting guidance sfas 123r beginning second quarter fiscal 2005 hp reevaluated assumptions used estimating fair value employee options granted part assessment management determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility therefore expected volatility fiscal 2006 2005 based marketbased implied volatility part sfas 123r adoption hp also examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis hp identified three employee populations hp used blackscholes option pricing model value options employee populations table presents weighted average expected life months combined three identified employee populations expected life computation based historical exercise patterns postvesting termination behavior within three populations identified riskfree interest rate periods within contractual life award based us treasury yield curve effect time grant fair value sharebased payment awards estimated using blackscholes option pricing model following assumptions weighted average fair values 1the fair value calculation based stock options granted period option activity principal option plans october 31 2006 changes fiscal 2006 follows aggregate intrinsic value table represents total pretax intrinsic value difference hps closing stock price last trading day fiscal 2006 exercise price multiplied number inthemoney options would received option holders option holders exercised options october 31 2006 amount changes based fair market value hps stock total intrinsic value options exercised fiscal 2006 1190 million total fair value options vested expensed fiscal 2006 265 million net taxes option activity follows following fiscal years ended october 31 information options outstanding follows october 31 2006 october 31 2006 677 million total unrecognized compensation cost related stock options expected recognized weightedaverage period 230 years cash received option exercises purchases espp fiscal 2006 2538 million actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2006 totaled 420 million nonvested restricted stock awards october 31 2006 changes fiscal 2006 follows october 31 2006 90 million unrecognized stockbased compensation expense related nonvested restricted stock awards cost expected recognized weightedaverage period 146 years fiscal 2006 hp recorded 58 million stockbased compensation expense net taxes relating options assumed acquisitions restricted stock awards hp recorded 144 million 33 million stockbased compensation expense net taxes relating options assumed acquisitions restricted stock awards fiscal years 2005 2004 respectively fiscal 2006 hp allocated stockbased compensation expense related espp principal option plans sfas 123r follows addition part fiscal 2005 restructuring plans hp accelerated vesting options held terminated employees included oneyear posttermination exercise period options modification resulted compensation expense 107 million hp included restructuring charges fiscal 2006 adjustment 14 million recorded reduction 107 million restructuring charges reflect actual stockbased compensation expense related employees left company stockbased compensation expense recognized incentive compensation plans approximately 522 million fiscal 2006 including 14 million credit restructuring charges referred 211 million fiscal 2005 including 107 million restructuring charges referred 48 million fiscal 2004 shares reserved shares available espp stockbased compensation plans 217556000 october 31 2006 including 39151000 shares assumed compaq plans 260669000 october 31 2005 including 32449000 shares assumed compaq plans 257554000 october 31 2004 including 29123000 shares assumed compaq plans hp 664267000 shares common stock reserved october 31 2006 794750000 shares common stock reserved october 31 2005 808855000 shares common stock reserved october 31 2004 future issuance stockrelated benefit plans additionally hp 21494000 shares common stock reserved october 31 2006 2005 2004 future issuances related conversion outstanding zerocoupon subordinated notes note 3 net earnings per share eps hp calculates basic eps using net earnings weightedaverage number shares outstanding reporting period diluted eps includes effect potential issuance common stock issuable pursuant exercise stock options assumed conversion convertible notes reconciliation numerators denominators basic diluted eps calculations follows following fiscal years ended october 31 fiscal 2006 2005 2004 hp excluded options exercise prices greater average market price hps common stock purchase approximately 130 million 255 million 408 million respectively shares calculation diluted eps effect antidilutive also result adopting sfas 123r november 1 2005 hp excluded additional 48 million options fiscal 2006 whose combined exercise price unamortized fair value excess tax benefit greater average market price hps common stock shares also antidilutive addition hp excluded approximately 8 million shares hp stock issuable upon assumed conversion zerocoupon subordinated notes calculation diluted eps fiscal 2005 effect antidilutive note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables hp revolving trade receivables based facilities permitting sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 477 million october 31 2006 approximately 150 million available programs fiscal 2006 hp another facility subject maximum amount 525 million euros euro program terminated october 31 2006 hp sold approximately 86 billion trade receivables fiscal 2006 including approximately 59 billion euro program fees associated facilities generally differ materially cash discounts offered customers previous alternative prompt payment programs inventory current assets property plant equipment depreciation expense approximately 17 billion fiscal 2006 17 billion fiscal 2005 18 billion fiscal 2004 longterm financing receivables assets accrued liabilities note 5 supplemental cash flow information supplemental cash flow information follows following fiscal years ended october 31 note 6 acquisitions hp recorded acquisitions using purchase method accounting accordingly included results operations hps consolidated results date acquisition hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill fair value assigned assets acquired based valuations using managements estimates assumptions hp expect goodwill recorded majority acquisitions deductible tax purposes peregrine december 19 2005 hp acquired outstanding shares peregrine systems inc peregrine cash merger 2608 per share purchase price approximately 538 million consisting 442 million cash paid includes direct transaction costs well assumption certain liabilities connection transaction acquisition peregrine adds key asset service management components hp openview portfolio distributed management software suite business operations connection acquisition hp recorded approximately 342 million goodwill 162 million amortizable intangible assets hp also expensed 34 million iprd hp amortizing purchased intangibles principally customer relationships developed technology straightline basis estimated useful lives ranging five six years acquisitions fiscal 2006 hp also completed seven acquisitions fiscal 2006 total consideration acquisitions buyout minority interest approximately 473 million included direct transaction costs largest transactions acquisition substantially assets scitex vision ltd scitex asset acquisition expected expand hps leadership printing industrial wideformat market hp recorded approximately 193 million goodwill 205 million purchased intangibles connection acquisitions hp also recorded approximately 18 million iprd related acquisitions fiscal 2006 addition hp paid approximately 17 million balance outstanding shares digital globalsoft limited consolidated subsidiary hp dgs result increased hps ownership 985 100 subsidiary enhanced hps capability services including expertise life cycle services migration technical application services hp included results operations transactions prospectively respective date transaction hp presented pro forma results operations acquired businesses results material hps results operations either individual aggregate basis mercury acquisition november 2 2006 hp completed tender offer mercury interactive corporation mercury leading management software services company acquired approximately 96 mercury shares cash consideration 52 per common share november 6 2006 hp acquired remaining outstanding shares mercury became wholly owned subsidiary hp aggregate purchase price approximately 48 billion consisting cash paid outstanding stock value vested employee stock options estimated direct transaction costs acquisition combine mercurys application management application delivery governance capabilities hps broad portfolio management solutions acquisition recorded using purchase method accounting accordingly results operations included hps consolidated results acquisition date purchase price allocated tangible assets liabilities intangible assets acquired based estimated fair values fair values determined based independent thirdparty valuations management estimates yet completed excess purchase price fair values recorded goodwill deductible tax purposes intangible assets consist primarily developed core technologies customer relationships maintenance agreements iprd expensed first quarter fiscal year 2007 remaining intangibles amortized estimated useful lives currently estimated range three seven years pro forma results operations presented results material hps consolidated results operations management currently assessing formulating product roadmap decisions integration plans may result additional costs including asset impairments costs terminate relocate employees exit costs related mercury activities employees accrued hp liability conjunction recording purchase mercury result increase goodwill addition hp incur charges related payments mercury executive officers key employees retention plan adopted connection acquisition well costs related integration efforts pending acquisitions december 2006 hp agreed acquire knightsbridge solutions holdings corporation privately held services company specializing information management areas business intelligence data warehousing data integration information quality transaction subject certain closing conditions expected completed first quarter fiscal 2007 upon completion business expected fully integrated hp services also december 2006 hp agreed acquire bitfone corporation privately held global software services company develops software solutions mobile device management wireless industry transaction subject certain closing conditions expected completed february 2007 following close acquisition business expected fully integrated handheld business unit hps personal systems group acquisitions fiscal 2005 fiscal 2005 hp acquired five companies aggregate purchase price approximately 648 million includes direct transaction costs certain liabilities recorded connection acquisitions largest transactions acquisitions sac llc business snapfish appiq inc appiq hp completed april 15 2005 october 24 2005 respectively snapfish leading online photo service acquisition snapfish enables hp capitalize growing market online photo printing customers benefiting affordable simpler comprehensive digital photography experience appiq leading provider open storage area network management storage resource management solutions acquisition appiq strengthens hps ability give customers single integrated console controls better manages storage server infrastructure hp recorded approximately 537 million goodwill 108 million amortizable purchased intangible assets connection five acquisitions hp also recorded approximately 2 million iprd charges related five acquisitions fiscal 2005 hp paid approximately 8 million cash additional shares dgs consolidated subsidiary hp increase hps ownership approximately 972 approximately 985 hp recorded approximately 7 million 281 million goodwill connection share purchases fiscal 2005 2004 respectively note 7 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2006 2005 changes carrying amount goodwill fiscal year ended october 31 2006 follows goodwill adjustments acquisitions made prior fiscal 2006 shown related primarily revisions acquisitionrelated tax estimates acquisitions reduction restructuring liability associated restructuring plans compaq computer corporation compaq prior acquisition hp reductions resulted adjusting original estimates actual costs incurred various locations throughout world based results annual impairment tests hp determined impairment goodwill existed august 1 2006 august 1 2005 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed amortization expense related finitelived purchased intangible assets approximately 604 million fiscal 2006 622 million fiscal 2005 603 million fiscal 2004 based results annual impairment tests hp determined impairment compaq trade name existed august 1 2006 august 1 2005 however future impairment tests could result charge earnings hp continue evaluate purchased intangible asset indefinite life annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weighted average useful lives approximately eight years developed core technology patents product trademarks weighted average useful lives approximately six years estimated future amortization expense related finitelived purchased intangible assets october 31 2006 follows note 8 restructuring charges fiscal 2005 restructuring plans fourth quarter fiscal 2005 hps board directors approved restructuring plan designed simplify hps structure reduce costs place greater focus customers hp included original estimates 15300 positions fiscal 2005 restructuring plan subsequent initial estimate hp reduced number total positions 15200 initial charge actions totaled 16 billion completion hps voluntary severance programs europe asia total charges connection plan coupled final adjustments expected exceed original charge 108 million fiscal 2006 hp recognized charges approximately 167 million relating employee severance benefits charges including adjustment related reduce noncash stockbased compensation 14 million hp also recognized 6 million termination benefit expense 3 million settlement curtailment loss nonus pension plans charges offset settlement gains 46 million us pension plans curtailment gains 24 million us retiree medical program 167 million severance related charge reflective higher population employees participating higher cost early retirement voluntary programs greatest impact europe charge fourth quarter fiscal 2005 included approximately 400 million related employee severance benefits associated early retirement 3200 us employees left hp october 31 2005 majority costs funded hps pension plan assets remaining charges approximately 12 billion include approximately 100 million noncash stockbased compensation related severance benefits approximately 12000 employees pursuant plan approximately 9500 positions eliminated fiscal 2006 bringing total 14200 october 31 2006 majority remaining 1000 positions expected eliminated fiscal 2007 hp expects pay majority remaining costs relating severance employee benefits end fiscal 2007 third quarter fiscal 2005 hps management approved restructuring plan hp recorded restructuring charges 109 million related severance related costs associated termination approximately 1450 employees left hp october 31 2005 initial restructuring amount hp paid substantially october 31 2006 fiscal 2005 workforce rebalancing addition restructuring activities described hp incurred approximately 236 million six months ended april 30 2005 workforce rebalancing charges within certain business segments primarily severance related costs result workforce rebalancing actions approximately 3000 employees left hp october 31 2005 initial restructuring amount hp paid substantially october 31 2006 fiscal 2003 restructuring plans fiscal 2006 hp recorded adjustments 4 million additional restructuring charges initial restructuring amount 752 million hp paid substantially october 31 2006 fiscal 2002 2001 restructuring plans 2002 2001 restructuring plans substantially complete although hp records minor revisions previous estimates necessary fiscal 2006 hp recorded additional adjustments 48 million charges pertained facility lease obligations severance addition adjustment fiscal 2006 includes 25 million reduction goodwill pertaining severance related restructuring trueups aggregate 103 million restructuring liability respect plans october 31 2006 relates primarily facility lease obligations severance hp expects pay obligations life related obligations extend end fiscal 2010 summary restructuring plans activity accrued restructuring balances related plans described follows fiscal 2006 october 31 2006 october 31 2005 hp included longterm portion restructuring liability 91 million 73 million respectively liabilities accompanying consolidated balance sheets note 9 financial instruments investments debt equity securities investments availableforsale debt equity securities fair value follows following fiscal years ended october 31 corporate debt consists primarily loans companies guaranteed standby letters credit issued third party banks debt securities consist primarily fixedinterest securities invested early retirement purposes required german laws equity securities public companies primarily common stock hp estimated fair values based quoted market prices pricing models using current market rates estimated fair values may representative actual values could realized yearend realized future gross unrealized losses october 31 2006 associated debt securities fair value 18 million continuous loss position fewer 12 months gross unrealized losses october 31 2005 associated investments public equity securities fair value 10 million continuous loss position fewer 12 months contractual maturities availableforsale debt securities follows october 31 2006 proceeds sales maturities availableforsale securities 91 million fiscal 2006 21 billion fiscal 2005 43 billion fiscal 2004 gross realized gains losses totaled 35 million 2 million respectively fiscal 2006 gross realized gains losses totaled 31 million 1 million respectively fiscal 2005 gross realized gains losses totaled 27 million 4 million respectively fiscal 2004 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity securities follows following fiscal years ended october 31 investments consist primarily marketable securities held generate returns hp expects offset changes certain liabilities related deferred compensation arrangements hp includes gains losses changes fair value securities offset losses gains related liabilities interest net hps consolidated statements earnings balance consists cost basis equity method investments derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts swaps options hedge certain foreign currency interest rate exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp use derivative contracts speculative purposes hp applies hedge accounting based upon criteria established sfas 133 accounting derivative instruments hedging activities sfas 133 whereby hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges hp recognizes derivatives consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs cash flows operating activities consolidated statement cash flows fair value hedges hp may enter fair value hedges reduce exposure debt portfolio interest rate risk foreign currency exchange rate risk hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp may use interest rate cross currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payments underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial hp may choose hedge foreign currency risk associated foreign currency denominated debt acts natural hedge foreign currency assets denominated currency investing fixed rate instruments hp may enter interest rate swaps convert fixed interest returns variable interest returns would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period hp terminates interest rate swap maturity resulting gain loss termination amortized remaining life underlying hedged item cash flow hedges hp may use cash flow hedges hedge variability liborbased interest income hp receives certain variablerate investments hp may enter interest rate swaps convert variable rate interest returns fixedrate interest returns interest rate swaps hp designates qualify cash flow hedges hp records changes fair values accumulated comprehensive income separate component stockholders equity subsequently reclassifies changes earnings period hedged transaction recognized earnings hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six months however certain leasing revenuerelated forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portions gain loss derivative instrument accumulated comprehensive loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item october 31 2006 amounts related derivatives qualifying cash flow hedges amounted accumulated comprehensive loss 46 million net taxes 45 million expected reclassified earnings next 12 months along earnings effects related forecasted transactions addition fiscal 2006 2005 hp discontinue cash flow hedges probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity cumulative translation adjustment decreased result unrecognized net loss net investment hedges 31 million 56 million fiscal years ended october 31 2006 2005 respectively derivatives designated hedging instruments sfas 133 consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures derivative instruments designated hedging instruments sfas 133 hp recognizes changes fair values earnings period change hp recognizes gains losses foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities interest net included net foreign currency exchange gains approximately 54 million fiscal 2006 gains approximately 70 million fiscal 2005 losses approximately 142 million fiscal 2004 hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt investments change fair value derivative interest rate swaps designated cash flow hedges hp measures effectiveness offsetting change variable portion interest rate swaps changes expected interest income received due fluctuations libor based interest rate foreign currency option forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings october 31 2006 portion hedging instruments gains losses excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years ended october 31 2006 2005 2004 hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value gross notional fair market value derivative financial instruments respective sfas 133 classification consolidated balance sheets follows following fiscal years ended october 31 fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps shortand longterm debt approximately 51 billion october 31 2006 compared carrying value 52 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 10 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting marketing hps thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 october 31 2006 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 equipment leased customers operating leases 21 billion october 31 2006 19 billion october 31 2005 included machinery equipment accumulated depreciation equipment lease 06 billion october 31 2006 october 31 2005 october 31 2006 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 note 11 guarantees indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates material usage service delivery costs differ estimates revisions estimated warranty liability would required changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 deferred revenue components deferred revenue follows following fiscal years ended october 31 deferred support contract services revenue represents amounts received billed advance primarily fixedprice support maintenance contracts services include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments service amounts deferred time customer billed recognized ratably contract life services rendered deferred revenue represents amounts received billed advance contracts related primarily consulting integration projects managed services startup transition work product sales minor amounts training note 12 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 notes payable banks lines credit includes deposits associated bankingrelated activities approximately 393 million 385 million october 31 2006 2005 respectively longterm debt longterm debt follows following fiscal years ended october 31 hp may redeem global notes series mediumterm notes collectively notes set forth table time redemption prices described prospectus supplements relating thereto notes senior unsecured debt may 2006 hp filed shelf registration statement 2006 shelf registration statement sec enable hp offer sell time one offerings debt securities common stock preferred stock depositary shares warrants may 23 2006 hp issued 10 billion floating rate global notes registration statement floating rate global notes bear interest floating rate equal threemonth usd libor plus 0125 per annum hp used portion proceeds received repay 525 euro mediumterm notes due july 2006 maturity remainder net proceeds general corporate purposes hp registered sale 30 billion debt global securities common stock preferred stock depositary shares warrants shelf registration statement march 2002 shelf registration statement december 2002 hp filed supplement 2002 shelf registration statement allows hp offer time 15 billion mediumterm notes series b due nine months date issuance series b mediumterm note program october 31 2006 hp issued mediumterm notes pursuant series b mediumterm note program hp registered sale 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange hp denominate notes currency including euro notes registered united states july 2006 hp repaid previously issued 750 million euro notes maturity programme lyons convertible holders adjusted rate 1509 shares hp common stock 1000 face value lyons payable either cash common stock hps election time hp may redeem lyons book value payable cash december 2000 board directors authorized repurchase program lyons allowed hp repurchase lyons time varying prices last repurchase program occurred fiscal 2002 december 15 2006 hp repaid 10 billion global notes due december 2006 maturity hp us commercial paper program 60 billion capacity subsidiaries authorized issue additional 10 billion commercial paper 500 million capacity currently available used hewlettpackard international bank plc whollyowned subsidiary hp euro commercial papercertificate deposit programme december 15 2005 hp two us credit facilities consisting 15 billion 364day credit facility expiring march 2006 15 billion 5year credit facility expiring march 2009 credit facilities subject weighted average commitment fee 725 basis points per annum december 15 2005 hp replaced two credit facilities 30 billion 5year credit facility subject commitment fee 65 basis points per annum interest rates terms borrowing credit facility vary based hps external credit ratings credit facility senior unsecured committed borrowing arrangement primarily support issuance us commercial paper amounts outstanding credit facility hp also maintains lines credit approximately 21 billion number financial institutions uncommitted available various foreign subsidiaries included including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2006 carrying value assets approximated carrying value borrowings 164 million october 31 2006 hp 125 billion available borrowing resources 2002 shelf registration statement programs described hp also may issue additional debt securities common stock preferred stock depositary shares warrants 2006 shelf registration statement aggregate future maturities longterm debt face value excluding fair value adjustment related sfas 133 63 million discount debt issuance 153 million follows october 31 2006 interest expense borrowings 336 million fiscal 2006 334 million fiscal 2005 247 million fiscal 2004 note 13 taxes earnings domestic foreign components earnings losses follows following fiscal years ended october 31 provision benefit taxes earnings follows following fiscal years ended october 31 significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 1certain reclassifications made prior year amounts order conform current year presentation breakdown current longterm deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 october 31 2006 hp deferred tax asset 558 million related loss carryforwards 336 million relates foreign net operating losses hp provided valuation allowance 315 million foreign net operating loss carryforwards hp expect utilize remaining 222 million deferred tax asset relates various state net operating losses acquired companies hp provided 158 million valuation allowance losses addition hp provided 86 million valuation allowance unrealized domestic capital losses total tax credit carryforwards 22 billion hp foreign tax credit carryforwards 15 billion begin expire fiscal 2012 hp alternative minimum tax credit carryforwards 92 million expire research development credit carryforwards 330 million 24 million expire fiscal 2013 remainder expire fiscal 2018 hp also tax credit carryforwards 363 million various states foreign countries hp provided valuation allowance 281 million gross deferred tax assets october 31 2006 2005 reduced valuation allowances 840 million 812 million respectively total valuation allowance increased 28 million valuation allowance increase comprised 95 million increase acquired net operating losses tax credits partially offset decrease valuation allowances state net operating losses tax credits 25 million foreign net operating losses tax credits 35 million miscellaneous items 7 million 840 million valuation allowances october 31 2006 236 million related deferred tax assets compaq acquired companies existed time acquisition future hp determines realization deferred tax assets likely reversal related valuation allowance reduce goodwill instead provision taxes total tax benefits resulting exercise employee stock options employee stock programs amounts booked stockholders equity approximately 356 million fiscal 2006 30 million fiscal 2005 35 million fiscal 2004 differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 fiscal 2006 hp recorded 599 million net income tax benefit related items unique year included net favorable tax adjustments 565 million income tax accruals result settlement internal revenue service irs examinations hps us income tax returns fiscal years 1993 1998 reductions net income tax accruals years related primarily resolution issues respect puerto rico manufacturing tax incentives export tax incentives issues involving nonus operations december 2006 tax relief health care act 2006 signed law includes retroactive reinstatement research development credit retroactive amount recorded hps financial statements first quarter fiscal 2007 quarter act signed law hp still evaluating tax relief health care act retroactive research credit expected material impact hps consolidated results operations financial condition fiscal 2005 hp recorded 697 million net income tax expense related items unique year tax expense result primarily 792 million associated repatriation 145 billion jobs act 76 million related additional distributions received foreign subsidiaries tax expenses offset part tax benefits 177 million resulting agreements irs governmental authorities reflected lower rates jurisdictions net fiscal 2004 tax rate benefited net favorable adjustments previously estimated tax liabilities 207 million decreased provision taxes significant favorable adjustments related resolution california state income tax audit net favorable revision estimated tax accruals upon filing 2003 us income tax return reduction taxes foreign earnings due change regulatory policy favorable adjustments offset part net effect smaller adjustments income tax liabilities various jurisdictions result certain employment actions capital investments hp undertaken income manufacturing activities subsidiaries certain countries subject reduced tax rates cases wholly exempt taxes fiscal 2019 gross income tax benefits attributable tax status subsidiaries estimated approximately 876 million 031 per diluted share fiscal 2006 1051 million 036 per diluted share fiscal 2005 947 million 031 per diluted share fiscal 2004 gross income tax benefits offset partially accruals us income taxes undistributed earnings irs completed examination income tax returns hp years 1998 years settled irss appeals division settlements approved joint committee taxation tax years remain open net operating loss foreign tax credit carrybacks subsequent years irss audits years approve carrybacks october 31 2006 irs process examining hps income tax returns years 1999 2003 hp expects irs begin audit 2004 2005 income tax returns 2007 addition hp subject numerous ongoing audits state foreign tax authorities hp believes adequate accruals provided hp open tax years compaq tax years merger date hp may 3 2002 audited agreed irs hp expects substantially remaining tax accruals compaq reclassified reduction goodwill fiscal 2007 upon closing statute limitations hp provided us federal income foreign withholding taxes 31 billion undistributed earnings nonus operations october 31 2006 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries excess cash accumulated determines advantageous business operations tax cash reasons american jobs creation act 2004repatriation foreign earnings american jobs creation act 2004 jobs act enacted october 22 2004 provided temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction resulted approximate 525 federal tax rate repatriated earnings third quarter fiscal 2005 hps ceo board directors approved domestic reinvestment plan required jobs act repatriate 145 billion foreign earnings fiscal 2005 hp recorded tax expense fiscal 2005 792 million related 145 billion dividend jobs act additional tax expense consists federal taxes 744 million state taxes net federal benefits 73 million net tax benefit 25 million related adjustment deferred tax liabilities repatriated unrepatriated foreign earnings note 14 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per common share fiscal 2006 2005 2004 stock repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2006 hp completed share repurchases approximately 188 million shares approximately 190 million shares settled 61 billion included 2 million shares repurchased transactions executed fiscal 2005 settled fiscal 2006 fiscal 2005 hp completed share repurchases approximately 150 million shares approximately 148 million shares settled 35 billion fiscal 2004 hp completed share repurchases approximately 172 million shares 33 billion shares repurchased settled fiscal 2006 open market repurchases shares repurchased settled fiscal 2005 included open market repurchases 37 million shares 10 billion 111 million shares 25 billion david lucile packard foundation packard foundation shares repurchased settled fiscal 2004 included open market repurchases 66 million shares 13 billion 72 million shares 13 billion accelerated share repurchase program investment bank accelerated purchase 34 million shares 679 million packard foundation addition transactions hp entered prepaid variable share purchase program pvspp thirdparty investment bank first quarter 2006 prepaid 17 billion exchange right receive variable number shares common stock weekly one year period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 hp recorded payment prepaid stock repurchase stockholders equity section consolidated balance sheet payment included cash flows financing activities consolidated statement cash flows connection program investment bank purchased continue trade shares hps common stock open market time prepaid funds expended ratably term program pvspp prices hp purchases shares subject minimum maximum price determined advance repurchases completed program thereby effectively hedging hps repurchase price minimum maximum number shares hp could receive program 52 million shares 70 million shares respectively exact number shares repurchased based upon volume weighted average market price hps shares weekly settlement period subject minimum maximum price well regulatory limitations number shares hp permitted repurchase hp decreases shares outstanding settlement period shares physically received hp retire shares repurchased pvspp hp longer deem shares outstanding fiscal 2006 hp received approximately 34 million shares aggregate price 11 billion pvspp accelerated purchase began september 2004 completed november 2004 upon completion accelerated purchase hp paid 51 million price adjustment based difference 1882 weighted average price open market stock purchases investment bank initial purchase price 1811 per share price adjustment also included certain amounts reflecting investment banks carrying costs benefits purchasing shares prices initial price benefits receiving 13 billion payment advance purchases hp accounted accelerated purchase equity transaction cash settlement dates hp repurchased shares packard foundation memorandum understanding dated september 9 2002 amended restated september 17 2004 among things priced repurchases reference volume weightedaverage price composite new york stock exchange transactions trading days repurchase occurred either hp packard foundation may suspend terminate sales amended restated memorandum understanding time hps board directors authorized additional 100 billion 40 billion 50 billion future repurchases outstanding common stock fiscal 2006 2005 2004 respectively october 31 2006 hp remaining authorization 56 billion future share repurchases previously authorized share repurchases also made pvspp remaining available balance exhausted second quarter fiscal 2007 comprehensive income changes components comprehensive income net taxes follows following fiscal years ended october 31 components accumulated comprehensive income loss net taxes follows following fiscal years ended october 31 note 15 retirement postretirement benefit plans plan design changes conjunction managements plan restructure certain operations discussed note 8 consolidated financial statements hp modified us retirement programs align closely industry practice effective january 1 2006 hp longer offers us defined benefit pension plans subsidized retiree medical programs new us hires addition hp ceased pension accruals eliminated eligibility subsidized retiree medical program current employees meet defined criteria based age years service calculated december 31 2005 additionally hp subsidy retiree medical program capped upon reaching two times 2003 subsidy levels fiscal 2006 hp recognized curtailment gains 24 million hp subsidized us retiree medical program gains reflected reduction eligible plan population stemming us enhanced early retirement program restructuring plans implemented fiscal 2005 hp recorded gains reductions restructuring charges subsequent headcount reductions take place restructuring program hp expects additional curtailment accounting occur us pension postretirement plans first quarter fiscal 2007 fiscal 2006 hp also recognized settlement gains 46 million us pension plans measurement period october 1 2005 september 30 2006 lumpsum benefit payments made primarily pension plan participants left hp us enhanced early retirement program restructuring plans lump sum benefit payments represent reduction projected benefit obligation result portion unrecognized gain recognized fiscal 2006 gain recorded accordance sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits requires settlement event recorded prescribed payment thresholds reached hp recorded gain reduction restructuring charges fiscal 2006 effective january 1 2006 hp increased matching 401k contribution 6 4 eligible salary employees pension retiree medicalprogram benefits frozen new employees defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan defined benefit pension plan us employees hired december 31 2002 benefits retirement plan generally based pay years service except eligible preacquisition compaq employees receive credit years service prior january 1 2003 effective december 31 2005 participants whose combination age plus years service less 62 ceased accruing benefits retirement plan us employees hired rehired january 1 2003 hp sponsors hewlettpackard company cash account pension plan cash account pension plan benefits accrue pursuant cash accumulation account formula based upon percentage pay plus interest effective december 31 2005 cash account pension plan closed new participants whose combination age plus years service less 62 ceased accruing benefits effective november 30 2005 hp merged cash account pension plan retirement plan merged plan treated one plan certain legal financial purposes including funding requirements merger impact separate benefit structures plans hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset retirement plan hp calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp september 30 measurement date follows following fiscal years ended october 31 postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required participation hp retiree medical program defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 430 million fiscal 2006 422 million fiscal 2005 405 million fiscal 2004 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation may 3 2002 hp assumed sponsorship compaq computer corporation 401k investment plan compaq 401k plan effective january 1 2004 hp merged compaq 401k plan hp 401k plan fiscal 2006 hp matched employee contributions hp 401k plan cash contributions maximum 6 eligible compensation effective january 1 2006 newlyhired employees rehired employees longer eligible participate defined benefit plans eligible 6 hp matching contribution effective january 31 2004 hp designated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 10 million 12 million 13 million dividends hp common shares held hp stock fund fiscal 2006 2005 2004 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 31 million shares hp common stock october 31 2006 pension postretirement benefit expense hps net pension postretirement benefit costs follows following fiscal years ended october 31 weighted average assumptions used calculate net benefit cost follows following fiscal years ended october 31 result restructuring plans implemented fiscal 2005 hp remeasured us defined benefit plan postretirement benefit plan obligations fiscal 2006 discount rates outlined table rates used hp conducting respective plan remeasurements reflect weighted average rate across measurement periods medical cost related assumptions used calculate net postretirement benefit cost following fiscal years ended october 31 follows 10 percentage point increase medical cost trend rate would increased fiscal 2006 service interest components postretirement benefit costs 17 million 10 percentage point decrease would resulted decrease 21 million period funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 weighted average assumptions used calculate benefit obligation september 30 measurement date follows 10 percentage point increase medical cost trend rate would increased total postretirement benefit obligation reported october 31 2006 30 million 10 percentage point decrease would resulted decrease 36 million net amount recognized hps defined benefit postretirement benefit plans follows following fiscal years ended october 31 defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows plan asset allocations hps weightedaverage target asset allocations september 30 measurement date follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment purposes hp occasionally utilizes derivatives effect asset allocation changes hedge certain investment exposures target asset allocation selected plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp regularly conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds private debt private equity provide diversification higher expected returns outside united states local regulations require different approaches target asset allocations resulting higher percentage allocation fixed income securities country outside us local pension board decides target allocation consideration local regulations results periodic assetliability studies hps corporate office acts governance role periodically reviewing investment strategy providing recommended list investment managers country plan basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix correlations among asset classes expected volatilities expected asset class returns reflect current yield us government bonds risk premiums asset class evaluating expected longterm rate return plan assets united states hp considers factors historical risk premiums current valuations dividend yields inflation expected earnings growth rates hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation future contributions funding policy fiscal 2007 hp expects contribute approximately 120 million pension plans approximately 15 million cover benefit payments us nonqualified plan participants hp expects pay approximately 80 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities august 2006 pension protection act 2006 act enacted law hp still evaluating act irs guidance required hp fully evaluate impact time hp expect significant effect current funding strategy us pension plans estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2006 1the estimated future benefits payable postretirement plans reflected net expected medicare part subsidy note 16 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include escalation clauses rent expense approximately 744 million fiscal 2006 770 million fiscal 2005 766 million fiscal 2004 sublease rental income approximately 47 million fiscal 2006 43 million fiscal 2005 fiscal 2004 respectively future annual minimum lease payments sublease rental income commitments excluding future obligations included restructuring liabilities consolidated balance sheets october 31 2006 follows october 31 2006 hp unconditional purchase obligations approximately 28 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally cost sales inventory items future unconditional purchase obligations october 31 2006 follows note 17 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business accordance sfas 5 accounting contingencies hp records provision liability management believes probable liability incurred hp reasonably estimate amount loss hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies diversion managements attention creation significant expenses pending litigation proceedings investigations copyright levies described proceedings ongoing hp certain european union eu member countries including litigation germany seeking impose levies upon equipment multifunction devices mfds printers alleging devices enable producing private copies copyrighted materials total levies due imposed would based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposing extension levies digital environment advocating compensation rights holders digital rights management systems verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted nonbinding arbitration proceedings hp june 2001 germany arbitration board patent trademark office proceedings relate whether extent copyright levies photocopiers imposed accordance copyright laws implemented germany mfds allegedly enable production copies private persons following unsuccessful arbitration vg wort filed lawsuit hp may 2004 stuttgart civil court stuttgart germany seeking levies mfds sold 1997 2001 december 22 2004 court held hp liable payments regarding mfds sold germany ordered hp pay vg wort amount equal 5 outstanding levies claimed plus interest mfds sold germany december 2001 vg wort appealed decision july 6 2005 stuttgart court appeals ordered hp pay vg wort levies based published tariffs photocopiers germany range eur 3835 eur 61356 per unit plus interest mfds sold germany december 2001 hp appealed stuttgart court appeals decision bundesgerichtshof german federal supreme court september 26 2005 vg wort filed additional lawsuit hp stuttgart civil court stuttgart germany seeking levies mfds sold germany 1997 2001 well products sold 2002 onwards hp filed response rejecting claim january 2006 july 2004 vg wort filed separate lawsuit hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 higher regional court baden wuerttemberg may 11 2005 higher regional court issued decision confirming levies due june 6 2005 hp filed appeal german supreme court karlsruhe september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich state court seeking levies pcs industry test case germany hp undertaken bound final decision december 23 2004 munich state court held pcs subject levy fsc must pay 12 euros plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 higher regional court bavaria december 15 2005 higher regional court affirmed munich state court decision fsc filed notice appeal german supreme court february 2006 december 29 2005 zpu joint association various german collection societies instituted nonbinding arbitration proceedings hp arbitration board patent trademark office demanding reporting every pc sold hp germany january 2002 december 2005 seeking levy 1842 euros plus tax pc sold period hp filed notice defense connection proceedings february 2006 grounds defense may 2006 based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address matters described however ultimate resolution matters including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain alvis v hp defective product consumer class action filed district court jefferson county texas april 2001 february 2000 similar suit captioned lapray v compaq filed district court jefferson county texas basic allegation hp compaq sold computers containing floppy disk controllers fail alert user certain floppy disk controller errors failure alleged result data loss data corruption complaints alvis lapray seek injunctive relief declaratory relief unspecified damages attorneys fees july 2001 nationwide class certified lapray case beaumont court appeals affirmed june 2002 texas supreme court reversed certification remanded trial court may 2004 march 29 2005 alvis trial court certified texaswide class action injunctive relief hp appealed april 15 2005 hps appeal alvis case still pending june 4 2003 barrett v hp grider v compaq filed district court cleveland county oklahoma factual allegations similar alvis lapray complaints barrett grider seek among things specific performance declaratory relief unspecified damages attorneys fees december 22 2003 district court entered order staying barrett case conclusion alvis september 23 2005 district court granted grider plaintiffs motion certify nationwide class action oklahoma court civil appeals affirmed october 13 2006 november 5 2006 hp filed petition writ certiorari oklahoma supreme court seeking reversal lower courts decisions november 5 2004 batiste v hp formerly scott v hp january 27 2005 schultz v hp formerly jurado v hp filed state court san joaquin county california factual allegations similar lapray alvis seeking certification californiaonly class injunctive relief unspecified damages including punitive damages restitution costs attorneys fees november 27 2006 trial court granted plaintiffs motion class certification certified schultz case californiaonly class hp intends file petition writ mandate california court appeal seeking reversal trial courts class certification decision addition civil division department justice general services administration office inspector general federal agencies conducting investigation allegations hp compaq made caused made false claims payment united states computers known hp compaq contain defective parts otherwise perform defective manner relating alleged floppy disk controller errors hp agreed department justice extend statute limitations investigation december 6 2006 hp cooperating fully investigation barbaras sales et al v intel corporation hewlettpackard company et al neubauer et al v compaq computer corporation separate lawsuits filed june 3 2002 circuit court third judicial district madison county illinois alleging hp compaq along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class trial court hp action certified illinois class intel denied nationwide class parties appealed trial courts decision july 25 2006 fifth district appellate court ruled trial court erred applying illinois law deciding certify illinois class deny certification nationwide class directed trial court reconsider decisions applying california law instead august 28 2006 intel appealed fifth districts decision illinois supreme court illinois supreme court granted intels petition appeal november 29 2006 proceedings hp stayed pending resolution parties appeal decision class action certification compaq stayed pending resolution parties appeal hp action skold et al v intel corporation hewlettpackard company lawsuit hp joined june 14 2004 initially filed state court alameda county california based upon factual allegations similar illinois cases plaintiffs skold matter also seek unspecified damages restitution attorneys fees costs certification nationwide class skold case since transferred state court santa clara county california feder v hp formerly tyler v hp lawsuit filed united states district court northern district california june 16 2005 asserting breach express implied warranty unjust enrichment violation consumers legal remedies act deceptive advertising unfair business practices violation californias unfair competition law among things plaintiffs alleged hp employed smart chip certain inkjet printing products order register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contend consumers received false ink depletion warnings smart chip limits ability consumers use cartridge full capacity choose competitive products september 6 2005 lawsuit captioned ciolino v hp filed united states district court northern district california allegations ciolino case substantively identical feder two cases formally consolidated single proceeding district court northern district california caption hp inkjet printer litigation plaintiffs seek class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees three related lawsuits filed california state court tyler v hp filed santa clara county february 17 2005 obi v hp filed los angeles county february 17 2005 weingart v hp filed los angeles county march 18 2005 dismissed without prejudice plaintiffs addition two related lawsuits filed federal court namely grabell v hp filed district new jersey march 18 2005 v hp filed eastern district new york april 20 2005 dismissed without prejudice plaintiffs substantially similar allegations made hp subsidiary hewlettpackard canada co four canadian class actions one commenced british columbia february 2006 two commenced quebec april 2006 may 2006 respectively one commenced ontario june 2006 seeking class certification restitution declaratory relief injunctive relief unspecified statutory compensatory punitive damages december 27 2001 cornell university cornell research foundation inc filed complaint amended september 6 2002 hp united states district court northern district new york alleging hps parisc 8000 family microprocessors servers workstations incorporating processors infringe patent assigned cornell research foundation inc describes way executing microprocessor instructions complaint seeks declaratory injunctive relief unspecified damages march 26 2004 court issued ruling interpreting disputed claim terms patent issue trial expected commence mid late 2007 patent issue litigation united states patent 4807115 expired february 21 2006 therefore plaintiffs longer entitled seek injunctive relief hp miller et al v hewlettpackard company lawsuit filed march 21 2005 united states district court district idaho behalf putative class persons employed thirdparty temporary service agencies performed work hp facilities united states plaintiffs claim incorrectly classified contractors contingent workers result wrongfully denied employee benefits covered employment retirement income security act 1974 erisa benefits covered erisa plaintiffs claim denied participation hps share ownership plan service award program adoption assistance program credit union dependent care reimbursement program educational assistance program time programs flexible work arrangements 401k plan may 22 2005 plaintiffs filed first amended complaint added worker adjustment retraining notification act warn claim defined class include persons hired hp agencies work hp facilities united states march 21 2000 present deprived full benefit employee status misclassified contractors contingent workers temporary workers otherwise misclassed plaintiffs seek declaratory relief injunction retroactive prospective benefits compensation unspecified damages enhanced damages interest costs attorneys fees hp successfully moved dismiss erisa warn claims sole remaining claim advanced remaining plaintiffs case breach contract claim digwamaje et al v bank america et al purported class action lawsuit names hp numerous multinational corporations defendants filed september 27 2002 united states district court southern district new york behalf current former south african citizens survivors suffered violence oppression apartheid regime lawsuit alleges hp companies helped perpetuate profited otherwise aided abetted apartheid regime period 19481994 selling products services agencies south african government claims based alien tort claims act torture victims protection act racketeer influenced corrupt organizations act state law complaint seeks among things accounting creation historic commission compensatory damages excess 200 billion punitive damages excess 200 billion costs attorneys fees november 29 2004 court dismissed prejudice plaintiffs complaint may 2005 plaintiffs filed amended notice appeal united states court appeals second circuit january 24 2006 second circuit court appeals heard oral argument plaintiffs appeal yet issued decision csiro patent litigation microsoft corporation hewlettpackard company et al v commonwealth scientific industrial research organisation australia action filed hp two plaintiffs may 9 2005 district court northern district california seeking declaratory judgment commonwealth scientific industrial research organisation australia csiro hps products employing ieee 80211a 80211g wireless protocol standards infringe csiros us patent 5487069 relating wireless transmission data frequencies excess 10ghz september 22 2005 csiro filed answer counterclaims alleging hp products employ wireless protocol standards infringe csiro patent seeking damages including enhanced damages attorneys fees costs injunction sales infringing products december 12 2006 csiro successfully moved case transferred district court eastern district texas court granted csiros motions summary judgment issues validity patent infringement patent infringement action brought csiro third party vendor wireless networking products based patent leak investigation proceedings described hp subject various governmental inquiries concerning processes employed investigation leaks hp confidential information members media •in august 2006 hp informally contacted attorney general state california requesting information concerning processes employed leak investigation •beginning september 2006 hp received requests committee energy commerce us house representatives committee records information concerning leak investigation securities transactions hp officers directors including august 25 2006 securities transaction mark hurd hps chairman chief executive officer related matters hp responded continuing respond requests addition mr hurd voluntarily gave testimony committee regarding leak investigation september 28 2006 •in september 2006 hp informally contacted united states attorneys office northern district california requesting similar information concerning processes employed leak investigation hp responding request •beginning september 2006 hp received requests division enforcement securities exchange commission records information interviews current former hp directors officers relating leak investigation resignation thomas j perkins hps board directors hps may 22 2006 september 6 2006 filings commission form 8k stock repurchases hp securities transactions officers directors occurred may 1 october 1 2006 hps policies practices approval securities transactions commission issued formal order investigation connection inquiry hp responded continuing respond requests •in september 2006 hp received request federal communications commission records information relating processes employed leak investigation hp responding request hp continuing cooperate fully ongoing inquiries investigations december 7 2006 hp announced entered agreement california attorney general resolve civil claims arising leak investigation including claim made california attorney general santa clara county superior court action filed december 7 2006 hp committed unfair business practices california law connection leak investigation result agreement includes injunction california attorney general pursue civil claims hp current former directors officers employees terms agreement hp pay total 145 million implement maintain five years series measures designed ensure hps corporate investigations conducted accordance california law companys high ethical standards 145 million 135 million used create privacy piracy fund assist california prosecutors investigating prosecuting consumer privacy information piracy violations 650000 used pay statutory damages 350000 reimburse california attorney generals office investigation costs finding liability hp part settlement addition four stockholder derivative lawsuits filed california purportedly behalf hp stockholders seeking recover damages alleged breach fiduciary duty require hp improve corporate governance internal control procedures result activities leak investigation staehr v dunn et al filed santa clara county superior court september 18 2006 worsham v dunn et al filed santa clara county superior court september 14 2006 tansey v dunn et al filed santa clara county superior court september 20 2006 hall v dunn et al filed santa clara county superior court september 25 2006 october 19 2006 santa clara county superior court consolidated four california cases caption hewlettpackard company derivative litigation consolidated complaint filed november 19 2006 also seeks recover damages connection sales hp stock alleged made certain current former hp officers directors possession material nonpublic information additional stockholder derivative lawsuit pifko v babbio et al filed chancery court county new castle delaware september 19 2006 seeking recover damages alleged breaches fiduciary duty obtain order instructing defendants refrain breaches fiduciary duty implement corrective measures prevent future occurrences alleged breaches fiduciary duty hp board directors appointed special litigation committee consisting independent board members authorized investigate review evaluate facts circumstances asserted derivative matters determine hp proceed matters european commission oem investigation may 2002 european commission eu publicly stated considering conducting investigation original equipment manufacturer activities concerning sales printers supplies consumers within eu european commission contacted hp requesting information printing systems businesses hp cooperated fully inquiry settled concluded litigation proceedings investigations compression labs patent litigation october 25 2006 hp 22 companies entered patent license settlement agreement compression labs inc subsidiary forgent networks cli resolve outstanding patent infringement litigation cli related us patent 4698672 672 patent settlement agreement results dismissal prejudice compression labs inc v hp et al lawsuit filed cli april 22 2004 united states district court eastern district texas subsequently consolidated pretrial proceedings northern district california nine similar lawsuits cli one defendants cli sought unspecified damages interest costs attorneys fees alleged infringement 672 patent cli asserted infringed jpeg stillimage compression standard terms settlement agreement defendants agreed pay cli aggregate 8 million portion paid hp cli granted hp defendants worldwide nonexclusive fully paidup irrevocable license exchange environmental hp party otherwise involved proceedings brought united states state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies policy apply strict standards environmental protection sites inside outside united states even subject regulations imposed local governments european union eu enacted waste electrical electronic equipment directive makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products deadline individual member states eu enact directive respective countries august 13 2004 legislation together directive weee legislation producers participating market financially responsible implementing responsibilities weee legislation beginning august 2005 implementation certain member states delayed 2006 2007 similar legislation may enacted jurisdictions including united states canada mexico china japan hp continuing evaluate impact weee legislation similar legislation jurisdictions individual countries issue implementation guidance liability environmental remediation environmental costs accrued considered probable costs reasonably estimated accrued amounts conjunction foregoing environmental issues believe adequate october 31 2006 accruals material operations financial position currently anticipate material capital expenditures environmental control facilities note 18 segment information description segments hp leading global provider products technologies software solutions services individual consumers small medium sized businesses smbs large enterprises including public education sectors hps offerings span personal computing access devices imaging printingrelated products services enterprise information technology infrastructure including enterprise storage server technology enterprise system network management software multivendor customer services including technology support maintenance consulting integration managed services fiscal 2006 hp operations organized seven business segments enterprise storage servers ess hp services hps software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology business segments disclosed consolidated financial statements based organizational structure information reviewed hps management evaluate business segment results ess hps software structured beneath broader technology solutions group tsg order provide supplementary view hps business aggregated financial data tsg presented herein hp reclassified segment operating results fiscal 2005 2004 conform certain minor fiscal 2006 organizational realignments future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows technology solutions group business segments within tsg described detail •enterprise storage servers provides storage server products various server offerings range lowend servers highend scalable servers including superdome line industry standard servers include primarily entrylevel midrange proliant servers run primarily windows®1 linux novell operating systems leverage intel corporation intel advanced micro devices amd processors business spans range product lines including pedestaltower servers densityoptimized rack servers hps bladesystem family blade servers business critical systems include itanium®2based integrity servers running hpux windows® linux openvms operating systems including highend superdome servers faulttolerant integrity nonstop servers business critical systems also include reduced instruction set computing riscbased servers hp 9000 line running hpux operating system hp alphaservers running tru64 unix®3and openvms mipsbased nonstop servers hps storageworks offerings include entrylevel midrange highend arrays storage area networks sans network attached storage nas storage management software virtualization technologies well tape drives tape libraries optical archival storage 1windows® registered trademark microsoft corporation 2itanium® registered trademark intel corporation 3unix® registered trademark open group •hp services provides portfolio multivendor services including technology services consulting integration managed services also known outsourcing hps also offers variety services tailored particular industries communications media entertainment manufacturing distribution financial services public sector including government education services hps collaborates enterprise storage servers software groups well thirdparty system integrators software networking companies bring solutions hp customers hps also works hps imaging printing group personal systems group provide managed print services end user workplace services mobile workforce productivity solutions enterprise customers technology services provides range services including standalone product support high availability services complex global networked multivendor environments business continuity recovery services technology services also manages delivery product warranty support service organization well authorized partners consulting integration provides services architect design implement technology industryspecific solutions customers consulting integration also provides crossindustry solutions areas architecture governance infrastructure applications packaged applications security service management information management enterprise microsoft solutions managed services offers management services including comprehensive outsourcing transformational infrastructure services client computing managed services managed web services application services business process outsourcing •software provides management software solutions including support allow enterprise customers manage infrastructure operations applications services business processes hp openview brand addition software delivers suite comprehensive carriergrade software platforms developing deploying nextgeneration voice data converged services network service providers hp opencall brand november 2006 hp completed acquisition mercury acquisition combine mercurys application management application delivery governance capabilities hps broad portfolio management solutions hps business segments described •personal systems group provides commercial pcs consumer pcs workstations handheld computing devices digital entertainment systems calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise smb customers connectivity manageability networked environments commercial pcs include hp compaq business desktops business notebooks well hp compaq tablet pcs consumer pcs targeted home user include hp pavilion compaq presario series multimedia consumer desktop pcs notebook pcs well hp media center pcs workstations individual computing products designed users demanding enhanced performance computer animation engineering design programs requiring highresolution graphics workstations run unix® windows® linuxbased operating systems handheld computing devices include series hp ipaq pocket pc handheld computing devices ranging value devices music global positioning system receivers advanced devices voice data capability run windows® mobile software digital entertainment products include plasma lcd flatpanel televisions hp digital entertainment center hd dvd rw drives dvd writers •imaging printing group provides consumer commercial printer hardware printing supplies printing media scanning devices ipg also focused imaging solutions commercial markets managed print services solutions addressing new growth opportunities commercial printing areas industrial applications outdoor signage graphic arts business inkjet systems include desktop single function inkjet allinone printers including photo productivity business inkjet printers scanners digital imaging products services include photo specialty printers photo kiosks digital cameras accessories online photo services snapfish north america laserjet systems include monochrome color laser printers printerbased mfds total print management solutions enterprise customers graphics imaging products include large format designjet printers indigo scitex digital presses digital publishing solutions graphics printing solutions printer supplies include laserjet toner inkjet printer cartridges related printing media hpbranded vivera colorsphere ink hp premium plus photo papers •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial life cycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments managed office strategy technology includes hp labs certain business incubation projects revenue segment attributable sale certain network infrastructure products including ethernet switch products enhance computing enterprise solutions brand procurve networking well licensing specific hp technology third parties segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include primarily amortization purchased intangible assets stockbased compensation expense related hpgranted employee stock options employee stock purchase plan certain acquisitionrelated charges purchased iprd well certain corporate governance costs hp allocate business segments restructuring charges associated adjustments related restructuring actions workforce rebalancing charges include involuntary workforce reductions voluntary severance incentives recorded six months ended april 30 2005 included business segment results selected operating results information business segment follows following fiscal years ended october 31 reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hp allocates assets business segments based primary segments benefiting assets corporate unallocated assets composed primarily cash equivalents described fiscal 2006 segment asset information stated based fiscal 2006 organizational structure total assets segment well tsg reconciliation segment assets hp consolidated total assets follows october 31 major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location single country outside united states represented 10 hps total consolidated net revenue period presented october 31 2006 belgium netherlands represented 10 hps total consolidated net assets october 31 2005 single country outside united states represented 10 hps total consolidated net assets october 31 2004 netherlands represented 10 hps total consolidated net assets single country outside united states represented 10 hps total consolidated net property plant equipment period presented hps longlived assets goodwill purchased intangible assets hp allocate specific geographic locations impracticable hp composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 hewlettpackard company subsidiaries quarterly summary unaudited 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements note 1 summary significant accounting policies note 2 stockbased compensation note 3 net earnings per share note 4 balance sheet details note 5 supplemental cash flow information note 6 acquisitions note 7 goodwill purchased intangible assets note 8 restructuring charges note 9 financial instruments note 10 financing receivables operating leases note 11 guarantees note 12 borrowings note 13 taxes earnings note 14 stockholders equity note 15 retirement postretirement benefit plans note 16 commitments note 17 litigation contingencies note 18 segment information quarterly summary report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2007 2006 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2007 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2007 2006 consolidated results operations cash flows three years period ended october 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness hewlettpackard companys internal control financial reporting october 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 14 2007 expressed unqualified opinion thereon discussed note 1 consolidated financial statements fiscal year 2007 hewlettpackard company changed method accounting defined benefit postretirement plans accordance guidance provided statement financial accounting standards 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r fiscal year 2006 changed method accounting stockbased compensation accordance guidance provided statement financial accounting standards 123r sharebased payment ernst young llp san jose california december 14 2007 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2007 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2007 2006 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2007 report dated december 14 2007 expressed unqualified opinion thereon ernst young llp san jose california december 14 2007 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2007 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment hps management determined hps internal control financial reporting effective october 31 2007 effectiveness hps internal control financial reporting october 31 2007 audited ernst young llp hps independent registered public accounting firm stated report appears page 73 annual report form 10k mark v hurd mark v hurd chairman chief executive officer president december 14 2007 catherine lesjak catherine lesjak executive vice president chief financial officer december 14 2007 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions reclassifications segment reorganization hp made certain organizational realignments order closely align financial reporting business structure realignments immaterial size reflect primarily revenue shifts among business units within business segment none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share hp revised presentation consolidated statements earnings consolidated statements cash flows fiscal years ended october 31 2006 2005 provide improved visibility comparability current year presentation change affect previously reported results operations period presented previously reported subtotals within consolidated statements cash flows use estimates preparation financial statements accordance us generally accepted accounting principles requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition net revenue derived primarily sale products services following revenue recognition policies define manner hp accounts sales transactions hp recognizes revenue persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured additionally hp recognizes revenue sales channel partners including resellers distributors valueadded solution providers channel partners economic substance apart hp completed obligations related sale sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based relative fair value software based vendor specific objective evidence vsoe fair value absence fair value delivered element hp first allocates revenue fair value undelivered elements residual revenue delivered elements fair value undelivered element cannot determined hp defers revenue delivered elements undelivered elements delivered fair value determinable remaining undelivered elements hp limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecified return refund privileges products hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue software accordance specific guidance american institute certified public accountants statement position 972 software revenue recognition applicable company recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria met term based software license revenue recognized subscription basis term license entitlement hp uses residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied revenue generated maintenance unspecified upgrades updates whenandifavailable basis recognized period items delivered services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcustomer support contracts ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract hp uses proportional performance basis basic accounting policy company uses completed performance method reasonable reliable cost estimates project cannot made outsourcing contracts hp recognizes revenue ratably contractual service period fixed price contracts output consumption basis outsourcing contracts hp recognizes costs associated outsourcing contracts incurred unless costs relate transition phase outsourcing contract case hp generally amortizes costs contractual service period hp recognizes revenue operating leases straightline basis service revenue rental period addition provisions emerging issues task force 0021 revenue arrangements multiple deliverables revenue delivered item recognized separable outsourcing arrangement hp also defers cost delivered item hp recognizes revenue associated cost delivered item ratably remaining contractual service period hp recognizes losses consulting outsourcing arrangements period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term shipping handling hp includes costs related shipping handling cost sales periods presented advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 11 billion fiscal 2007 fiscal 2006 fiscal 2005 taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents original maturity investment three months less cash equivalents consists primarily highly liquid investments time deposits held major banks commercial paper october 31 2007 2006 carrying value cash equivalents approximates fair value due short period time maturity interest income approximately 598 million fiscal 2007 623 million fiscal 2006 424 million fiscal 2005 allowance doubtful accounts hp establishes allowance doubtful accounts ensure trade financing receivables overstated due uncollectibility hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware customers inability meet financial obligations case bankruptcy filings deterioration customers operating results financial position circumstances related customers change hp would adjust estimates recoverability receivables inventory hp values inventory lower cost market cost computed firstin firstout basis fixed assets hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements hp expenses maintenance repairs incurred hp provides depreciation using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized costs using straightline method estimated useful lives software generally three five years goodwill indefinitelived purchased intangible assets statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 prohibits amortization goodwill purchased intangible assets indefinite useful lives hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value hp determines fair value reporting units based weighting income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference sfas 142 also requires fair value indefinitelived purchased intangible assets estimated compared carrying value hp estimates fair value intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value longlived assets including finitelived purchased intangible assets hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years hp evaluates longlived assets property plant equipment purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 144 accounting impairment disposal longlived assets hp assesses fair value assets based undiscounted future cash flow assets expected generate recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 9 full description hps derivative financial instrument activities related accounting policies incorporated herein reference investments hps investments consist principally time deposits commercial paper corporate debt securities equity securities publiclytraded privatelyheld companies hp classifies investments maturities less one year shortterm investments hp classifies investments debt securities equity investments public companies availableforsale securities carries fair value hp determines fair values investments public companies using quoted market prices hp records unrealized gains losses availableforsale securities net taxes accumulated comprehensive income loss hp carries equity investments privatelyheld companies lower cost fair value hp may estimate fair values investments privatelyheld companies based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies losses investments hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined temporary hp records impairment charge establishes new cost basis investment current fair value order determine whether decline value temporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company financial institution including key operational cash flow metrics current market conditions future trends issuers industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value hp determined declines value certain investments temporary accordingly hp recorded impairments approximately 28 million fiscal 2007 8 million fiscal 2006 43 million fiscal 2005 hp includes impairments gains losses investments consolidated statements earnings depending market conditions hp may record additional impairments investment portfolio future concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively concentrated primarily north america represented approximately 23 gross accounts receivable october 31 2007 21 october 31 2006 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances ensure receivable balance overstated due uncollectibility allowance doubtful accounts maintained required us generally accepted accounting principles past due delinquency status receivable based contractual payment terms receivable need write receivable balance depends age size determination collectibility receivable hp generally experienced longer accounts receivable collection cycles emerging markets particular asia pacific latin america compared united states european markets event accounts receivable collection cycles emerging markets significantly deteriorate one hps larger resellers regions fail hps operating results could adversely affected concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely effect hps revenue gross margins stockbased compensation effective november 1 2005 hp adopted fair value recognition provisions sfas 123 revised 2004 sharebased payment sfas 123r using modified prospective transition method therefore restated results prior periods transition method stockbased compensation expense fiscal 2006 included stockbased compensation expense sharebased payment awards granted prior yet vested november 1 2005 based grantdate fair value estimated accordance original provision sfas 123 accounting stockbased compensation sfas 123 stockbased compensation expense sharebased payment awards granted november 1 2005 based grantdate fair value estimated accordance provisions sfas 123r hp recognizes compensation costs straightline basis requisite service period award generally option vesting term four years prior adoption sfas 123r hp recognized stockbased compensation expense accordance accounting principles board apb opinion 25 accounting stock issued employees apb 25 march 2005 securities exchange commission sec issued staff accounting bulletin 107 sab 107 regarding secs interpretation sfas 123r valuation sharebased payments public companies hp applied provisions sab 107 adoption sfas 123r november 2005 financial accounting standards board fasb issued fasb staff position fsp fas 123r3 transition election related accounting tax effects sharebased payment awards fsp 123r3 hp elected adopt alternative transition method provided fsp 123r3 calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establish beginning balance additional paidin capital pool apic pool related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r see note 2 consolidated financial statements discussion stockbased compensation foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect period except net revenue cost sales expenses related previously noted balance sheet amounts hp remeasures historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive income loss retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date plans september 30 fiscal 2007 fiscal 2006 see note 15 full description plans accounting funding policies incorporated herein reference recent pronouncements july 2006 financial accounting standards board fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 fin 48 clarifies accounting uncertainty income taxes prescribing recognition threshold tax position required meet recognized financial statements also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 required adopted hp first quarter fiscal 2008 cumulative effects applying fin 48 recorded adjustment retained earnings beginning period adoption additionally may 2007 fasb published fasb staff position fin 481 definition settlement fasb interpretation 48 fsp fin 481 fsp fin 481 amendment fin 48 clarifies enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits fsp fin 481 effective upon initial adoption fin 48 therefore adopted hp first quarter fiscal 2008 hp still evaluating impact adoption fin 48 fsp fin 481 consolidated financial statements estimated adoption fin 48 fsp fin 481 result net increase retained earnings range 500 million 900 million estimate subject revision management completes analysis september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 provides guidance using fair value measure assets liabilities also responds investors requests expanded information extent companies measure assets liabilities fair value information used measure fair value effect fair value measurements earnings sfas 157 applies whenever standards require permit assets liabilities measured fair value expand use fair value new circumstances sfas 157 effective financial statements issued fiscal years beginning november 15 2007 required adopted hp first quarter fiscal 2009 hp currently evaluating effect adoption sfas 157 consolidated results operations financial condition yet position determine effects september 2006 fasb issued sfas 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r sfas 158 sfas 158 requires funded status defined benefit postretirement plans recognized companys balance sheet changes funded status reflected comprehensive income effective fiscal years ending december 15 2006 hp adopted fiscal 2007 see note 15 effect applying provision consolidated financial statements sfas 158 also requires companies measure funded status plan date fiscal year end effective fiscal years ending december 15 2008 hp expects adopt measurement provisions sfas 158 effective october 31 2009 february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 sfas 159 sfas 159 expands use fair value accounting affect existing standards require assets liabilities carried fair value sfas 159 company may elect use fair value measure accounts loans receivable availableforsale heldtomaturity securities equity method investments accounts payable guarantees issued debt eligible items include firm commitments financial instruments otherwise would recognized inception noncash warranty obligations warrantor permitted pay third party provide warranty goods services use fair value elected upfront costs fees related item must recognized earnings cannot deferred debt issuance costs fair value election irrevocable generally made instrumentbyinstrument basis even company similar instruments elects measure based fair value adoption date unrealized gains losses existing items fair value elected reported cumulative adjustment beginning retained earnings subsequent adoption sfas 159 changes fair value recognized earnings sfas 159 effective fiscal years beginning november 15 2007 required adopted hp first quarter fiscal 2009 hp currently determining whether fair value accounting appropriate eligible items cannot estimate impact sfas 159 consolidated results operations financial condition june 2007 fasb also ratified eitf 073 accounting nonrefundable advance payments goods services received use future research development activities eitf 073 eitf 073 requires nonrefundable advance payments goods services used rendered future research development activities deferred capitalized recognized expense goods delivered related services performed eitf 073 effective prospective basis fiscal years beginning december 15 2007 adopted hp first quarter fiscal 2009 hp expect adoption eitf 073 material effect hps consolidated results operations financial condition december 2007 fasb issued sfas 141 revised 2007 business combinations sfas 141r sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 adopted hp first quarter fiscal 2010 hp currently evaluating potential impact adoption sfas 141r consolidated results operations financial condition december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51 sfas 160 sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parents ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 adopted hp first quarter fiscal 2010 hp currently evaluating potential impact adoption sfas 160 consolidated results operations financial condition addition sfas 158 adoption mentioned hp adopted following accounting standards fiscal 2007 none material effect hps consolidated results operations period financial condition end period •sfas 154 accounting changes error corrections •staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements •eitf 055 accounting early retirement postemployment programs specific features terms specified altersteilzeit early retirement arrangements •eitf 069 reporting change elimination previously existing difference fiscal year end parent company consolidated entity reporting period investor equity method investee note 2 stockbased compensation october 31 2007 hp stockbased employee compensation plans described total compensation expense taxes related plans 629 million 536 million fiscal 2007 2006 respectively prior november 1 2005 hp accounted plans recognition measurement provisions apb 25 accordingly hp generally recognized stockbased compensation expense granted options discounted exercise price resulting compensation expense recognized ratably associated service period generally option vesting term prior november 1 2005 hp also provided pro forma disclosure amounts accordance sfas 148 accounting stockbased compensationtransition disclosure sfas 148 fair value method defined sfas 123 applied stockbased compensation effective november 1 2005 hp adopted fair value recognition provisions sfas 123r using modified prospective transition method therefore restated prior periods results transition method stockbased compensation expense fiscal 2006 included compensation expense sharebased payment awards granted prior yet vested november 1 2005 based grantdate fair value estimated accordance original provisions sfas 123 stockbased compensation expense sharebased payment awards granted november 1 2005 based grantdate fair value estimated accordance provisions sfas 123r hp recognizes compensation costs net estimated forfeiture rate recognizes compensation costs shares expected vest straightline basis requisite service period award generally option vesting term four years hp estimated forfeiture rates fiscal 2007 2006 based historical experience fiscal grant years majority vesting terms satisfied result adopting sfas 123r earnings income taxes net earnings fiscal 2007 lower 494 million 353 million respectively continued account stockbased compensation apb 25 unfavorable impact basic diluted earnings per share fiscal 2007 013 per share earnings income taxes net earnings fiscal 2006 lower 448 million 318 million respectively result adopting sfas 123r unfavorable impact basic diluted earnings per share fiscal 2006 011 per share addition prior adoption sfas 123r hp presented tax benefit stock option exercises operating cash flows upon adoption sfas 123r tax benefit resulting tax deductions excess tax benefit related compensation cost recognized options classified financing cash flows pro forma table reflects net earnings basic diluted net earnings per share following fiscal year ended october 31 2005 hp applied fair value recognition provisions sfas 123 employee stock purchase plan hp sponsors hewlettpackard company 2000 employee stock purchase plan also known share ownership plan espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock prior november 1 2005 employees able purchase stock semiannually price equal 85 fair market value certain plandefined dates november 1 2005 hp changed espp employees purchase stock semiannually price equal 85 fair market value purchase date since price shares determined purchase date longer lookback period hp recognizes expense based 15 discount purchase fiscal 2007 espp compensation expense 56 million net taxes october 31 2007 approximately 161000 employees eligible participate approximately 51000 employees participants espp fiscal 2006 espp compensation expense 53 million net taxes october 31 2006 approximately 147000 employees eligible participate approximately 53000 employees participants espp fiscal 2007 participants purchased approximately 8744000 shares hp common stock weightedaverage price 39 per share fiscal 2006 participants purchased approximately 11076000 shares hp common stock weightedaverage price 30 per share fiscal 2005 participants purchased approximately 20673000 shares hp common stock weightedaverage price 17 per share incentive compensation plans hp stock option plans include principal plans adopted 2004 2000 1995 1990 principal option plans well various stock option plans assumed acquisitions stock options outstanding regular employees meeting certain employment qualifications eligible receive stock options fiscal 2007 approximately 99000 employees holding options one option plans october 31 2007 options granted principal option plans generally nonqualified stock options principal option plans permit options granted qualify incentive stock options us internal revenue code exercise price stock option equal fair market value hps common stock option grant date determined average highest lowest reported sale prices hps common stock date contractual term options granted since fiscal 2003 generally eight years contractual term options granted prior fiscal 2003 generally ten years principal option plans hp may choose certain cases establish discounted exercise price less 75 fair market value grant date hp granted discounted options since fiscal 2003 principal option plans hp granted certain employees cash restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units cash restricted stock awards independent option grants generally subject forfeiture employment terminates prior release restrictions awards generally vest one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding hp expenses cost restricted stock awards hp determined fair market value shares date grant ratably period restrictions lapse fiscal 2007 hp granted 1469000 shares restricted stock weightedaverage grant date fair value 43 fiscal 2006 hp granted 1492000 shares restricted stock weightedaverage grant date fair value 32 fiscal 2005 hp granted 6773000 shares restricted stock weightedaverage grant date fair value 21 hp 4763000 shares restricted stock outstanding october 31 2007 5492000 shares restricted stock outstanding october 31 2006 7099000 shares restricted stock outstanding october 31 2005 fiscal 2007 hp granted 151000 shares restricted stock units weightedaverage grant date fair value 45 fiscal 2006 hp granted 33000 shares restricted stock units weightedaverage grant date fair value 30 fiscal 2005 hp granted 1820000 shares restricted stock units weightedaverage grant date fair value 21 hp restricted stock units covering approximately 935000 shares outstanding october 31 2007 873000 shares outstanding october 31 2006 1780000 shares outstanding october 31 2005 light new accounting guidance sfas 123r beginning second quarter fiscal 2005 hp reevaluated assumptions used estimating fair value employee options granted part assessment management determined implied volatility calculated based actively traded options hp common stock better indicator expected volatility future stock price trends historical volatility therefore expected volatility fiscal 2007 2006 2005 based marketbased implied volatility part sfas 123r adoption hp also examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis hp identified three employee populations hp used blackscholes option pricing model value options employee populations table presents weightedaverage expected life months combined three identified employee populations expected life computation based historical exercise patterns postvesting termination behavior within three populations identified riskfree interest rate periods within contractual life award based us treasury yield curve effect time grant fair value sharebased payment awards estimated using blackscholes option pricing model following assumptions weightedaverage fair values 1the fair value calculation based stock options granted period option activity principal option plans october 31 fiscal year follows aggregate intrinsic value table represents total pretax intrinsic value difference hps closing stock price last trading day fiscal 2007 fiscal 2006 exercise price multiplied number inthemoney options would received option holders option holders exercised options october 31 2007 2006 amount changes based fair market value hps stock total intrinsic value options exercised fiscal 2007 2006 20 billion 12 billion respectively total fair value options vested expensed fiscal 2007 2006 297 million 265 million respectively net taxes option activity follows fiscal year ended october 31 2005 information options outstanding follows october 31 2007 october 31 2007 771 million total unrecognized compensation cost related stock options expected recognized weightedaverage 211 years october 31 2006 677 million total unrecognized compensation cost related stock options expected recognized weightedaverage period 230 years cash received option exercises purchases espp fiscal 2007 31 billion actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2007 totaled 675 million cash received option exercises purchases espp fiscal 2006 25 billion actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2006 totaled 420 million nonvested restricted stock awards october 31 2007 2006 follows october 31 2007 83 million unrecognized stockbased compensation expense related nonvested restricted stock awards cost expected recognized weightedaverage period 102 years october 31 2006 90 million unrecognized stockbased compensation expense related nonvested restricted stock awards cost expected recognized weightedaverage period 146 years hp recorded 84 million 58 million 144 million stockbased compensation expense net taxes relating options assumed acquisitions restricted stock awards fiscal 2007 2006 2005 respectively hp allocated stockbased compensation expense related espp principal option plans sfas 123r follows fiscal years total stockbased compensation expense taxes fiscal 2007 excludes 14 million credit adjustment restructuring charges associated fiscal 2005 restructuring plan 29 million restructuring charge accelerating vesting options held employees elected participate 2007 eer fiscal 2005 part fiscal 2005 restructuring plans hp accelerated vesting options held terminated employees included oneyear posttermination exercise period options modification resulted compensation expense 107 million hp included restructuring charges fiscal 2006 adjustment 14 million recorded reduction 107 million restructuring charges reflect actual stockbased compensation expense related employees left company stockbased compensation expense recognized incentive compensation plans approximately 644 million fiscal 2007 including 14 million credit adjustment restructuring charges 29 million charge accelerating vesting options held employees elected participate 2007 eer referred 522 million fiscal 2006 including 14 million credit restructuring charges referred 211 million fiscal 2005 including 107 million restructuring charges referred shares reserved shares available future grant espp stockbased compensation plans 181704000 october 31 2007 including 45312000 shares assumed compaq plans 217556000 october 31 2006 including 39151000 shares assumed compaq plans 260669000 october 31 2005 including 32449000 shares assumed compaq plans hp 549045000 shares common stock reserved october 31 2007 664267000 shares common stock reserved october 31 2006 794750000 shares common stock reserved october 31 2005 future issuance stockrelated benefit plans additionally hp 21494000 shares common stock reserved october 31 2007 october 31 2006 october 31 2005 future issuances related conversion outstanding zerocoupon subordinated notes note 3 net earnings per share hp calculates basic earnings per share eps using net earnings weightedaverage number shares outstanding reporting period diluted eps includes effect potential issuance common stock issuable pursuant exercise stock options assumed conversion convertible notes reconciliation numerators denominators basic diluted eps calculations follows following fiscal years ended october 31 hp excludes options exercise prices greater average market price calculation diluted eps effect would antidilutive fiscal 2007 2006 2005 hp excluded 60 million shares 130 million shares 255 million shares respectively diluted eps calculation also result adopting sfas 123r november 1 2005 hp excluded calculation diluted eps options purchase additional 33 million shares 48 million shares fiscal 2007 fiscal 2006 respectively whose combined exercise price unamortized fair value excess tax benefits greater periods average market price hps common stock effect would antidilutive addition hp excluded approximately 8 million shares hp stock issuable upon assumed conversion zerocoupon subordinated notes calculation diluted eps fiscal 2005 effect antidilutive note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables hp revolving trade receivablesbased facilities permitting sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 525 million october 31 2007 hp sold approximately 22 billion trade receivables fiscal 2007 october 31 2007 hp approximately 117 million available programs inventory current assets property plant equipment depreciation expense approximately 19 billion fiscal 2007 17 billion fiscal 2006 fiscal 2005 longterm financing receivables assets accrued liabilities longterm deferred revenue represents service product deferred revenue recognized one year balance sheet date deferred revenue represents amounts received billed advance fixedprice support maintenance contracts software customer support contracts outsourcing services startup transition work consulting integration projects product sales leasing income fixedprice support maintenance contracts include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments hp defers service amounts time hp bills customer hp recognizes amounts ratably contract life hp renders services note 5 supplemental cash flow information supplemental cash flow information follows following fiscal years ended october 31 note 6 acquisitions hp recorded acquisitions using purchase method accounting accordingly included results operations hps consolidated results date acquisition hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd charges based estimated fair values excess purchase price fair values recorded goodwill fair value assigned assets acquired based valuations using managements estimates assumptions hp expect goodwill recorded majority acquisitions deductible tax purposes hp presented pro forma results operations acquisitions material hps consolidated results operations either individual aggregate basis mercury acquisition november 2 2006 hp completed tender offer mercury interactive corporation mercury leading management software services company acquired approximately 96 mercury common shares cash consideration 52 per share november 6 2006 hp acquired remaining outstanding common shares mercury became wholly owned subsidiary hp acquisition combines mercurys application management application delivery governance capabilities hps broad portfolio management solutions aggregate purchase price approximately 49 billion consisted cash paid outstanding stock vested inthemoney stock options direct transaction costs addition purchase price also included estimated fair value earned unvested stock options outofthemoney vested stock options assumed hp based valuations prepared using estimates assumptions provided management purchase price allocation date acquisition allocated follows note 8 contains information related cost restructuring programs mercury employees also included part liabilities assumed hp included mercury openview business within hp software segment goodwill represents excess purchase price net tangible intangible assets acquired deductible tax purposes amortizable intangible assets amortized estimated useful lives follows opsware acquisition september 17 2007 hp completed tender offer opsware inc opsware leader data center automation acquired 90 opswares common shares cash consideration 1425 per share september 21 2007 hp acquired remaining outstanding opsware shares opsware became wholly owned subsidiary hp included hp software segment aggregate purchase price approximately 17 billion consisted cash paid outstanding stock vested inthemoney stock options direct transaction costs addition purchase price also included estimated fair value earned unvested stock options outofthemoney vested stock options assumed hp connection acquisition hp recorded approximately 13 billion goodwill 249 million amortizable intangible assets hp amortizing purchased intangibles straightline basis estimated lives ranging five six years hp record iprd connection opsware acquisition acquisitions fiscal 2007 hp also completed eight acquisitions fiscal 2007 total consideration acquisitions approximately 10 billion included direct transaction costs estimated fair value earned unvested stock options certain liabilities recorded connection acquisitions largest transactions acquisition neoware inc hp expects leadership personal computing accelerating hps thin client portfolio hp recorded approximately 700 million goodwill 182 million purchased intangibles connection acquisitions hp also recorded approximately 9 million iprd related acquisitions fiscal 2007 projects qualify treatment iprd yet reached technological feasibility alternative use hp included results operations transactions prospectively respective date transaction pending subsequent acquisitions november 2007 hp agreed acquire eyp mission critical facilities inc consulting company specializing strategic technology planning design operations support largescale data centers transaction subject certain closing conditions expected completed hps first quarter fiscal 2008 upon completion business expected fully integrated hp services november 2007 hp completed acquisition macdermid colorspan inc privately held manufacturer wideformat digital inkjet printers business integrated hps imaging printing group november 2007 hp completed acquisition atos origin middle east group one middle easts leading systems integrators business integrated hp services december 2007 hp agreed acquire nur macroprinters ltd maker industrial wideformat digital inkjet printers transaction subject certain closing conditions expected completed hps second quarter fiscal 2008 upon completion business expected fully integrated hps imaging printing group acquisitions fiscal 2006 peregrine december 19 2005 hp acquired outstanding shares peregrine systems inc peregrine cash merger 2608 per share purchase price approximately 538 million consisting 442 million cash paid includes direct transaction costs well assumption certain liabilities connection transaction acquisition peregrine added key asset service management components hp openview portfolio distributed management software suite business operations connection acquisition hp recorded approximately 342 million goodwill 162 million amortizable intangible assets hp also expensed 34 million iprd hp amortizing purchased intangibles principally customer relationships developed technology straightline basis estimated useful lives ranging five six years acquisitions fiscal 2006 hp also completed seven acquisitions fiscal 2006 total consideration acquisitions buyout minority interest approximately 473 million included direct transaction costs largest transactions acquisition substantially assets scitex vision ltd scitex asset acquisition expanded hps leadership printing industrial wideformat market hp recorded approximately 193 million goodwill 205 million purchased intangibles connection acquisitions hp also recorded approximately 18 million iprd related acquisitions fiscal 2006 addition hp paid approximately 17 million balance outstanding shares digital globalsoft limited consolidated subsidiary hp dgs result increased hps ownership 985 100 subsidiary enhanced hps capability services including expertise life cycle services migration technical application services hp included results operations transactions prospectively respective date transaction hp presented pro forma results operations acquired businesses results material hps results operations either individual aggregate basis note 7 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2007 2006 changes carrying amount goodwill fiscal year ended october 31 2007 follows goodwill adjustments relate primarily reversal income tax reserves compaq computer corporation compaq hp acquired 2002 preacquisition tax years tax years audited agreed upon internal revenue service statute limitations expired accordingly reserves reclassified reduction goodwill based results annual impairment tests hp determined impairment goodwill existed august 1 2007 august 1 2006 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed amortization expense related finitelived purchased intangible assets approximately 783 million fiscal 2007 604 million fiscal 2006 622 million fiscal 2005 based results annual impairment tests hp determined impairment compaq trade name existed august 1 2007 august 1 2006 however future impairment tests could result charge earnings hp continue evaluate purchased intangible asset indefinite life annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weightedaverage useful lives approximately eight years developed core technology patents product trademarks weightedaverage useful lives approximately six years estimated future amortization expense related finitelived purchased intangible assets october 31 2007 follows note 8 restructuring charges fiscal 2007 us enhanced early retirement program second quarter fiscal 2007 hp announced offering eligible employees option participate 2007 eer 2007 eer open employees satisfied defined eligibility criteria based combined age years service well otherwise eligible employees included previous restructuring programs voluntarily left company since november 30 2006 total 3080 employees participated 2007 eer including 595 persons included previous restructuring programs voluntarily left company since november 30 2006 participating employees left company may 31 2007 hp recorded net restructuring charge 354 million fiscal 2007 connection 2007 eer charge reflected 367 million severance benefits cost participating employees 29 million stockbased compensation expense accelerating vesting options held participating employees 2 million outplacement costs charges partially offset 28 million settlement gain hps us pension plan 16 million curtailment gain us postretirement benefit plans net restructuring charge 354 million 2007 eer program subsequently offset 542 million curtailment gain hp recognized fiscal 2007 resulting changes us defined benefit pension postretirement plans hp also announced second quarter 2007 hp funded cash expenditures associated 2007 eer primarily using available us pension plan assets information see note 15 incorporated herein reference fiscal 2007 mercury plan connection acquisition mercury hps management approved initiated plans restructure operations mercury eliminate certain duplicative activities reduce cost structure better align product operating expenses existing general economic conditions fiscal 2007 hp recorded 45 million severancerelated costs associated initial estimate elimination approximately 370 positions primarily united states europe hp eliminated substantially positions paid majority related severance payments fiscal 2007 fiscal 2007 hp also recorded total cost 13 million related exiting duplicative leased facilities hp expects pay costs exiting facilities 2014 mercury restructuring costs reflected purchase price mercury accordance eitf 953 recognition liabilities connection purchase business combination costs subject change based actual costs incurred changes estimates could increase decrease amount purchase price allocated goodwill fiscal 2005 restructuring plans fourth quarter fiscal 2005 hps board directors approved restructuring plan designed simplify hps structure reduce costs place greater focus customers time hp estimated would eliminate 15300 positions connection restructuring plan subsequent initial estimate hp reduced number total positions 14985 october 31 2007 hp substantially completed eliminating positions initial charge actions totaled 16 billion fiscal 2007 hp recognized net 46 million reduction recorded first quarter fiscal 2007 included severance adjustments employees whose positions hp eliminated found positions within hp 14 million noncash stockbased compensation expense adjustment 9 million curtailment gain relating hp subsidized us retiree medical program net reduction offset 46 million higher employee severance benefit charges originally estimated hp paid majority costs related severance employee benefits october 31 2007 expects pay remaining costs associated primarily tax payments early retirees fiscal 2018 third quarter fiscal 2005 hps management approved restructuring plan hp recorded restructuring charges 109 million related severance related costs associated termination approximately 1450 employees left hp october 31 2005 hp paid costs associated restructuring plan january 31 2007 fiscal 2003 2002 2001 restructuring plans 2003 2002 2001 restructuring plans substantially complete although hp records minor revisions previous estimates necessary fiscal 2007 hp recorded adjustment 33 million additional restructuring charges relating primarily facility lease obligations october 31 2007 aggregate 69 million outstanding restructuring liability respect plans relates primarily facility lease obligations hp expects pay majority obligations lives related obligations extend end fiscal 2010 workforce rebalancing part ongoing business operations hp incurs workforce rebalancing charges severance related costs within certain business segments workforce rebalancing activities considered part normal operations hp continues optimize cost structure workforce rebalancing costs included hps business segment results hp expects incur additional workforce rebalancing costs future summary restructuring plans activity accrued restructuring balances related plans described follows fiscal 2007 october 31 2007 october 31 2006 hp included longterm portion restructuring liability 50 million 91 million respectively liabilities accompanying consolidated balance sheets note 9 financial instruments investments debt equity securities investments availableforsale debt equity securities fair value follows following fiscal years ended october 31 time deposits consist certificate deposits maturity dates greater three months commercial paper investments include assetbacked commercial paper corporate debt consists primarily loans companies guaranteed standby letters credit issued thirdparty banks debt securities consist primarily fixedinterest securities invested early retirement purposes equity securities public companies primarily common stock hp estimated fair values based quoted market prices pricing models using current market rates estimated fair values may representative actual values could realized yearend realized future gross unrealized losses october 31 2007 associated debt securities fair value 20 million continuous loss position 12 months longer gross unrealized losses due primarily changes interest rates hp intent ability retain investment period time sufficient allow anticipated recovery fair value hp consider investments otherthantemporarily impaired october 31 2007 gross unrealized losses october 31 2006 associated debt securities fair value 18 million continuous loss position fewer 12 months contractual maturities availableforsale debt securities follows october 31 2007 proceeds sales maturities availableforsale securities 425 million fiscal 2007 91 million fiscal 2006 21 billion fiscal 2005 gross realized gains totaled 42 million fiscal 2007 gross realized gains losses totaled 35 million 2 million respectively fiscal 2006 gross realized gains losses totaled 31 million 1 million respectively fiscal 2005 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity securities follows following fiscal years ended october 31 equity securities privatelyheld companies include cost basis equity method investments consist primarily marketable trading securities held generate returns hp expects offset changes certain liabilities related deferred compensation arrangements hp includes gains losses changes fair value securities offset losses gains related liabilities interest net hps consolidated statements earnings gains losses associated securities material fiscal years 2007 2006 derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts swaps options hedge certain foreign currency interest rate exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp use derivative contracts speculative purposes hp applies hedge accounting based upon criteria established sfas 133 accounting derivative instruments hedging activities sfas 133 whereby hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges hp recognizes derivatives consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs cash flows operating activities consolidated statement cash flows fair value hedges hp may enter fair value hedges reduce exposure debt portfolio interest rate risk foreign currency exchange rate risk hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp may use interest rate cross currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payments underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial hp may choose hedge foreign currency risk associated foreign currency denominated debt acts natural hedge foreign currency assets denominated currency investing fixed rate instruments hp may enter interest rate swaps convert fixed interest returns variable interest returns would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period hp terminates interest rate swap maturity resulting gain loss termination amortized remaining life underlying hedged item cash flow hedges hp may use cash flow hedges hedge variability liborbased interest income hp receives certain variablerate investments hp may enter interest rate swaps convert variable rate interest returns fixedrate interest returns interest rate swaps hp designates qualify cash flow hedges hp records changes fair values accumulated comprehensive income separate component stockholders equity subsequently reclassifies changes earnings period hedged transaction recognized earnings hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six months however certain leasing revenuerelated forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portions gain loss derivative instrument accumulated comprehensive loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item october 31 2007 amounts related derivatives qualifying cash flow hedges amounted accumulated comprehensive loss 64 million net taxes 63 million hp expects reclassify earnings next 12 months along earnings effects related forecasted transactions addition fiscal 2007 2006 hp discontinue cash flow hedges probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity cumulative translation adjustment decreased result unrecognized net loss net investment hedges 109 million 31 million fiscal years ended october 31 2007 2006 respectively derivatives designated hedging instruments sfas 133 consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures derivative instruments designated hedging instruments sfas 133 hp recognizes changes fair values earnings period change hp recognizes gains losses foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities interest net included net foreign currency exchange gains approximately 86 million fiscal 2007 gains approximately 54 million fiscal 2006 gains approximately 70 million fiscal 2005 hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt investments change fair value derivative interest rate swaps designated cash flow hedges hp measures effectiveness offsetting change variable portion interest rate swaps changes expected interest income received due fluctuations libor based interest rate foreign currency option forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings october 31 2007 portion hedging instruments gains losses excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years ended october 31 2007 2006 2005 hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value gross notional fair market value derivative financial instruments respective sfas 133 classification consolidated balance sheets follows following fiscal years ended october 31 fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps shortand longterm debt approximately 81 billion october 31 2007 compared carrying value 82 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 10 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting marketing hps thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 october 31 2007 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 equipment leased customers operating leases 24 billion october 31 2007 21 billion october 31 2006 included machinery equipment accumulated depreciation equipment lease 06 billion october 31 2007 october 31 2006 october 31 2007 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 note 11 guarantees indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates material usage service delivery costs differ estimates revisions estimated warranty liability would required changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 note 12 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 notes payable banks lines credit includes deposits associated hps bankingrelated activities approximately 391 million 393 million october 31 2007 2006 respectively longterm debt longterm debt follows following fiscal years ended october 31 hp may redeem global notes series mediumterm notes collectively notes set forth table time redemption prices described prospectus supplements relating thereto notes senior unsecured debt may 2006 hp filed shelf registration statement 2006 shelf registration statement securities exchange commission sec enable hp offer sell time one offerings debt securities common stock preferred stock depositary shares warrants may 23 2006 hp issued 10 billion floating rate global notes due may 22 2009 2006 shelf registration statement notes bear interest floating rate equal threemonth usd libor plus 0125 per annum hp used portion proceeds received repay 525 euro mediumterm notes due july 2006 maturity remainder net proceeds general corporate purposes february 22 2007 hp issued additional 20 billion global notes 2006 shelf registration statement global notes included 600 million notes due march 2012 floating interest rate equal threemonth usd libor plus 011 per annum 900 million notes due march 2012 fixed interest rate 525 per annum 500 million notes due march 2017 fixed interest rate 540 per annum hp issued 600 million notes par hp issued 900 million notes 500 million notes discounts par 99938 99694 respectively hp used net proceeds offering general corporate purposes including funding repurchase notes assumed connection mercury acquisition described detail repaying shortterm commercial paper june 12 2007 hp issued additional 20 billion global notes 2006 shelf registration statement global notes included 10 billion notes due june 2009 floating interest rate equal threemonth usd libor plus 001 per annum 10 billion notes due june 2010 floating interest rate equal threemonth usd libor plus 006 per annum hp issued global notes par hp used net proceeds offerings general corporate purposes including redemption floating rate global notes due may 22 2009 june 2007 repayment shortterm commercial paper hp registered sale 30 billion debt global securities common stock preferred stock depositary shares warrants shelf registration statement march 2002 shelf registration statement december 2002 hp filed supplement 2002 shelf registration statement allows hp offer time 15 billion mediumterm notes series b due nine months date issuance series b mediumterm note program october 31 2007 hp issued mediumterm notes pursuant series b mediumterm note program hp registered sale 30 billion mediumterm notes euro mediumterm note programme filed luxembourg stock exchange hp denominate notes currency including euro hp register notes united states july 2006 hp repaid previously issued 750 million euro notes maturity programme lyons convertible holders adjusted rate 1509 shares hp common stock 1000 face value lyons payable either cash common stock hps election december 2000 hp board directors authorized repurchase program lyons allowed hp repurchase lyons time varying prices last repurchase program occurred fiscal 2002 november 2006 connection mercury acquisition hp assumed notes issued mercury notes face value 300 million maturing july 1 2007 bearing interest rate 475 per annum july 31 2007 hp repurchased repaid maturity outstanding mercury notes hp us commercial paper program 60 billion capacity subsidiaries authorized issue additional 10 billion commercial paper 500 million capacity currently available used hewlettpackard international bank plc whollyowned subsidiary hp euro commercial papercertificate deposit programme hp 30 billion fiveyear credit facility commitment fees interest rates terms borrowing credit facility vary based hps external credit ratings credit facility senior unsecured committed borrowing arrangement primarily support issuance us commercial paper amounts outstanding credit facility hp also maintains uncommitted lines credit number financial institutions available various foreign subsidiaries amount available use october 31 2007 approximately 18 billion included including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2007 carrying value assets approximated carrying value borrowings 5 million october 31 2007 hp approximately 10 billion available borrowing resources 2002 shelf registration statement programs hp also may issue additional debt securities common stock preferred stock depositary shares warrants 2006 shelf registration statement aggregate future maturities longterm debt face value excluding fair value adjustment related sfas 133 10 million discount debt issuance 145 million follows october 31 2007 interest expense borrowings 531 million fiscal 2007 336 million fiscal 2006 334 million fiscal 2005 note 13 taxes earnings domestic foreign components earnings losses follows following fiscal years ended october 31 provision benefit taxes earnings follows following fiscal years ended october 31 significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 breakdown current longterm deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 october 31 2007 hp deferred tax asset 16 billion related loss carryforwards 12 billion relates foreign net operating losses hp provided valuation allowance 11 billion foreign net operating loss carryforwards hp expect utilize remaining 377 million deferred tax asset relates 970 million 805 million federal state net operating losses respectively including losses acquired companies hp provided 178 million valuation allowance losses begin expire fiscal 2010 total tax credit carryforwards 20 billion hp foreign tax credit carryforwards 11 billion 29 million expire fiscal 2012 remainder begin expire fiscal 2015 hp alternative minimum tax credit carryforwards 86 million expire research development credit carryforwards 387 million begin expire fiscal 2019 hp also tax credit carryforwards 436 million various states foreign countries hp provided valuation allowance 263 million credits begin expire fiscal 2009 gross deferred tax assets october 31 2007 2006 reduced valuation allowances 15 billion 840 million respectively total valuation allowances increased 703 million valuation allowance increase composed 787 million net increase attributable foreign net operating losses previously recorded deferred tax assets 96 million increase attributable nonus tax credits 20 million increase attributable federal net operating loss carryovers increases partially offset 86 million decrease valuation allowances unrealized domestic capital losses 114 million decrease valuation allowances state tax credits net operating losses 15 billion valuation allowances october 31 2007 140 million related deferred tax assets acquired companies existed time acquisition future hp determines realization deferred tax assets likely reversal related valuation allowance reduce goodwill instead provision taxes total tax benefits resulting exercise employee stock options employee stock programs amounts recorded stockholders equity approximately 530 million fiscal 2007 356 million fiscal 2006 30 million fiscal 2005 differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 fiscal 2007 hp recorded 80 million net income tax benefit related items unique year attributable 154 million valuation allowance release attributable state tax credits 60 million benefit foreign net operating losses offset 96 million net increase various tax reserves net tax charge 18 million adjustment estimated fiscal 2006 tax accruals upon filing 2006 us federal state income tax returns net tax charge 20 million items fiscal 2006 hp recorded 599 million net income tax benefit related items unique year included net favorable tax adjustments 565 million income tax accruals result settlement internal revenue service irs examinations hps us income tax returns fiscal years 1993 1998 reductions net income tax accruals years related primarily resolution issues respect puerto rico manufacturing tax incentives export tax incentives issues involving nonus operations december 2006 tax relief health care act 2006 signed law includes retroactive reinstatement research development credit retroactive amount recorded hps financial statements first quarter fiscal 2007 amount material impact hps consolidated results operations financial condition fiscal 2005 hp recorded 697 million net income tax expense related items unique year tax expense result primarily 792 million associated repatriation 145 billion jobs act 76 million related additional distributions received foreign subsidiaries tax expenses offset part tax benefits 177 million resulting agreements irs governmental authorities reflected lower rates jurisdictions net result certain employment actions capital investments hp undertaken income manufacturing activities subsidiaries certain countries subject reduced tax rates cases wholly exempt taxes 2019 gross income tax benefits attributable tax status subsidiaries estimated 12 billion 043 per diluted share fiscal year 2007 876 million 031 per diluted share fiscal year 2006 11 billion 036 per diluted share fiscal year 2005 gross income tax benefits offset partially accruals us income taxes undistributed earnings irs completed examination income tax returns hp years fiscal 1998 hps 1993 1998 years settled irss appeals division settlements approved joint committee taxation 2006 tax years remain open net operating loss foreign tax credit carrybacks subsequent years irss audits years approve carrybacks june 28 2007 hp received notice deficiency irs fiscal 1999 2000 tax years notice deficiency asserted hp owes additional tax 13 million two years time hp received revenue agents report rar irs fiscal 2001 tax year proposed change hps tax liability year addition proposed deficiencies fiscal 1999 2000 irss adjustments sustained would reduce tax refund claims hp filed foreign tax credit net operating loss carrybacks earlier fiscal years reduce tax benefits carryforwards subsequent years approximately 361 million hp plans contest certain adjustments proposed notice deficiency rar towards end hp filed petition united states tax court september 25 2007 hp believes provided adequate reserves tax deficiencies reductions refund claims could result irs actions october 31 2007 irs process concluding examination hps income tax returns years 2002 2003 irs began audit hps 2004 2005 income tax returns 2007 addition hp subject numerous ongoing audits state foreign tax authorities hp believes adequate accruals provided hp open tax years compaq tax years merger date hp may 3 2002 audited agreed irs fiscal 2007 substantially remaining tax accruals compaq reclassified reduction goodwill upon closing statute limitations hp provided us federal income foreign withholding taxes 77 billion undistributed earnings nonus operations october 31 2007 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries excess cash accumulated determines advantageous business operations tax cash reasons american jobs creation act 2004repatriation foreign earnings american jobs creation act 2004 jobs act enacted october 22 2004 provided temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction resulted approximate 525 federal tax rate repatriated earnings third quarter fiscal 2005 hps ceo board directors approved domestic reinvestment plan required jobs act repatriate 145 billion foreign earnings fiscal 2005 hp recorded tax expense fiscal 2005 792 million related 145 billion dividend jobs act additional tax expense consists federal taxes 744 million state taxes net federal benefits 73 million net tax benefit 25 million related adjustment deferred tax liabilities repatriated unrepatriated foreign earnings note 14 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per common share fiscal 2007 2006 2005 stock repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2007 hp completed share repurchases approximately 209 million shares repurchases approximately 210 million shares settled 91 billion included approximately 1 million shares repurchased transactions executed fiscal 2006 settled fiscal 2007 fiscal 2006 hp completed share repurchases approximately 188 million shares repurchases approximately 190 million shares settled 61 billion included 2 million shares repurchased transactions executed fiscal 2005 settled fiscal 2006 fiscal 2005 hp completed share repurchases approximately 150 million shares approximately 148 million shares settled 35 billion shares repurchased settled fiscal 2007 fiscal 2006 open market repurchases shares repurchased settled fiscal 2005 included open market repurchases 37 million shares 10 billion 111 million shares 25 billion david lucile packard foundation addition transactions hp entered accelerated share repurchase asr program thirdparty investment bank second quarter fiscal 2007 pursuant terms asr program hp purchased 40 million shares common stock investment bank 18 billion purchase price march 30 2007 purchase date hp decreased shares outstanding reduced outstanding shares used calculate weightedaverage common shares outstanding basic diluted eps purchase date shares delivered hp included shares investment bank borrowed third parties investment bank purchased equivalent number shares open market cover position respect borrowed shares contractually specified averaging period began purchase date ended june 6 2007 end averaging period investment banks total purchase cost based volume weightedaverage purchase price hp shares averaging period approximately 90 million less purchase price accordingly hp option either receive additional shares hps common stock cash payment amount difference investment bank june 2007 hp received approximately 2 million additional shares purchased investment bank open market value approximately equal amount hp reduced shares outstanding upon receipt shares also hp entered prepaid variable share purchase program pvspp thirdparty investment bank first quarter 2006 prepaid approximately 17 billion exchange right receive variable number shares common stock weekly oneyear period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 pvspp prices hp purchased shares subject minimum maximum price determined advance repurchases completed program thereby effectively hedging hps repurchase price minimum maximum number shares hp could receive program 52 million shares 70 million shares respectively exact number shares repurchased based upon volume weightedaverage market price hps shares weekly settlement period subject minimum maximum price well regulatory limitations number shares hp permitted repurchase hp decreased shares outstanding settlement period shares physically received hp completed repurchases pvspp march 9 2007 date hp cumulatively received total 53 million shares hp retired shares repurchased longer deems shares outstanding hps board directors authorized additional 80 billion 100 billion 40 billion future share repurchases fiscal 2007 2006 2005 respectively october 31 2007 hp remaining authorization 27 billion future share repurchases november 19 2007 hps board directors authorized additional 80 billion future share repurchases comprehensive income changes components comprehensive income net taxes follows following fiscal years ended october 31 components accumulated comprehensive income net taxes follows following fiscal years ended october 31 note 15 retirement postretirement benefit plans plan design changes fiscal 2007 hp modified us defined benefit pension plan remaining number us employees still accruing benefits program effective january 1 2008 employees cease accruing pension benefits hp calculate final pension benefit amount based pay service december 31 2007 addition hp limited future eligibility pre2003 hp retiree medical program employees within five years satisfying programs retirement criteria june 30 2007 actions resulted reductions us defined benefit postretirement plan obligations result hp recognized onetime curtailment gains 541 million us defined benefit pension plan 1 million postretirement benefit plan part announcement hp offered option eligible affected employees participate 2007 eer total 3080 employees participated 2007 eer hp recognized special termination benefit expense 307 million fiscal 2007 reflects aggregate additional lumpsum benefits hp expects pay individuals participating 2007 eer hp distribute amount plan assets also hp recognized special termination benefit expense 60 million hp retiree medical plans employees participating 2007 eer expense amount reflects additional medical coverage hp expects provide employees participating 2007 eer total 367 million expense 2007 eer included restructuring charge fiscal 2007 hp fund cash expenditures associated 2007 eer primarily using available us pension plan assets eligible employees whose pension accruals cease effective december 31 2007 benefit increased company 401k match opportunity 4 percent 6 percent eligible earnings effective january 1 2008 fiscal 2007 hp also recognized net settlement loss 8 million us pension plans including settlement loss 36 million partially offset settlement gain 28 million us pension plans settlement loss 36 million related distributions subsequent transfer accrued pension benefits us excess benefit plan us executive deferred compensation plan terminated vested plan participants distributions transfer pension obligation represented reduction projected benefit obligation exceeded sum service interest cost plan result hp recognized portion unrecognized loss remeasured january 31 2007 second quarter fiscal 2007 settlement gain 28 million primarily resulted distribution lumpsum benefit payments made pension plan participants left hp 2007 eer lump sum benefit payments paid participants october 1 2006 september 30 2007 measurement period represent reduction projected benefit obligation result portion unrecognized gain recognized fiscal 2007 gain recorded accordance sfas 88 employers accounting settlements curtailments defined benefit pension plans termination benefits requires settlement event recorded prescribed payment thresholds reached hp recorded 28 million reduction restructuring charge recorded connection 2007 eer fiscal 2007 hp recognized net curtailment gain 26 million us postretirement benefit plans gain included 16 million 9 million resulting reduction eligible plan population stemming 2007 eer restructuring plans implemented fiscal 2005 respectively hp reported gains reductions restructuring charge hp also recorded onetime curtailment gain 1 million postretirement benefit plans result modification pre2003 hp retiree medical program fiscal 2007 described detail fiscal 2007 hp recognized net curtailment gains 13 million connection nonus defined benefit plans gains reflected plan design change mexico canada 11 million hp ceased pension accruals current employees meet defined criteria based age years service 2 million gain related fiscal 2005 restructuring programs recorded reduction restructuring charges fiscal 2007 also fiscal 2007 hp recognized restructuring settlement expense 4 million settlement expense reflected primarily distribution lumpsum benefit payments mexico canada thereby resulting portion unrecognized loss recorded expense settlement recognition thresholds reached addition hp incurred 4 million restructuring special termination benefit expense associated early retirement employees uk ireland defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan defined benefit pension plan us employees hired december 31 2002 benefits retirement plan generally based pay years service except eligible preacquisition compaq employees receive credit years service prior january 1 2003 effective december 31 2005 participants whose combination age plus years service less 62 ceased accruing benefits retirement plan effective january 1 2008 remaining number us employees still accruing benefits program cease accruing pension benefits us employees hired rehired january 1 2003 hp sponsors hewlettpackard company cash account pension plan cash account pension plan benefits accrue pursuant cash accumulation account formula based upon percentage pay plus interest effective november 30 2005 hp merged cash account pension plan retirement plan merged plan treated one plan certain legal financial purposes including funding requirements merger impact separate benefit structures plans effective december 31 2005 cash account pension plan closed new participants whose combination age plus years service less 62 cease accruing benefits hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset retirement plan hp calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp september 30 measurement date follows following fiscal years ended october 31 postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required participation hp retiree medical program also hp limited future eligibility pre2003 hp retiree medical program employees within five years satisfying programs retirement criteria june 30 2007 defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 481 million fiscal 2007 430 million fiscal 2006 422 million fiscal 2005 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation fiscal 2007 hp matched employee contributions hp 401k plan cash contributions maximum 6 eligible compensation effective january 1 2008 us employees eligible 6 hp matching contribution effective january 31 2004 hp designated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 9 million 10 million 12 million dividends hp common shares held hp stock fund fiscal 2007 2006 2005 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 28 million shares hp common stock october 31 2007 implementation sfas 158 sfas 158 requires funded status defined benefit postretirement plans recognized companys balance sheet changes funded status reflected comprehensive income effective fiscal years ending december 15 2006 hp adopted effective october 31 2007 sfas 158 also requires companies measure funded status plan date fiscal yearend effective fiscal years ending december 15 2008 hp expects adopt measurement provisions sfas 158 effective october 31 2009 following table summarizes financial impact stemming initial adoption sfas 158 following table summarizes pretax net experience gain loss prior service cost benefit recognized accumulated comprehensive income companys defined benefit postretirement benefit plans october 31 2007 following table summarizes experience gain loss prior service cost benefit amortized accumulated comprehensive income recognized components net periodic benefit cost credit next fiscal year pension postretirement benefit expense hps net pension postretirement benefit costs follows following fiscal years ended october 31 weighted average assumptions used calculate net benefit cost follows following fiscal years ended october 31 result restructuring plans implemented fiscal 2007 hp remeasured us defined benefit plan postretirement benefit plan obligations 2007 discount rates outlined table rates used hp conducting respective plan remeasurements reflect weightedaverage rate across measurement periods medical cost related assumptions used calculate net postretirement benefit cost following fiscal years ended october 31 follows 10 percentage point increase medical cost trend rate would increased fiscal 2007 service interest components postretirement benefit costs 18 million 10 percentage point decrease would resulted decrease 22 million period funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 adoption sfas 158 net amount recognized hps defined benefit postretirement benefit plans hps consolidated balance sheet october 31 2007 follows net amount recognized hps defined benefit postretirement benefit plans follows fiscal year ended october 31 20061 1due adoption sfas 158 implemented october 31 2007 yeartoyear comparability practical weighted average assumptions used calculate benefit obligation september 30 measurement date follows 10 percentage point increase medical cost trend rate would increased total postretirement benefit obligation reported october 31 2007 30 million 10 percentage point decrease would resulted decrease 36 million defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows plan asset allocations hps weightedaverage target asset allocations september 30 measurement date follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment purposes hp occasionally utilizes derivatives effect asset allocation changes hedge certain investment exposures target asset allocation selected plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp regularly conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds private debt private equity provide diversification higher expected returns outside united states local regulations require different approaches target asset allocations resulting higher percentage allocation fixed income securities country outside us local pension board decides target allocation consideration local regulations hps corporate office acts governance role periodically reviewing investment strategy providing recommended list investment managers country plan basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix correlations among asset classes expected volatilities expected asset class returns reflect current yield us government bonds risk premiums asset class hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees beginning fiscal 2008 hp implemented liabilitydriven investment strategy us defined benefit pension plan frozen december 31 2007 currently overfunded part strategy hp transitioned equity allocation predominantly fixed income assets expected return plan assets used calculating net benefit cost reduced 83 63 fiscal 2008 reflect changes asset allocation policy approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation future contributions funding policy fiscal 2008 hp expects contribute approximately 145 million pension plans approximately 15 million cover benefit payments us nonqualified plan participants hp expects pay approximately 80 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities august 2006 pension protection act 2006 act enacted law act significant effect hps current funding strategy us pension plan estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2007 1the estimated future benefits payable postretirement plans reflected net expected medicare part subsidy note 16 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include escalation clauses rent expense approximately 767 million fiscal 2007 744 million fiscal 2006 770 million fiscal 2005 sublease rental income approximately 44 million fiscal 2007 47 million fiscal 2006 43 million fiscal 2005 future annual minimum lease payments sublease rental income commitments october 31 2007 follows october 31 2007 hp unconditional purchase obligations approximately 20 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally inventory items future unconditional purchase obligations october 31 2007 follows note 17 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business accordance sfas 5 accounting contingencies hp records provision liability management believes probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies diversion managements attention creation significant expenses litigation proceedings investigations copyright levies described proceedings ongoing hp certain european union eu member countries including litigation germany seeking impose levies upon equipment multifunction devices mfds printers alleging devices enable producing private copies copyrighted materials total levies due imposed would based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposing extension levies digital environment advocating compensation rights holders digital rights management systems verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted nonbinding arbitration proceedings hp june 2001 germany arbitration board patent trademark office proceedings relate whether extent copyright levies photocopiers imposed accordance copyright laws implemented germany mfds allegedly enable production copies private persons following unsuccessful arbitration vg wort filed lawsuit hp may 2004 stuttgart civil court stuttgart germany seeking levies mfds sold 1997 2001 december 22 2004 court held hp liable payments regarding mfds sold germany ordered hp pay vg wort amount equal 5 outstanding levies claimed plus interest mfds sold germany december 2001 vg wort appealed decision july 6 2005 stuttgart court appeals ordered hp pay vg wort levies based published tariffs photocopiers germany range eur 3835 eur 61356 per unit plus interest mfds sold germany december 2001 hp appealed stuttgart court appeals decision bundesgerichtshof german federal supreme court oral hearing set january 30 2008 september 26 2005 vg wort filed additional lawsuit hp stuttgart civil court stuttgart germany seeking levies mfds sold germany 1997 2001 well products sold 2002 onwards july 26 2007 court issued decision following ruling stuttgart court appeals respect initial vg wort lawsuit described hp appealed decision appeal court stayed proceedings pending german federal supreme court judgment initial vg wort lawsuit seeking levies mfds described july 2004 vg wort filed separate lawsuit hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 higher regional court baden wuerttemberg may 11 2005 higher regional court issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law court yet issued written decision vg wort indicated considering claim german federal constitutional court september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich state court seeking levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fsc december 23 2004 munich state court held pcs subject levy fsc must pay 12 euros plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 higher regional court bavaria december 15 2005 higher regional court affirmed munich state court decision fsc filed appeal german federal supreme court february 2006 december 29 2005 zpu joint association various german collection societies instituted nonbinding arbitration proceedings hp arbitration board patent trademark office demanding reporting every pc sold hp germany january 2002 december 2005 seeking levy 1842 euros plus tax pc sold period hp filed notice defense connection proceedings february 2006 arbitration hearing held december 2006 august 3 2007 arbitration board issued ruling proposing levy 15 euros plus tax pc sold period hp rejected ruling arbitration board arbitration proceedings concluded zpu indicated pursue claim regular courts based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain alvis v hp defective product consumer class action filed district court jefferson county texas april 2001 february 2000 similar suit captioned lapray v compaq filed district court jefferson county texas basic allegation hp compaq sold computers containing floppy disk controllers fail alert user certain floppy disk controller errors failure alleged result data loss data corruption complaints alvis lapray seek injunctive relief declaratory relief unspecified damages attorneys fees july 2001 nationwide class certified lapray case beaumont court appeals affirmed june 2002 texas supreme court reversed certification remanded trial court may 2004 march 29 2005 alvis trial court certified texaswide class action injunctive relief hp appealed april 15 2005 hps appeal alvis case still pending june 4 2003 barrett v hp grider v compaq filed district court cleveland county oklahoma factual allegations similar alvis lapray complaints barrett grider seek among things specific performance declaratory relief unspecified damages attorneys fees december 22 2003 district court entered order staying barrett case conclusion alvis september 23 2005 district court granted grider plaintiffs motion certify nationwide class action oklahoma court civil appeals affirmed october 13 2006 november 5 2006 hp filed petition writ certiorari oklahoma supreme court seeking reversal lower courts decisions petition denied march 26 2007 grider case scheduled trial april 2008 november 5 2004 batiste v hp formerly scott v hp january 27 2005 schultz v hp formerly jurado v hp filed state court san joaquin county california factual allegations similar lapray alvis seeking certification californiaonly class injunctive relief unspecified damages including punitive damages restitution costs attorneys fees november 27 2006 trial court granted plaintiffs motion class certification certified schultz case californiaonly class march 26 2007 hp filed petition writ mandate california supreme court petition summarily denied may 9 2007 december 11 2007 court grider v compaq barrett v hp cases preliminarily approved settlement grider barrett alvis lapray schultz batiste class actions dismissed prejudice proposed settlement eligible class members right obtain redemption certificate use purchasing pc hps website usb flash drive long class member meets certain requirements software patch designed address alleged defect issue lawsuits addition class counsel class representatives paid attorneys fees expenses stipends amount yet finally approved court october 31 2007 hp established adequate reserves cover costs associated settlement including anticipated attorneys fees expenses stipends court scheduled hearing april 29 2008 determine whether grant final approval settlement addition civil division department justice general services administration office inspector general federal agencies conducting investigation allegations hp compaq made caused made false claims payment united states computers known hp compaq contain defective parts otherwise perform defective manner relating alleged floppy disk controller errors hps agreement department justice extend statute limitations investigation expired december 6 2006 hp cooperating fully investigation barbaras sales et al v intel corporation hewlettpackard company et al neubauer et al v compaq computer corporation separate lawsuits filed june 3 2002 circuit court third judicial district madison county illinois alleging hp compaq along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class trial court hp action certified illinois class intel denied nationwide class parties appealed trial courts decision july 25 2006 fifth district appellate court ruled trial court erred applying illinois law deciding certify illinois class deny certification nationwide class directed trial court reconsider decisions applying california law instead august 28 2006 intel appealed fifth districts decision illinois supreme court november 29 2007 illinois supreme court reversed certification nationwide class held statewide class could certified illinois law remanded case back trial court skold et al v intel corporation hewlettpackard company lawsuit hp joined june 14 2004 initially filed state court alameda county california based upon factual allegations similar illinois cases plaintiffs skold matter also seek unspecified damages restitution attorneys fees costs certification nationwide class skold case since transferred state court santa clara county california feder v hp formerly tyler v hp lawsuit filed united states district court northern district california june 16 2005 asserting breach express implied warranty unjust enrichment violation consumers legal remedies act deceptive advertising unfair business practices violation californias unfair competition law among things plaintiffs alleged hp employed smart chip certain inkjet printing products order register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contend consumers received false ink depletion warnings smart chip limits ability consumers use cartridge full capacity choose competitive products september 6 2005 lawsuit captioned ciolino v hp filed united states district court northern district california allegations ciolino case substantively identical feder two cases formally consolidated single proceeding district court northern district california caption hp inkjet printer litigation addition january 17 2007 additional lawsuit captioned blennis v hp filed united states district court northern district california allegations substantially consolidated inkjet printer litigation plaintiffs seek class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees three related lawsuits filed california state court tyler v hp filed santa clara county february 17 2005 obi v hp filed los angeles county february 17 2005 weingart v hp filed los angeles county march 18 2005 dismissed without prejudice plaintiffs addition two related lawsuits filed federal court namely grabell v hp filed district new jersey march 18 2005 v hp filed eastern district new york april 20 2005 dismissed without prejudice plaintiffs substantially similar allegations made hp subsidiary hewlettpackard canada co four canadian class actions one commenced british columbia february 2006 two commenced quebec april 2006 may 2006 respectively one commenced ontario june 2006 seeking class certification restitution declaratory relief injunctive relief unspecified statutory compensatory punitive damages schorsch v hp consumer class action filed hp october 28 2003 illinois state court alleging hp included electrically erasable programmable read memory eeprom chip certain laserjet printers prematurely advises user drum kit needs replacing violation illinois state law plaintiffs subsequently filed amended complaint seeking expand class purchasers drum kits purchasers hp printer consumables contain eeprom chips current amended complaint seeks certification illinoisonly class seeks unspecified damages attorneys fees costs june 6 2007 separate consumer class action lawsuit captioned baggett v hp filed united states district court central district california containing similar allegations hp employs technology laserjet color printers whereby printing process shuts prematurely preventing customers using toner stranded cartridge plaintiffs allege hp fails disclose consumers unable utilize toner remaining cartridge printer shuts complaint seeks certification nationwide class purchasers hp laserjet color printers seeks unspecified damages restitution disgorgement injunctive relief attorneys fees costs rich v hp consumer class action filed hp may 22 2006 united states district court northern district california suit alleges hp designed color inkjet printers unnecessarily use color ink addition black ink printing black white images text plaintiffs seek injunctive monetary relief behalf nationwide class court granted hps motion dismiss several plaintiffs claims hp answered remaining claims february 2007 december 27 2001 cornell university cornell research foundation inc filed complaint amended september 6 2002 hp united states district court northern district new york alleging hps parisc 8000 family microprocessors servers workstations incorporating processors infringe patent assigned cornell research foundation inc describes way executing microprocessor instructions complaint seeks declaratory injunctive relief unspecified damages march 26 2004 district court issued ruling interpreting disputed claim terms patent issue hp filed five motions summary judgment september 29 2006 district court ruled motions september 24 2007 eliminating certain patent claims otherwise allowing case proceed trial patent issue litigation united states patent 4807115 expired february 21 2006 therefore plaintiffs longer entitled seek injunctive relief hp trial date set digwamaje et al v bank america et al purported class action lawsuit names hp numerous multinational corporations defendants filed september 27 2002 united states district court southern district new york behalf current former south african citizens survivors suffered violence oppression apartheid regime lawsuit alleges hp companies helped perpetuate profited otherwise aided abetted apartheid regime period 19481994 selling products services agencies south african government claims based alien tort claims act torture victims protection act racketeer influenced corrupt organizations act state law complaint seeks among things accounting creation historic commission compensatory damages excess 200 billion punitive damages excess 200 billion costs attorneys fees november 29 2004 district court dismissed prejudice plaintiffs complaint october 12 2007 united states court appeals second circuit affirmed part reversed part district courts decision second circuit affirmed dismissal plaintiffs claims torture victims protection act reversed district courts dismissal plaintiffs alien tort claims act claims finding possible plaintiffs state claim second circuit therefore remanded case district court permit plaintiffs attempt plead allegations needed state claim alien tort claims act csiro patent litigation microsoft corporation hewlettpackard company et al v commonwealth scientific industrial research organisation australia action filed hp two plaintiffs may 9 2005 district court northern district california seeking declaratory judgment commonwealth scientific industrial research organisation australia csiro hps products employing ieee 80211a 80211g wireless protocol standards infringe csiros us patent 5487069 relating wireless transmission data frequencies excess 10ghz september 22 2005 csiro filed answer counterclaims alleging hp products employ wireless protocol standards infringe csiro patent seeking damages including enhanced damages attorneys fees costs injunction sales infringing products december 12 2006 csiro successfully moved case transferred district court eastern district texas court granted csiros motions summary judgment issues validity patent infringement permanent injunction favor csiro patent infringement action brought csiro third party vendor wireless networking products based patent june 15 2007 csiro filed amended answer counterclaims adding allegation hp products employ draft ieee 80211n wireless protocol infringe csiro patent trial scheduled april 2009 polaroid corp v hp lawsuit filed hp polaroid corporation december 2006 united states district court district delaware lawsuit involves single us patent expire april 2008 polaroid alleges certain hp products containing digital flash adaptive lighting technology infringe polaroids us patent 4829381 relating system method continuously enhancing electronic images varying contrast different portions image polaroid seeks monetary relief trial scheduled december 2008 tandberg data corporation v hp january 2006 exabyte corporation since acquired tandberg data corporation sued hp united states district court district colorado plaintiff alleges particular hp tape drive infringes patent describes apparatus method recovering data distorted tape rewinding replaying tape slower speed complaint seeks injunctive relief unspecified damages june 2006 hp asserted counterclaims plaintiff asserting two hp patents relating tape drive technology hp seeks injunctive relief unspecified damages plaintiffs alleged infringement claim construction hearing scheduled january 2008 trial scheduled september 2008 convolve inc massachusetts institute technology v compaq computer corporation seagate technology inc july 2000 compaq seagate sued united states district court southern district new york mit small technology company named convolve accused compaq seagate misappropriating certain confidential information infringing certain patents seagates development certain disk drive products compaqs development user interface mit convolve owners one patents issue respect one patents accused feature contained within seagate drive procured compaq compaqs designs products therefore seagate taking lead defending convolves claims second patent relates user interface hp removed products seagate agreed indemnify hp respect one patent hp requested received indemnification seagate respect second pretrial discovery ongoing claim construction hearing held march 3031 2004 court issued ruling august 10 2005 trial date set united states america ex rel norman rille neal roberts v hewlettpackard company et al 2004 two private individuals filed civil qui tam complaint false claims act united states district court eastern district arkansas containing generalized allegations hp several companies participated industrywide practice using partnership alliance programs make improper payments cause submission false claims connection contracts provide products services federal government april 12 2007 us department justice intervened qui tam action filed complaint hp several companies separate actions behalf united states containing allegations hp violated false claims act antikickback act 1986 providing millions dollars kickbacks alliance partners including influencer fees new business opportunity rebates us complaint alleges hp violated false claims act antikickback act breached federal government contracts induced federal government make payments hp entitled receive contracts unjustly enriched expressly impliedly making false statements records certifications federal government complied would continue comply antikickback act submitting claims government allegedly inflated included amounts influencer fees new business opportunity rebates us complaint seeks treble damages plus civil penalties connection alleged violations false claims act double damages plus civil penalties connection alleged violations antikickback act disgorgement profits earned connection breach contract unjust enrichment claims leak investigation proceedings described hp subject various governmental inquiries concerning processes employed investigation leaks hp confidential information members media concluded may 2006 •in august 2006 hp informally contacted attorney general state california requesting information concerning processes employed leak investigation december 7 2006 hp announced entered agreement california attorney general resolve civil claims arising leak investigation including claim made california attorney general santa clara county superior court action filed december 7 2006 hp committed unfair business practices california law connection leak investigation result agreement includes injunction california attorney general pursue civil claims hp current former directors officers employees terms agreement hp paid total 145 million agreed implement maintain five years series measures designed ensure hps corporate investigations conducted accordance california law companys high ethical standards 145 million 135 million used create privacy piracy fund assist california prosecutors investigating prosecuting consumer privacy information piracy violations 650000 used pay statutory damages 350000 reimbursed california attorney generals office investigation costs finding liability hp part settlement •beginning september 2006 hp received requests committee energy commerce us house representatives committee records information concerning leak investigation securities transactions hp officers directors including august 25 2006 securities transaction mark hurd hps chairman chief executive officer related matters hp responded requests addition mr hurd voluntarily gave testimony committee regarding leak investigation september 28 2006 •in september 2006 hp informally contacted us attorney northern district california requesting similar information concerning processes employed leak investigation hp responding request •beginning september 2006 hp received requests division enforcement securities exchange commission records information interviews current former hp directors officers relating leak investigation resignation thomas j perkins hps board directors hps may 22 2006 september 6 2006 filings sec form 8k stock repurchases hp securities transactions officers directors occurred may 1 october 1 2006 hps policies practices approval securities transactions may 2007 hp consented entry order sec ordering hp cease desist committing causing violations public reporting requirements securities exchange act 1934 amended hp advised staff division enforcement staff completed investigation intend recommend sec enforcement action brought connection matters •in september 2006 hp received request us federal communications commission records information relating processes employed leak investigation hp responded request hp continuing cooperate fully ongoing inquiries investigations addition four stockholder derivative lawsuits filed california purportedly behalf hp stockholders seeking recover damages alleged breach fiduciary duty require hp improve corporate governance internal control procedures result activities leak investigation staehr v dunn et al filed santa clara county superior court september 18 2006 worsham v dunn et al filed santa clara county superior court september 14 2006 tansey v dunn et al filed santa clara county superior court september 20 2006 hall v dunn et al filed santa clara county superior court september 25 2006 october 19 2006 santa clara county superior court consolidated four california cases caption hewlettpackard company derivative litigation consolidated complaint filed november 19 2006 also seeks recover damages connection sales hp stock alleged made certain current former hp officers directors possession material nonpublic information two additional stockholder derivative lawsuits pifko v babbio et al filed september 19 2006 gross v babbio et al filed november 21 2006 filed chancery court county new castle delaware seek recover damages alleged breaches fiduciary duty obtain order instructing defendants refrain breaches fiduciary duty implement corrective measures prevent future occurrences alleged breaches fiduciary duty january 24 2007 delaware court consolidated two cases caption hewlettpackard company derivative litigation subsequently stayed proceedings parties reached tentative settlement hp board directors appointed special litigation committee consisting independent board members authorized investigate review evaluate facts circumstances asserted derivative matters determine hp proceed matters december 14 2007 hp plaintiffs california delaware derivative actions entered agreement settle lawsuits agreement subject approval california delaware courts becomes final terms proposed settlement hp agreed continue certain corporate governance changes december 31 2012 pay plaintiffs attorneys fees mercury interactive corporation proceedings november 2006 hp completed acquisition mercury interactive corporation mercury upon completion acquisition hp assumed oversight litigation regulatory matters pending subsequently commenced mercury following mercuryrelated litigation regulatory inquiries currently pending •prior announcement acquisition beginning august 19 2005 four securities class action lawsuits filed mercury certain officers directors behalf purchasers mercurys stock october 2003 november 2005 archdiocese milwaukee supporting fund inc v mercury interactive et al johnson v mercury interactive et al munao v mercury interactive et al public employees retirement system mississippi v mercury interactive et al class action lawsuits consolidated united states district court northern district california mercury interactive corporation securities litigation consolidated complaint filed september 8 2006 alleges putative class period october 17 2000 november 1 2005 defendants made false misleading public statements regarding mercurys business operations violation section 10b section 20a securities exchange act 1934 amended rule 10b5 promulgated thereunder seeks unspecified monetary damages relief july 30 2007 court granted defendants motion dismiss consolidated complaint leave amend october 15 2007 hp counsel plaintiffs reached agreement principle settle consolidated class action lawsuit agreement finalized approved court provides hp pay aggregate 1175 million administer settlement compensate class pay attorneys fees •on february 26 2007 hp received request permanent subcommittee investigations us senate committee homeland security governmental affairs information relating mercurys past executive compensation stock option granting policies procedures including information practice backdating grant date options allegedly occurred hp acquired mercury hp responded subcommittees request intends cooperate inquiry european commission oem investigation may 2002 european commission eu publicly stated considering conducting investigation original equipment manufacturer oem activities concerning sales printers supplies consumers within eu european commission contacted hp requesting information printing systems businesses hp cooperated fully response initial inquiry intends cooperate fully respect subsequent requests information environmental hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies policy apply strict standards environmental cleanup sites outside united states even required applicable local laws regulations european union eu adopted waste electrical electronic equipment directive january 2003 directive makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products deadline individual member states eu enact legislation implementing directive respective countries august 13 2004 legislation together directive weee legislation eu member states obliged make producers participating market financially responsible implementing responsibilities weee legislation beginning august 2005 implementation certain member states delayed 2007 similar legislation may enacted jurisdictions including united states canada mexico china japan hp continuing evaluate impact take steps comply weee legislation similar legislation jurisdictions individual countries issue implementation legislation guidance liability environmental remediation environmental costs accrued considered probable costs reasonably estimated accrued amounts conjunction foregoing environmental issues believe adequate october 31 2007 accruals material operations financial position currently anticipate material capital expenditures environmental control facilities note 18 segment information description segments hp leading global provider products technologies software solutions services individual consumers small medium sized businesses smbs large enterprises including public education sectors hps offerings span personal computing access devices imaging printingrelated products services enterprise information technology infrastructure including enterprise storage server technology software optimizes business technology investments multivendor customer services including technology support maintenance consulting integration outsourcing services hp operations organized seven business segments enterprise storage servers ess hp services hps hp software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology business segments disclosed accompanying consolidated financial statements based organizational structure information reviewed hps management evaluate business segment results ess hps hp software structured beneath broader technology solutions group tsg order provide supplementary view hps business aggregated financial data tsg presented herein hp reclassified segment operating results fiscal 2006 fiscal 2005 conform certain fiscal 2007 organizational realignments immaterial size reflect primarily revenue shifts among business units within business segment none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows technology solutions group business segments within tsg described detail •enterprise storage servers provides storage server products various server offerings range entrylevel servers highend scalable servers including superdome servers industry standard servers include primarily entrylevel midrange proliant servers run primarily windows®1 linux novell operating systems leverage intel corporation intel advanced micro devices amd processors business spans range product lines including pedestaltower servers densityoptimized rack servers hps bladesystem family server blades business critical systems include itanium®2based integrity servers running hpux windows® linux openvms operating systems including highend superdome servers faulttolerant integrity nonstop servers business critical systems also include reduced instruction set computing riscbased servers hp 9000 line running hpux operating system hp alphaservers running tru64 unix®3 openvms mipsbased nonstop servers hps storageworks offerings include entrylevel midrange highend arrays storage area networks sans network attached storage nas storage management software virtualization technologies well tape drives tape libraries optical archival storage 1windows® registered trademark microsoft corporation 2itanium® registered trademark intel corporation 3unix® registered trademark open group •hp services provides portfolio multivendor services including technology services consulting integration outsourcing services hps also offers variety services tailored particular industries communications media entertainment manufacturing distribution financial services health life sciences public sector including government services hps collaborates enterprise storage servers hp software well thirdparty system integrators software networking companies bring solutions hp customers hps also works hps imaging printing group personal systems group provide managed print services end user workplace services mobile workforce productivity solutions enterprise customers technology services provides range services including standalone product support high availability services complex global networked multivendor environments technology services also manages delivery product warranty support service organization well authorized partners consulting integration provides services architect design implement technology industryspecific solutions customers consulting integration also provides crossindustry solutions areas architecture governance infrastructure applications packaged applications security service management information management enterprise microsoft solutions outsourcing services offers variety management outsourcing services support customers infrastructure applications business processes end user workplace print environment business continuity recovery requirements •hp software openview opencall businesses openview including mercurys product lines provides suite business technology optimization bto software automating key processes across critical functions including strategy applications operations hp bto software solutions help customers drive business results wide range functional initiatives including demand portfolio management service oriented architecture transformation software quality management business service management service management infrastructure library opencall brand hp software also delivers suite solutions platforms enables service providers develop deploy next generation multimedia services including voice data video hps business segments described •personal systems group provides commercial pcs consumer pcs workstations handheld computing devices digital entertainment systems calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise smb customers connectivity manageability networked environments commercial pcs include hp compaq business desktops business notebooks tablet pcs consumer pcs targeted home user include hp pavilion compaq presario series multimedia consumer desktops notebooks well hp media center voodoo gaming pcs workstations individual computing products designed users demanding enhanced performance computer animation engineering design programs requiring highresolution graphics workstations run unix® windows® linuxbased operating systems handheld computing devices include series hp ipaq handheld computing devices ranging pocket pcs navigation devices smartphones data devices run windows® mobile software include software support handheld computing also offers software support provide security manageability mobile devices digital entertainment products include plasma lcd flatpanel televisions hd dvd rw drives dvd writers hp digital entertainment center •imaging printing group provides consumer commercial printer hardware printing supplies printing media scanning devices ipg also focused imaging solutions commercial markets managed print services solutions addressing new growth opportunities commercial printing areas industrial applications outdoor signage graphic arts business inkjet systems include desktop single function inkjet allinone printers including photo productivity business inkjet printers scanners digital imaging products services include photo specialty printers photo kiosks digital cameras accessories online photo services snapfish laserjet systems include monochrome color laser printers printerbased mfds total print management solutions enterprise customers graphics imaging products include large format designjet printers indigo scitex digital presses digital publishing solutions graphics printing solutions printer supplies include laserjet toner inkjet printer cartridges printingrelated media hpbranded vivera colorsphere ink hp premium plus photo papers •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial lifecycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments managed office strategy technology includes hp labs certain business incubation projects revenue segment attributable sale certain network infrastructure products including ethernet switch products enhance computing enterprise solutions brand procurve networking well licensing specific hp technology third parties segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include primarily amortization purchased intangible assets stockbased compensation expense related hpgranted employee stock options employee stock purchase plan certain acquisitionrelated charges purchased iprd well certain corporate governance costs hp allocate business segments restructuring charges associated adjustments related restructuring actions selected operating results information business segment follows following fiscal years ended october 31 reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hp allocates assets business segments based primary segments benefiting assets corporate unallocated assets composed primarily cash equivalents described fiscal 2007 segment asset information stated based fiscal 2007 organizational structure total assets segment well tsg reconciliation segment assets hp consolidated total assets follows october 31 major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location united states single country represented 10 hps total consolidated net revenue period presented hp reports revenue net sales taxes use taxes valueadded taxes directly imposed governmental authorities hps revenue producing transactions customers october 31 2007 single country united states 10 hps total consolidated net assets october 31 2006 belgium netherlands represented 10 hps total consolidated net assets addition united states october 31 2005 single country united states 10 hps total consolidated net assets single country united states 10 hps total consolidated net property plant equipment period presented hps longlived assets goodwill purchased intangible assets hp allocate specific geographic locations impracticable hp composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 1certain fiscal 2007 organizational realignments reflected retroactively provide improved visibility comparability fiscal year 2006 realignments primarily resulted revenue movement within business units within ess hps segments impact total segment revenue 2reflects name change managed services outsourcing services effective fiscal 2007 hewlettpackard company subsidiaries quarterly summary unaudited 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2008 2007 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2008 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2008 2007 consolidated results operations cash flows three years period ended october 31 2008 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness hewlettpackard companys internal control financial reporting october 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 15 2008 expressed unqualified opinion thereon discussed note 1 consolidated financial statements fiscal year 2008 hewlettpackard company changed method accounting income taxes accordance guidance provided financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fiscal year 2007 hewlettpackard company changed method accounting defined benefit postretirement plans accordance guidance provided statement financial accounting standards 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r ernst young llp san jose california december 15 2008 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying managements report internal control financial reporting managements assessment conclusion effectiveness internal control financial reporting include internal controls electronic data systems corporation included 2008 consolidated financial statements hewlettpackard company fiscal year ended october 31 2008 electronic data systems corporation constituted 3 percent hewlettpackard companys total net revenue fair value assigned tangible assets purposes applying purchase method accounting acquisition date accounted approximately 11 percent hewlettpackard companys total assets october 31 2008 audit internal control financial reporting hewlettpackard company also include evaluation internal control financial reporting electronic data systems corporation opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2008 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2008 2007 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2008 report dated december 15 2008 expressed unqualified opinion thereon ernst young llp san jose california december 15 2008 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2008 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework discussed note 6 consolidated financial statements hp completed acquisition electronic data systems corporation eds august 2008 hp excluded eds assessment effectiveness internal control financial reporting october 31 2008 revenue business operations acquired eds represented approximately 3 percent hps total net revenue fiscal year ended october 31 2008 fair value assigned tangible assets purposes applying purchase method accounting date acquisition accounted approximately 11 percent hps total assets october 31 2008 based assessment hps management determined hps internal control financial reporting effective october 31 2008 effectiveness hps internal control financial reporting october 31 2008 audited ernst young llp hps independent registered public accounting firm stated report appears page 78 annual report form 10k mark v hurd mark v hurd chairman chief executive officer president december 15 2008 catherine lesjak catherine lesjak executive vice president chief financial officer december 15 2008 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions business combinations hp records acquisitions using purchase method accounting accordingly included results operations hps consolidated results date acquisition hp allocates purchase price acquisitions tangible assets acquired liabilities assumed intangible assets acquired including inprocess research development iprd charges based estimated fair values excess purchase price fair values recorded goodwill see note 6 discussion hp acquisition activities reclassifications segment reorganization hp made certain organizational realignments order optimize operating structure reclassifications prior year financial information made conform current year presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share hp revised presentation consolidated statements earnings fiscal years ended october 31 2007 2006 provide improved visibility comparability current year presentation change affect previously reported results operations period presented use estimates preparation financial statements accordance us generally accepted accounting principles requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition net revenue derived primarily sale products services following revenue recognition policies define manner hp accounts sales transactions hp recognizes revenue persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured additionally hp recognizes revenue sales channel partners including resellers distributors valueadded solution providers channel partners economic substance apart hp completed obligations related sale hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based relative fair value software based vendor specific objective evidence vsoe fair value absence fair value delivered element hp first allocates revenue fair value undelivered elements residual revenue delivered elements fair value undelivered element cannot determined hp defers revenue delivered elements undelivered elements delivered fair value determinable remaining undelivered elements revenue delivered item recognized separable undelivered item hp also defers cost delivered item hp limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecified return refund privileges instances revenue derived sales thirdparty vendor services revenue recorded gross company principal transaction net costs company acting agent customer vendor several factors considered determine whether company agent principal notably whether company primary obligator customer established pricing inventory credit risks company reports revenue net required taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority products hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue software accordance specific guidance american institute certified public accountants statement position 972 software revenue recognition amended applicable company recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria met termbased software license revenue recognized subscription basis term license entitlement hp uses residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied revenue generated maintenance unspecified upgrades updates whenandifavailable basis recognized period items delivered hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract hp recognizes revenue certain design build design development andor construction software andor systems projects using percentageofcompletion method hp uses cost method measurement towards completion determined percentage cost incurred date total estimated costs project hp uses completed contract method reasonable reliable cost estimates project cannot made outsourcing services revenue generally recognized service provided amount earned contingent upon future event service provided evenly contract term service billings uneven revenue recognized straightline basis contract term hp recognizes revenue operating leases straightline basis service revenue rental period hp recognizes costs associated outsourcing contracts incurred unless costs relate transition phase outsourcing contract case hp defers subsequently amortizes setup costs contractual services period deferred contract costs amortized straightline basis remaining original term unless billing patterns indicate accelerated method appropriate based actual projected contract financial performance indicators recoverability deferred contract costs associated particular contract analyzed periodic basis using undiscounted estimated cash flows whole contract remaining contract term undiscounted cash flows insufficient recover longlived assets deferred contract costs deferred contract costs written based discounted cash flow model cash flow deficiency remains reducing balance deferred contract costs zero remaining longlived assets related contract evaluated impairment hp recognizes losses consulting outsourcing arrangements period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term shipping handling hp includes costs related shipping handling cost sales periods presented hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 10 billion fiscal 2008 11 billion fiscal 2007 11 billion fiscal 2006 taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents original maturity investment three months less cash equivalents consists primarily highly liquid investments time deposits held major banks commercial paper october 31 2008 2007 carrying value cash equivalents approximates fair value due short period time maturity interest income approximately 401 million fiscal 2008 598 million fiscal 2007 623 million fiscal 2006 allowance doubtful accounts hp establishes allowance doubtful accounts ensure trade financing receivables overstated due uncollectability hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware customers likely inability meet financial obligations case bankruptcy filings deterioration customers operating results financial position circumstances related customers change hp would adjust estimates recoverability receivables inventory hp values inventory lower cost market cost computed firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolescence impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements hp expenses maintenance repairs incurred hp provides depreciation using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 15 years machinery equipment hp depreciates leasehold improvements life lease hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized costs using straightline method estimated useful lives software generally three five years goodwill indefinitelived purchased intangible assets statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 prohibits amortization goodwill purchased intangible assets indefinite useful lives hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 142 goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value reporting units consistent reportable segments identified note 18 hp determines fair value reporting units based weighting income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference sfas 142 also requires fair value indefinitelived purchased intangible assets estimated compared carrying value hp estimates fair value intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value longlived assets including finitelived purchased intangible assets hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years hp evaluates longlived assets property plant equipment purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable accordance sfas 144 accounting impairment disposal longlived assets hp assesses fair value assets based undiscounted future cash flow assets expected generate recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 9 full description hps derivative financial instrument activities related accounting policies incorporated herein reference investments hps investments consist principally time deposits commercial paper corporate debt securities equity securities publiclytraded privatelyheld companies hp classifies investments maturities less one year shortterm investments hp classifies investments debt securities equity investments public companies availableforsale securities carries fair value hp determines fair values investments public companies using quoted market prices hp records unrealized gains losses availableforsale securities net taxes accumulated comprehensive income loss hp carries equity investments privatelyheld companies lower cost fair value hp may estimate fair values investments privatelyheld companies based upon one following pricing models using historical forecasted financial information current market rates liquidation values recent rounds financing quoted market prices comparable public companies losses investments hp monitors investment portfolio impairment periodic basis event carrying value investment exceeds fair value decline value determined temporary hp records impairment charge establishes new cost basis investment current fair value order determine whether decline value temporary hp evaluates among factors duration extent fair value less carrying value financial condition business outlook company financial institution including key operational cash flow metrics current market conditions future trends issuers industry companys relative competitive position within industry hps intent ability retain investment period time sufficient allow anticipated recovery fair value hp determined declines value certain investments temporary accordingly hp recorded impairments approximately 27 million fiscal 2008 28 million fiscal 2007 8 million fiscal 2006 hp includes impairments gains losses investments consolidated statements earnings depending market conditions hp may record additional impairments investment portfolio future hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively concentrated primarily north america europe represented approximately 18 gross accounts receivable october 31 2008 23 october 31 2007 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances ensure receivable balance overstated due uncollectibility allowance doubtful accounts maintained required us generally accepted accounting principles past due delinquency status receivable based contractual payment terms receivable need write receivable balance depends age size determination collectability receivable hp generally experienced longer accounts receivable collection cycles emerging markets particular asia pacific latin america compared united states european markets event accounts receivable collection cycles emerging markets significantly deteriorate one hps larger resellers enterprise customers fail hps operating results could adversely affected concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins stockbased compensation stockbased compensation expense sharebased payment awards granted november 1 2005 determined based grantdate fair value estimated accordance provisions hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued sfas 123 revised 2004 sharebased payment sfas 123r hp recognizes compensation costs net estimated forfeiture rate recognizes compensation cost shares expected vest straightline basis requisite service period award generally option vesting term four years hp estimated forfeiture rate based historical experience fiscal grant years majority vesting terms satisfied hp adopted alternative transition method provided financial accounting standards board staff position fas 123r3 transition election related accounting tax effects sharebased payment awards fsp 123r3 calculating tax effects stockbased compensation pursuant sfas 123r alternative transition method includes simplified methods establish beginning balance additional paidin capital pool apic pool related tax effects employee stockbased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee stockbased compensation awards outstanding upon adoption sfas 123r see note 2 discussion stockbased compensation foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect period except net revenue cost sales expenses related previously noted balance sheet amounts hp remeasures historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive income loss retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans addition hp assumed additional retirement postretirement plans connection acquisition electronic data systems corporation eds august 2008 hp generally amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date hp plans september 30 fiscal 2008 fiscal 2007 measurement date eds plans fiscal 2008 october 31 see note 15 full description plans accounting funding policies incorporated herein reference recent pronouncements previously reported hps 2007 annual report form 10k hp recognized funded status benefit plans october 31 2007 accordance recognition provisions statement financial accounting standards sfas 158 employers accounting defined benefit pension postretirement plansan amendment financial accounting standards board fasb statements 87 88 106 132r sfas 158 addition recognition hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued provisions sfas 158 also requires companies measure funded status plan date fiscal year end effective fiscal years ending december 15 2008 hp adopt measurement provisions sfas 158 effective october 31 2009 hp pension post retirement plans hp expect adoption measurement provisions sfas 158 material impact consolidated results operations financial condition september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 required adopted hp first quarter fiscal 2009 february 2008 fasb issued fasb staff position fsp fas 1571 application fasb statement 157 fasb statement 13 accounting pronouncements address fair value measurements purposes lease classification measurement statement 13 also issued fsp 1572 effective date fasb statement 157 collectively remove certain leasing transactions scope sfas 157 partially delay effective date sfas 157 one year certain nonfinancial assets liabilities october 2008 fasb also issued fsp sfas 1573 determining fair value financial asset market asset active clarifies application sfas 157 inactive market illustrates entity would determine fair value market financial asset active although company continue evaluate application sfas 157 hp currently believe adoption sfas 157 material impact consolidated results operations financial condition february 2007 fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 sfas 159 sfas 159 allows companies elect measure eligible financial instruments certain items fair value required measured fair value sfas 159 requires unrealized gains losses items fair value option elected reported earnings reporting date sfas 159 effective fiscal years beginning november 15 2007 required adopted hp first quarter fiscal 2009 hp currently believe adoption material impact consolidated results operations financial condition since expect apply fair value option existing eligible assets liabilities december 2007 fasb issued sfas 141 revised 2007 business combinations sfas 141r sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired connection business combinations sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 adopted hp first quarter fiscal 2010 hp continues evaluate impact adoption sfas 141r consolidated results operations financial condition impact largely dependent size nature business combinations completed adoption statement december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51 sfas 160 sfas 160 establishes accounting reporting standards ownership interests subsidiaries held hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued parties parent amount consolidated net income attributable parent noncontrolling interest changes parents ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 adopted hp first quarter fiscal 2010 hp currently evaluating potential impact adoption sfas 160 consolidated results operations financial condition march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 sfas 161 sfas 161 applies derivative instruments related hedged items accounted sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 161 requires entities provide greater transparency entity uses derivative instruments derivative instruments related hedged items accounted sfas 133 related interpretations derivative instruments related hedged items affect entitys financial position results operations cash flows sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 adopted hp second quarter fiscal 2009 hp expect adoption sfas 161 material effect consolidated results operations financial condition may 2008 fasb issued sfas 162 hierarchy generally accepted accounting principles sfas 162 sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity generally accepted accounting principles gaap hierarchy statement 162 became effective november 15 2008 hp expect adoption sfas 162 material effect consolidated results operations financial condition may 2008 fasb issued fsp accounting principles board apb 141 accounting convertible debt instruments may settled cash upon conversion including partial cash settlement fsp apb 141 fsp apb 141 requires issuer certain convertible debt instruments may settled cash assets conversion separately account liability debt equity conversion option components instrument manner reflects issuers nonconvertible debt borrowing rate fsp apb 141 effective fiscal years beginning december 15 2008 retroactive basis adopted hp first quarter fiscal 2010 hp currently evaluating potential impact adoption fsp apb 141 consolidated results operations financial condition june 2008 fasb issued fsp emerging issues task force eitf 0361 determining whether instruments granted sharebased payment transactions participating securities fsp eitf 0361 clarifies sharebased payment awards entitle holders receive nonforfeitable dividends dividend equivalents vesting considered participating securities hp grants restricted stock contain nonforfeitable rights dividends considered participating securities upon adoption fsp eitf 0361 participating securities hp required include instruments calculation earnings per share eps need calculate eps using twoclass method twoclass method computing eps earnings allocation formula determines eps class common stock hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued participating security according dividends declared accumulated participation rights undistributed earnings fsp eitf 0361 effective fiscal years beginning december 15 2008 retrospective basis adopted hp first quarter fiscal 2010 hp currently evaluating potential impact adoption fsp eitf 0361 could calculation eps november 2008 fasb ratified eitf issue 087 accounting defensive intangible assets eitf 087 eitf 087 applies defensive intangible assets acquired intangible assets acquirer intend actively use intends hold prevent competitors obtaining access assets separately identifiable eitf 087 requires acquiring entity account defensive intangible assets separate unit accounting defensive intangible assets must recognized fair value accordance sfas 141r sfas 157 eitf 087 effective defensive intangible assets acquired fiscal years beginning december 15 2008 adopted hp first quarter fiscal 2010 hp currently evaluating potential impact adoption eitf 087 consolidated results operations financial condition fiscal 2008 hp adopted following accounting standard fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 see note 13 effect applying fin 48 consolidated balance sheets note 2 stockbased compensation october 31 2008 hp stockbased employee compensation plans described total compensation expense taxes related plans 606 million 629 million 536 million fiscal 2008 2007 2006 respectively employee stock purchase plan hp sponsors hewlettpackard company 2000 employee stock purchase plan also known share ownership plan espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock employees purchase stock pursuant espp semiannually price equal 85 fair market value purchase date hp recognizes expense based 15 discount fair market value hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued espp activity october 31 fiscal year follows incentive compensation plans hp stock option plans include principal plans adopted 2004 2000 1995 1990 principal option plans well various stock option plans assumed acquisitions stock options outstanding employees meeting certain employment qualifications eligible receive stock options fiscal 2008 approximately 109000 employees holding options one option plans october 31 2008 options granted principal option plans generally nonqualified stock options principal option plans permit options granted qualify incentive stock options us internal revenue code exercise price stock option equal fair market value hps common stock option grant date determined reported sale prices hps common stock market closes date contractual term options granted since fiscal 2003 generally eight years contractual term options granted prior fiscal 2003 generally ten years principal option plans hp may choose certain cases establish discounted exercise price less 75 fair market value grant date hp granted discounted options since fiscal 2003 principal option plans hp granted certain employees cash restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units cash restricted stock awards independent option grants generally subject forfeiture employment terminates prior release restrictions awards generally vest one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding hp expenses fair market value restricted stock awards determined date grant ratably period restrictions lapse fiscal 2008 hp implemented program provides issuance performancebased restricted units prus representing hypothetical shares hp common stock may issued hewlettpackard company 2004 stock incentive plan pru awards may granted eligible employees including hps principal executive officer principal financial officer hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued executive officers pru award reflects target number shares may issued award recipient actual number shares recipient receives determined end threeyear performance period based results achieved versus company performance goals based hps annual cash flow operations percentage revenue average total shareholder return tsr relative sp 500 performance period depending hps results threeyear performance period actual number shares grant recipient receives end period may range 0 200 targeted shares granted based calculations described cash flow performance goals established beginning year end year portion target number shares may credited award recipients name depending achievement cash flow performance goal year number shares credited varies 0 performance minimum level 150 performance maximum level performance minimum level maximum level proportionate percentage 30 150 applied based relative performance minimum maximum following expiration threeyear performance period number shares credited award recipient performance period adjusted tsr modifier tsr modifier determined beginning performance period varies 0 minimum level met resulting payout pru award 133 performance maximum level performance minimum level maximum level proportionate tsr modifier 66 133 applied based relative performance minimum maximum number shares received pru award recipient equals number shares credited award recipient performance period multiplied tsr modifier recipients pru awards generally must remain employed hp continuous basis end applicable threeyear performance period order receive portion shares subject award target shares subject pru awards dividend equivalent rights voting rights common stock earned issued following end applicable performance period stock options hp utilized blackscholes option pricing model value stock options granted principal option plans hp examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis hp identified three employee populations apply blackscholes model table presents weightedaverage expected life months combined three identified employee populations expected life computation based historical exercise patterns postvesting termination behavior within three populations identified riskfree interest rate periods within contractual life award based us treasury yield curve effect time grant hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued fair value sharebased payment awards estimated using blackscholes option pricing model following assumptions weightedaverage fair values 1the fair value calculation based stock options granted period option activity principal option plans october 31 fiscal year follows fiscal 2008 approximately 8 million stock options weightedaverage exercise price 50 assumed acquisition eds aggregate intrinsic value table represents total pretax intrinsic value difference hps closing stock price last trading day fiscal 2008 fiscal 2007 exercise price multiplied number inthemoney options would received option holders option holders exercised options october 31 2008 2007 amount changes based fair market value hps stock total intrinsic value options exercised fiscal 2008 2007 2006 11 billion 20 billion 12 billion respectively total fair value options vested expensed fiscal 2008 2007 2006 264 million 297 million 265 million respectively net taxes hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued information options outstanding follows october 31 2008 october 31 2008 425 million total unrecognized compensation cost related stock options expected recognized weightedaverage 16 years october 31 2007 771 million total unrecognized compensation cost related stock options expected recognized weightedaverage period 21 years restricted stock awards nonvested restricted stock awards october 31 2008 2007 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued details restricted stock awards granted assumed acquisitions follows fiscal 2008 approximately 11 million restricted stock units weightedaverage grant date fair value 45 assumed acquisition eds details nonvested restricted stock awards fiscal year end follows october 31 2008 263 million unrecognized stockbased compensation expense related nonvested restricted stock awards cost expected recognized weightedaverage period 12 years october 31 2007 83 million unrecognized stockbased compensation expense related nonvested restricted stock awards cost expected recognized weightedaverage period 10 years performancebased restricted units hp estimated fair value target pru share using monte carlo simulation model tsr modifier contains market condition estimated fair value target share current year 4021 estimated fair value target share second third years threeyear performance period determined cash flow performance goal set next two annual performance periods expense amortized remainder threeyear performance period estimated expense net forfeitures based monte carlo fair value updated achievement cash flow performance goal year end reporting period hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued following assumptions used determine fair value pru awards first year 1hp uses historic volatility pru awards implied volatility cannot used simulating multivariate prices companies sp 500 nonvested performancebased restricted units october 31 2008 follows october 31 2008 108 million total unrecognized compensation cost related performancebased restricted units first year expected recognized weightedaverage period 20 years stockbased compensation expense related income tax benefits hp allocated stockbased compensation expense follows fiscal years 1includes 105 million 84 million 58 million stockbased compensation expense net taxes relating stock awards assumed acquisitions restricted stock awards granted fiscal 2008 2007 2006 respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued cash received option exercises purchases espp fiscal 2008 18 billion actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2008 totaled 412 million cash received option exercises purchases espp fiscal 2007 31 billion actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2007 totaled 675 million shares reserved shares available future grant espp stockbased compensation plans 190802000 october 31 2008 including 73147000 shares assumed compaq eds plans 181704000 october 31 2007 including 45312000 shares assumed compaq plans 217556000 october 31 2006 including 39151000 shares assumed compaq plans hp 498574000 shares common stock reserved october 31 2008 549045000 shares common stock reserved october 31 2007 664267000 shares common stock reserved october 31 2006 future issuance stockrelated benefit plans additionally hp 21494000 shares common stock reserved october 31 2007 october 31 2006 future issuances related conversion zerocoupon subordinated notes redeemed march 2008 note 3 net earnings per share hp calculates basic earnings per share eps using net earnings weightedaverage number shares outstanding reporting period diluted eps includes effect potential issuance common stock issuable pursuant exercise stock options hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 net earnings per share continued reconciliation numerators denominators basic diluted eps calculations follows following fiscal years ended october 31 hp excludes options exercise prices greater average market price calculation diluted eps effect would antidilutive fiscal 2008 2007 2006 hp excluded 54 million shares 60 million shares 130 million shares respectively diluted eps calculation also accordance sfas 123r hp excluded calculation diluted eps options purchase additional 28 million shares 33 million shares 48 million shares fiscal 2008 2007 2006 respectively whose combined exercise price unamortized fair value excess tax benefits greater periods average market price hps common stock effect would antidilutive disclosed note 2 fiscal year ended october 31 2008 hp granted pru awards representing approximately 9 million shares target hp includes pru awards dilutive potential common shares become contingently issuable per sfas 128 earnings per share excludes awards contingently issuable pru awards granted fiscal year ended october 31 2008 included dilutive potential common shares performance conditions awards satisfied fiscal 2008 october november 1997 hp issued us dollar zerocoupon subordinated convertible notes due 2017 lyons outstanding principal amount redeemed march 2008 lyons convertible option holders time prior maturity unless previously redeemed otherwise purchased purposes calculating diluted earnings per share interest expense net tax associated lyons added back net earnings shares issuable upon conversion lyons included weightedaverage shares used compute diluted earnings per share periods lyons outstanding hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables increase allowance doubtful accounts receivable 226 million october 31 2007 553 million october 31 2008 due primarily additional allowances acquired connection eds acquisition allowances taken edss accounts receivable acquisition combined increase allowances taken hps customer specific risks due part slowing economy hp revolving trade receivablesbased facilities permitting sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs approximately 584 million october 31 2008 hp sold approximately 27 billion trade receivables fiscal 2008 october 31 2008 hp approximately 142 million available programs inventory current assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued property plant equipment depreciation expense approximately 24 billion fiscal 2008 19 billion fiscal 2007 17 billion fiscal 2006 longterm financing receivables assets accrued liabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued longterm deferred revenue represents service product deferred revenue recognized one year balance sheet date deferred revenue represents amounts received billed advance fixedprice support maintenance contracts software customer support contracts outsourcing services startup transition work consulting integration projects product sales leasing income fixedprice support maintenance contracts include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multi vendor environments hp defers service amounts time hp bills customer hp recognizes amounts ratably contract life hp renders services hp also defers subsequently amortizes certain setup costs related activities enable performance customer contract deferred contract costs including setup unbilled costs amortized straightline basis remaining original contract term unless billing patterns indicate accelerated method appropriate note 5 supplemental cash flow information supplemental cash flow information follows following fiscal years ended october 31 note 6 acquisitions hp recorded acquisitions using purchase method accounting accordingly included results operations acquired businesses hps consolidated results date acquisition hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including iprd charges based estimated fair values excess purchase price fair values recorded goodwill fair value assigned assets acquired based valuations using managements estimates assumptions acquisitions fiscal 2008 acquisition electronic data systems corporation august 26 2008 hp completed acquisition eds leading global technology services company delivering broad portfolio information technology applications business process outsourcing services clients manufacturing financial services healthcare communications energy transportation consumer retail industries governments around world acquisition eds strengthen hps service offerings information technology outsourcing including data center services workplace services networking services managed security business hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued process outsourcing including health claims financial processing crm hr outsourcing applications including development modernization management total preliminary estimated purchase price eds approximately 130 billion comprised connection acquisition hp assumed options purchase approximately 8 million shares hps common stock weightedaverage exercise price approximately 50 per share hp also assumed approximately 11 million restricted stock units weightedaverage grant date fair value 45 see note 2 discussion stock compensation relation eds direct transaction costs include investment banking legal accounting fees external costs directly related acquisition purchase price allocations date acquisition table reflect various preliminary estimates analyses including preliminary work performed thirdparty valuation specialists subject change purchase price allocation period generally one year acquisition date valuations finalized hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued total purchase price preliminary estimate approximately 45 billion allocated amortizable intangible assets acquired preliminary estimate approximately 19 billion allocated net tangible liabilities assumed connection acquisition goodwill represents excess purchase price net tangible intangible assets acquired deductible tax purposes amortizable intangible assets amortized straight line basis estimated useful lives follows customer contracts related relationship assets represent existing contracts relate primarily underlying customer relationships preliminary estimated fair value customer contracts related relationships represents sum present value expected cash flows attributable customer relationships cash flows determined revenue profit forecasts associated existing contracts renewals well addons growth opportunities expected generated customer relationships developed technology trade name assets include patents business processes tools proprietary business methods eds family brand edss technology leveraged assist improve existing services iprd charges relate amounts assigned tangible intangible assets used research development projects alternative future use therefore charged expense acquisition date accordingly portion purchase price allocated inprocess research development charged expense hps fiscal quarter ended october 31 2008 hp evaluated continues evaluate certain preacquisition contingencies relating eds existed acquisition date additional information existed acquisition date time unknown hp may become known hp remainder purchase price allocation period may result goodwill adjustments preacquisition contingencies become probable nature estimable end purchase price allocation period amounts would recorded matters hps results operations pro forma results eds acquisition following unaudited pro forma financial information presents combined results operations hp eds acquisition occurred beginning periods presented pro forma financial information presented informational purposes indicative results operations would achieved acquisition related borrowings taken place beginning periods presented unaudited pro forma financial information fiscal year ended october 31 2008 combines historical results hp year ended october 31 2008 includes postacquisition results eds period august 26 2008 october 31 2008 historical results preacquisition eds hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued period november 1 2007 august 25 2008 due different fiscal period ends unaudited pro forma financial information fiscal year ended october 31 2007 combines historical results hp fiscal year ended october 31 2007 historical results eds twelve months ended september 30 2007 unaudited pro forma results periods presented include amortization charges acquired intangible assets eliminations intercompany transactions restructuring charges iprd charges adjustments incremental stockbased compensation expense related unearned portion eds stock options restricted stock units assumed adjustments depreciation expense property plant equipment adjustments interest expense related tax effects unaudited pro forma results follows fiscal years ended october 31 2008 2007 acquisitions fiscal 2008 hp also completed eight acquisitions minority interest purchase fiscal 2008 total consideration acquisitions minority interest purchase approximately 16 billion includes direct transaction costs estimated fair value stock options assumed certain liabilities recorded connection transactions hp recorded approximately 10 billion goodwill approximately 600 million purchased intangibles approximately 15 million iprd related transactions largest transactions acquisition exstream software llc integrated hps imaging printing group total purchase price paid approximately 720 million included direct transaction costs well certain debt repaid acquisition date connection acquisition hp recorded approximately 434 million goodwill 235 million purchased intangibles expensed 11 million iprd hp amortizing purchased intangibles straightline basis weightedaverage estimated life 68 years subsequent acquisitions november 13 2008 hp completed acquisition lefthand networks inc leading provider storage virtualization solutions approximately 347 million lefthand networks integrated hps enterprise storage servers segment within technology solutions group acquisitions fiscal 2007 mercury acquisition november 2 2006 hp completed tender offer mercury interactive corporation mercury leading management software services company acquired approximately 96 mercury common shares cash consideration 52 per share november 6 2006 hp hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued acquired remaining outstanding common shares mercury became wholly owned subsidiary hp acquisition combined mercurys application management application delivery governance capabilities hps broad portfolio management solutions aggregate purchase price approximately 49 billion consisted cash paid outstanding stock fair value stock options assumed direct transaction costs based valuations prepared using estimates assumptions provided management purchase price allocation date acquisition allocated follows hp included mercury within hp software segment amortizable intangible assets amortized straightline basis estimated useful lives follows opsware acquisition september 17 2007 hp completed tender offer opsware inc opsware leader data center automation acquired 90 opswares common shares cash consideration 1425 per share september 21 2007 hp acquired remaining outstanding opsware shares opsware integrated hp software segment aggregate purchase price approximately 17 billion consisted cash paid outstanding stock fair value stock options assumed direct transaction costs connection acquisition hp recorded approximately 13 billion goodwill 249 million amortizable intangible assets hp amortizing purchased intangibles straightline basis weightedaverage estimated life 50 years hp record iprd connection opsware acquisition hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued acquisitions fiscal 2007 hp also completed eight acquisitions fiscal 2007 total consideration acquisitions approximately 10 billion included direct transaction costs estimated fair value earned unvested stock options certain liabilities recorded connection acquisitions largest transactions acquisition neoware inc integrated hps personal systems group hp recorded approximately 700 million goodwill 182 million purchased intangibles connection acquisitions hp also recorded approximately 9 million iprd related acquisitions fiscal 2007 note 7 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2008 2007 changes carrying amount goodwill fiscal year ended october 31 2008 follows year hp recorded approximately 104 billion goodwill eds date acquisition approximately 10 billion goodwill related acquisitions hp also recorded reduction approximately 600 million goodwill result currency translation period august 26 2008 october 31 2008 respect edss foreign subsidiaries whose functional currency us dollar goodwill adjustments relate primarily reversal income tax reserves hps acquisitions associated preacquisition tax years reserves reclassified reduction goodwill addition goodwill adjustments fiscal 2008 include transfer goodwill associated certain acquisitions enterprise storage servers hp software line organizational reclassifications software business based results annual impairment tests hp determined impairment goodwill existed august 1 2008 august 1 2007 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed year hp recorded approximately 45 billion purchased intangibles related eds acquisition amortization expense related finitelived purchased intangible assets approximately 967 million fiscal 2008 783 million fiscal 2007 604 million fiscal 2006 based results annual impairment tests hp determined impairment compaq trade name existed august 1 2008 august 1 2007 however future impairment tests could result charge earnings hp continue evaluate purchased intangible asset indefinite life annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weightedaverage useful lives 8 years developed core technology patents product trademarks weightedaverage useful lives 53 years hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued estimated future amortization expense related finitelived purchased intangible assets october 31 2008 follows note 8 restructuring charges fiscal 2008 restructuring plan connection acquisition eds august 26 2008 hps management approved initiated restructuring plan streamline combined companys services business better align structure efficiency business hps operating model restructuring plan expected implemented next four years include changes combined companys workforce well changes corporate overhead functions real estate procurement part restructuring plan hp expects eliminate approximately 24700 positions fourth quarter fiscal 2008 hp recorded liability approximately 18 billion related restructuring plan approximately 15 billion liability associated preacquisition eds recorded goodwill remaining approximately 03 billion associated hp recorded restructuring charge liability consisted mainly severance costs vacate duplicate facilities costs associated early termination certain contractual obligations october 31 2008 approximately 2300 positions eliminated hp expects restructuring costs paid 2012 majority paid end fiscal 2009 future quarters hp expects record additional charge approximately 280 million related severance costs approximately 2700 employees cost vacate duplicate facilities restructuring costs associated preacquisition eds reflected purchase price eds accordance eitf 953 recognition liabilities connection purchase business combination costs subject change based actual costs incurred changes estimates could increase decrease amount purchase price allocated goodwill prior fiscal year plans restructuring plans initiated fiscal years 2007 2005 2003 2002 2001 substantially complete although hp records minor revisions previous estimates necessary fiscal 2008 hp recorded net charge 24 million due primarily adjustments severance facilities costs associated prioryear plans october 31 2008 remaining balance hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued approximately 77 million accrued restructuring expenses associated plans hp expects pay majority costs 2018 workforce rebalancing part hps ongoing business operations hp incurred workforce rebalancing charges severance related costs within certain business segments fiscal 2008 workforce rebalancing activities considered part normal operations hp continues optimize cost structure workforce rebalancing costs included hps business segment results hp expects incur additional workforce rebalancing costs future summary restructuring plans activity accrued restructuring balances related plans described follows fiscal 2008 october 31 2008 october 31 2007 hp included longterm portion restructuring liability 670 million 50 million respectively liabilities shortterm portion accrued liabilities accompanying consolidated balance sheets hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments investments debt equity securities investments availableforsale debt equity securities fair value follows following fiscal years ended october 31 time deposits consist certificate deposits maturity dates greater three months commercial paper investments include assetbacked commercial paper corporate debt consists primarily loans companies guaranteed standby letters credit issued thirdparty banks debt securities consist primarily fixedinterest securities invested early retirement purposes also fixed income fund equity securities public companies primarily common stock hp estimated fair values based quoted market prices pricing models using current market rates estimated fair values may representative actual values could realized yearend realized future gross unrealized loss october 31 2008 due primarily declines certain assetbacked securities associated commercial paper hp intends hold commercial paper believes assetbacked securities recover time fiscal 2008 2007 hp recognized gross realized losses 16 million 15 million respectively associated commercial paper hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued contractual maturities availableforsale debt securities follows october 31 2008 proceeds sales maturities availableforsale securities 280 million fiscal 2008 425 million fiscal 2007 94 million fiscal 2006 gross realized gains totaled 19 million fiscal 2008 42 million fiscal 2007 gross realized gains losses totaled 35 million 2 million respectively fiscal 2006 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification investments debt equity securities follows following fiscal years ended october 31 equity securities privatelyheld companies include cost basis equity method investments marketable trading securities investments consist primarily marketable trading securities held generate returns hp expects offset changes certain liabilities related deferred compensation arrangements hp includes gains losses changes fair value securities offset losses gains related liabilities interest net hps consolidated statements earnings gains losses associated securities material fiscal years 2008 2007 derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts swaps options hedge certain foreign currency interest rate exposures hps objective offset gains losses resulting hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp use derivative contracts speculative purposes hp applies hedge accounting based upon criteria established sfas 133 accounting derivative instruments hedging activities sfas 133 whereby hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges hp recognizes derivatives consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs cash flows operating activities consolidated statement cash flows result use derivative instruments hp exposed risk counterparties derivative contracts fail meet contractual obligations mitigate counterparty credit risk hp policy entering contracts carefully selected major financial institutions based upon credit ratings factors maintains strict dollar term limits correspond institutions credit rating hps established policies procedures mitigating credit risk principal transactions short term cash include reviewing establishing limits credit exposure continually assessing creditworthiness counterparties master agreements counterparties include master netting arrangements mitigation credit exposure counterparties arrangements permit hp net amounts due hp counterparty amounts due hp counterparty reducing maximum loss credit risk event counterparty default fair value hedges hp may enter fair value hedges reduce exposure debt portfolio interest rate risk foreign currency exchange rate risk hp issues longterm debt either us dollars foreign currencies based market conditions time financing hp may use interest rate cross currency swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense manage exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payments underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial hp may choose hedge foreign currency risk associated foreign currency denominated debt acts natural hedge foreign currency assets denominated currency investing fixed rate instruments hp may enter interest rate swaps convert fixed interest returns variable interest returns would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period hp terminates interest rate swap maturity resulting gain loss termination amortized remaining life underlying hedged item hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued cash flow hedges hp may use cash flow hedges hedge variability liborbased interest income hp receives certain variablerate investments hp may enter interest rate swaps convert variable rate interest returns fixedrate interest returns interest rate swaps hp designates qualify cash flow hedges hp records changes fair values accumulated comprehensive income separate component stockholders equity subsequently reclassifies changes earnings period hedged transaction recognized earnings hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales intercompany lease loan denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six months however certain leasing revenuerelated forward contracts intercompany lease loan forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portions gain loss derivative instrument accumulated comprehensive loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item october 31 2008 amounts related derivatives qualifying cash flow hedges amounted accumulated comprehensive gain 840 million net taxes accumulated comprehensive loss 38 million net taxes hp expects reclassify net accumulated comprehensive gain 807 million earnings next 12 months along earnings effects related forecasted transactions addition fiscal 2008 2007 hp discontinue cash flow hedges probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity cumulative translation adjustment increased result unrecognized net gain net investment hedges 218 million decreased result unrecognized net loss net investment hedges 109 million fiscal years ended october 31 2008 2007 respectively derivatives designated hedging instruments sfas 133 consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures derivative instruments designated hedging instruments sfas 133 hp recognizes changes fair values earnings period change hp recognizes gains losses foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities interest net included net foreign currency exchange losses approximately 166 million hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued fiscal 2008 gains approximately 86 million fiscal 2007 gains approximately 54 million fiscal 2006 hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt investments change fair value derivative interest rate swaps designated cash flow hedges hp measures effectiveness offsetting change variable portion interest rate swaps changes expected interest income received due fluctuations liborbased interest rate foreign currency options forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings october 31 2008 portion hedging instruments gains losses excluded assessment effectiveness material fair value net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years ended october 31 2008 2007 2006 hp estimates fair values derivatives based quoted market prices pricing models using current market rates records derivatives balance sheet fair value gross notional fair market value derivative financial instruments respective sfas 133 classification consolidated balance sheets follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps short longterm debt approximately 177 billion october 31 2008 compared carrying value 179 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 10 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting marketing hps thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financing receivables operating leases continued october 31 2008 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 equipment leased customers operating leases 23 billion october 31 2008 24 billion october 31 2007 included machinery equipment accumulated depreciation equipment lease 05 billion october 31 2008 06 billion october 31 2007 october 31 2008 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 note 11 guarantees indemnifications ordinary course business hp may provide certain clients principally governmental entities subsidiary performance guarantees andor financial performance guarantees may backed standby letters credit surety bonds general hp would liable amounts guarantees event hp hps subsidiaries nonperformance permits termination related contract client likelihood hp believes remote hp believes company compliance performance obligations material service contracts performance guarantee result acquisition eds hp acquired certain service contracts supported client financing securitization arrangements specific circumstances involving non performance resulting service contract termination failure comply terms financing arrangement hp would required acquire certain assets hp considers possibility failure comply remote asset amounts involved immaterial ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 guarantees continued evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates repair rates post sales support costs differ estimates revisions estimated warranty liability would required changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 note 12 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 notes payable banks lines credit includes deposits associated hps bankingrelated activities approximately 262 million 391 million october 31 2008 2007 respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued longterm debt longterm debt follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued hp may redeem global notes set forth table time redemption prices described prospectus supplements relating thereto global notes senior unsecured debt hp registered sale 30 billion debt global securities common stock preferred stock depositary shares warrants shelf registration statement march 2002 shelf registration statement hp unable issue additional securities 2002 shelf registration statement december 1 2008 may 2006 hp filed shelf registration statement 2006 shelf registration statement sec enable hp offer sell time one offerings unlimited amount debt securities common stock preferred stock depositary shares warrants october 31 2008 hp 70 billion global notes issued 2006 shelf registration statement december 5 2008 hp issued additional 20 billion global notes 2006 shelf registration statement global notes issued december 2008 due march 2014 fixed interest rate 6125 per annum issued discounts par 99561 hp used net proceeds offerings general corporate purposes repayment shortterm commercial paper august 2008 connection hps acquisition eds outstanding debt eds consolidated hps financial statements face value eds debt consisted 700 million 7125 senior notes due october 2009 11 billion 60 unsecured senior notes due august 2013 10 billion zerocoupon convertible senior notes due october 2021 carrying value 1 million october 31 2008 690 million 3875 unsecured convertible senior notes due july 2023 carrying value 4 million october 31 2008 300 million 745 senior notes due october 2029 collectively eds debt securities capital lease obligations approximately 419 million september 5 2008 hp entered supplemental indenture pursuant hp agreed guarantee eds debt securities debt aggregate fair value approximately 33 billion acquisition date october 2008 hp redeemed majority 690 million 3875 unsecured convertible senior notes approximately 685 million october 31 2008 outstanding amount eds debt securities 26 billion march 2008 hp redeemed outstanding lyons approximately 377 million lyons convertible option holders time prior maturity unless previously redeemed otherwise purchased may 2008 board directors approved increasing capacity hps us commercial paper program 100 billion 160 billion hps subsidiaries authorized issue additional 10 billion commercial paper 500 million capacity currently available used hewlettpackard international bank plc whollyowned subsidiary hp euro commercial papercertificate deposit programme august 2008 hp issued approximately 99 billion commercial paper fund acquisition eds october 2008 hp registered commercial paper funding facility cpff provided federal reserve bank new york facility enables hp issue threemonth unsecured commercial paper special purpose vehicle federal reserve rate established cpff program currently equal spread threemonth overnight index swap rate hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued maximum amount commercial paper hp may issue time program 104 billion less total principal amount outstanding commercial paper hp issued hp unable issue commercial paper program april 30 2009 october 31 2008 hp issued commercial paper cpff program hp 29 billion fiveyear credit facility expiring may 2012 february july 2008 hp entered additional 364day credit facilities 30 billion 80 billion respectively commitment fees interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities senior unsecured committed borrowing arrangements primarily support issuance us commercial paper amounts outstanding credit facilities terms july 2008 80 billion 364day credit facility amount credit available declines amount equal proceeds future issuance longterm debt hp december 5 2008 hp issued 20 billion global notes 2006 shelf registration statement resulted reduction amount credit available july 2008 credit facility 60 billion hp also maintains uncommitted lines credit number financial institutions available various foreign subsidiaries amount available use october 31 2008 approximately 12 billion included including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2008 carrying value assets approximated carrying value borrowings 61 million october 31 2008 hp approximately 116 billion available borrowing resources including 10 billion 2002 shelf registration statement approximately 106 billion programs hp also may issue unlimited amount additional debt securities common stock preferred stock depositary shares warrants 2006 shelf registration statement hp unable issue additional securities 2002 shelf registration statement december 1 2008 aggregate future maturities longterm debt face value excluding fair value adjustment related sfas 133 78 million premium debt issuance 1 million follows october 31 2008 interest expense borrowings approximately 467 million fiscal 2008 531 million fiscal 2007 336 million fiscal 2006 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings domestic foreign components earnings follows following fiscal years ended october 31 provision benefit taxes earnings follows following fiscal years ended october 31 1hp revised presentation fiscal years ended october 31 2007 2006 regarding tax benefit stock option plans largest impacts revisions increase current us federal tax provision 428 million decrease deferred us federal tax provision 428 million fiscal 2007 decrease current us federal benefit tax 260 million decrease deferred us federal tax provision 260 million fiscal 2006 change affect previously reported results operations financial position periods presented previously reported totals provision benefit taxes earnings hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 breakdown current longterm deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 october 31 2008 hp recorded deferred tax asset 18 billion related loss carryforwards 12 billion relates foreign net operating losses hp provided valuation allowance 10 billion deferred tax assets foreign net operating loss carryforwards hp expect realize remaining 540 million deferred tax asset consists 365 million federal 175 million state deferred tax assets relating federal state net operating losses respectively including net operating losses acquired companies hp provided 312 million hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued valuation allowance deferred tax assets related net operating losses begin expire fiscal 2010 october 31 2008 hp recorded deferred tax assets various tax credit carryforwards 15 billion including 958 million foreign tax credit carryforwards subject 47 million valuation allowance begin expire fiscal 2015 hp alternative minimum tax credit carryforwards 81 million expire research development credit carryforwards 136 million begin expire fiscal 2019 hp also tax credit carryforwards 374 million various states foreign countries hp provided valuation allowance 233 million reduce related deferred tax asset credits begin expire fiscal 2009 gross deferred tax assets october 31 2008 2007 reduced valuation allowances 18 billion 15 billion respectively valuation allowance increased 258 million 2008 valuation allowance increases consisted 449 million recorded deferred tax assets acquired current year acquisitions 126 million recorded deferred tax assets related certain federal state net operating loss carryovers tax credits 47 million related deferred tax assets foreign tax credit carryovers increases partially offset 203 million net reduction valuation allowances due fin48 adoption adjustments deferred tax assets related foreign net operating loss carryovers 161 million valuation allowances deferred tax assets related foreign tax credits net operating losses carryovers 18 billion valuation allowances october 31 2008 565 million related deferred tax assets acquired companies existed time acquisition prior effective date sfas 141r extent hp determines realization deferred tax assets likely reversal valuation allowance would recorded reduction goodwill instead provision income taxes excess tax benefits resulting exercise employee stock options employee stock programs recorded increase stockholders equity approximately 316 million fiscal 2008 530 million fiscal 2007 356 million fiscal 2006 differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 fiscal 2008 hp recorded 251 million net income tax expense related items unique year recorded amounts consisted tax charge 205 million associated postacquisition eds integration 44 million adjustment estimated fiscal 2007 tax accruals upon filing 2007 us federal income tax return net tax charges 2 million attributable items hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued october 2008 emergency economic stabilization act 2008 signed law included retroactive two year extension research development tax credit january 1 2008 december 31 2009 retroactive income tax benefit 45 million recorded hps financial statements fourth quarter fiscal 2008 fiscal 2007 hp recorded 80 million net income tax benefit related items unique year recorded amounts consisted income tax benefits valuation allowance reversals 154 million attributable deferred tax assets state tax credits 60 million attributable deferred tax assets foreign net operating losses offset 96 million net increase various tax reserves net tax charge 18 million adjustment estimated fiscal 2006 tax accruals upon filing 2006 us federal state income tax returns net tax charge 20 million items fiscal 2006 hp recorded 599 million net income tax benefit related items unique year recorded amounts included net favorable tax adjustments 565 million income tax accruals result settlement internal revenue service irs examinations hps us income tax returns fiscal years 1993 1998 reductions net income tax accruals years related primarily resolution issues respect puerto rico manufacturing tax incentives export tax incentives issues involving nonus operations result certain employment actions capital investments hp undertaken income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes 2022 gross income tax benefits attributable tax status subsidiaries estimated 900 million 035 per diluted share fiscal year 2008 12 billion 043 per diluted share fiscal year 2007 876 million 031 per diluted share fiscal year 2006 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors november 1 2007 hp adopted fin 48 clarifies accounting uncertainty income taxes prescribing recognition threshold tax position required meet recognized financial statements also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition result adoption fin 48 hp reduced liability net unrecognized tax benefits 718 million hp accounted cumulative effect change accounting principle recorded increase retained earnings 687 million decrease goodwill 31 million total amount gross unrecognized tax benefits date adoption 23 billion 650 million would affect effective tax rate realized hp historically classified unrecognized tax benefits current income taxes payable implementing fin 48 hp reclassified 13 billion current income taxes payable longterm income taxes payable addition hp reclassified income tax receivable longterm income tax receivable date adoption fin 48 irs process concluding examination hps income tax returns years 2002 2003 examination concluded first fiscal quarter 2008 irs began audit hps 2004 2005 income tax returns 2007 addition hp subject numerous ongoing audits state foreign tax authorities hp believes adequate reserves provided open tax years hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued total amount gross unrecognized tax benefits 23 billion october 31 2008 680 million would affect hps effective tax rate realized reconciliation beginning ending amount unrecognized tax benefits follows hp recognizes interest expense penalties accrued unrecognized tax benefits within income tax expense policy change result adoption fin 48 addition upon adoption fin 48 hp began recognizing interest income favorable settlements income tax receivables within income tax expense date adoption fin 48 hp accrued net 28 million payable interest penalties october 31 2008 hp accrued net 20 million receivable interest penalties fiscal 2008 hp recognized net interest income tax overpayments deficiencies net tax 34 million hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution irs audit cycle within next 12 months however reasonably possible certain foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 340 million within next twelve months respect major foreign state tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp subject income tax united states sixty foreign countries subject routine corporate income tax audits many jurisdictions described hp received irs notices deficiency fiscal 1999 2000 2003 tax years revenue agents reports rars fiscal 2001 2002 tax years january 30 2008 hp received notice deficiency irs fiscal 2003 tax year notice deficiency asserted hp owes additional tax 21 million time hp received rar irs fiscal 2002 tax year proposed change hps tax liability year addition proposed deficiency fiscal 2003 irss adjustments years sustained would reduce tax refund claims hp filed net operating loss carrybacks earlier fiscal years reduce tax benefits tax credit carryforwards subsequent years approximately 249 million amount reflects certain transfer pricing adjustments settled fiscal 2008 hp plans contest certain remaining adjustments proposed notice deficiency rar towards end hp filed petition united states tax court april 29 2008 hp believes provided adequate reserves tax deficiencies reductions refund claims could result irs actions hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued june 28 2007 hp received notice deficiency irs fiscal 1999 2000 tax years notice deficiency asserted hp owes additional tax 13 million two years time hp received rar irs fiscal 2001 tax year proposed change hps tax liability year addition proposed deficiencies fiscal 1999 2000 irss adjustments sustained would reduce tax refund claims hp filed foreign tax credit net operating loss carrybacks earlier fiscal years reduce tax benefits carryforwards subsequent years approximately 80 million hp plans contest certain adjustments proposed notice deficiency rar towards end hp filed petition united states tax court september 25 2007 hp believes provided adequate reserves tax deficiencies reductions refund claims could result irs actions tax years eds 2002 audited irs proposed adjustments resolved october 31 2008 irs process concluding examination calendar years 2003 2004 december 5 2008 eds received rar exam years 2003 2004 proposing tax deficiency 82 million deficiency includes 12 million effect carrybacks 2000 2001 hp expects appeal certain issues believes adequate reserves provided october 31 2008 years hp provided us federal income foreign withholding taxes 129 billion undistributed earnings nonus operations october 31 2008 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated determines advantageous business operations tax cash reasons note 14 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per common share fiscal 2008 2007 2006 stock repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2008 hp completed share repurchases approximately 230 million shares repurchases approximately 216 million shares settled 96 billion included approximately 1 million shares repurchased transactions executed fiscal 2007 settled fiscal 2008 end fiscal 2008 hp approximately 14 million shares settled next fiscal year fiscal 2007 hp completed share repurchases approximately 209 million shares repurchases approximately 210 million shares settled 91 billion included approximately 1 million shares repurchased transactions executed fiscal 2006 settled fiscal 2007 fiscal 2006 hp completed share repurchases approximately 188 million shares approximately 190 million shares settled 61 billion included approximately 2 million shares repurchased transactions executed fiscal 2005 settled fiscal 2006 foregoing hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 stockholders equity continued shares repurchased settled fiscal 2008 fiscal 2007 fiscal 2006 open market repurchase transactions addition transactions hp entered accelerated share repurchase asr program thirdparty investment bank second quarter fiscal 2007 pursuant terms asr program hp purchased 40 million shares common stock investment bank 18 billion purchase price march 30 2007 purchase date hp decreased shares outstanding reduced outstanding shares used calculate weightedaverage common shares outstanding basic diluted eps purchase date shares delivered hp included shares investment bank borrowed third parties investment bank purchased equivalent number shares open market cover position respect borrowed shares contractually specified averaging period began purchase date ended june 6 2007 end averaging period investment banks total purchase cost based volume weightedaverage purchase price hp shares averaging period approximately 90 million less purchase price accordingly hp option either receive additional shares hps common stock cash payment amount difference investment bank june 2007 hp received approximately 2 million additional shares purchased investment bank open market value approximately equal amount hp reduced shares outstanding upon receipt shares also hp entered prepaid variable share purchase program pvspp thirdparty investment bank first quarter 2006 prepaid approximately 17 billion exchange right receive variable number shares common stock weekly oneyear period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 pvspp prices hp purchased shares subject minimum maximum price determined advance repurchases completed program thereby effectively hedging hps repurchase price minimum maximum number shares hp could receive program 52 million shares 70 million shares respectively exact number shares repurchased based upon volume weightedaverage market price hps shares weekly settlement period subject minimum maximum price well regulatory limitations number shares hp permitted repurchase hp decreased shares outstanding settlement period shares physically received hp completed repurchases pvspp march 9 2007 date hp cumulatively received total 53 million shares hp retired shares repurchased longer deems shares outstanding hps board directors authorized additional 160 billion 80 billion 100 billion future share repurchases fiscal 2008 2007 2006 respectively october 31 2008 hp remaining authorization 91 billion future share repurchases including 11 billion remaining 80 billion repurchase authorization approved hps board directors november 19 2007 80 billion additional repurchase authorization approved board september 19 2008 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 stockholders equity continued comprehensive income changes components comprehensive income net taxes follows following fiscal years ended october 31 components accumulated comprehensive income net taxes follows following fiscal years ended october 31 note 15 retirement postretirement benefit plans acquisition eds august 26 2008 eds became wholly owned subsidiary hp eds sponsors qualified nonqualified defined benefit pension plans covering substantially employees majority eds defined benefit pension plans noncontributory plans employees become fully vested upon attaining two five years service benefits based many factors differ hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued country significant years service earnings projected unit credit cost method used actuarial purposes plan assets plan obligations associated eds defined benefit pension plans included acquisition date october 31 2008 global basis eds plan assets totaled 78 billion plan obligations totaled 101 billion august 26 2008 us portion global assets obligations totaled 41 billion 50 billion respectively following acquisition eds hp announced modifying eds us qualified nonqualified plans employees accruing benefits programs effective january 1 2009 eds employees us cease accruing pension benefits final pension benefit amount calculated based pay service december 31 2008 defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan defined benefit pension plan us employees hired december 31 2002 benefits retirement plan generally based pay years service except eligible preacquisition compaq employees receive credit years service prior january 1 2003 effective december 31 2005 participants whose combination age plus years service less 62 ceased accruing benefits retirement plan us employees hired rehired january 1 2003 hp sponsors hewlettpackard company cash account pension plan cash account pension plan benefits accrue pursuant cash accumulation account formula based upon percentage pay plus interest effective december 31 2005 cash account pension plan closed new participants whose combination age plus years service less 62 ceased accruing benefits effective november 30 2005 hp merged cash account pension plan retirement plan merged plan treated one plan certain legal financial purposes including funding requirements merger impact separate benefit structures plans february 20 2007 hp announced modifying us defined benefit pension plans remaining number us employees still accruing benefits program effective january 1 2008 employees ceased accruing pension benefits hp calculated final pension benefit amount pay service december 31 2007 hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset retirement plan hp calculates defined benefit pension cost obligations fair value plan assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued projected benefit obligations us defined benefit plans combined dpsp september 30 measurement date follows following fiscal years ended october 31 12008 plan assets projected benefit obligation include eds us pension plans postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required participation hp retiree medical program february 2007 hp limited future eligibility pre2003 hp retiree medical program employees within five years satisfying programs retirement criteria june 30 2007 employees meeting modified program criteria may become eligible participation hp retiree medical program november 2008 hp announced changing limits future costsharing pre2003 program whereby future cost increases paid participating retirees starting 2011 defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 548 million fiscal 2008 481 million fiscal 2007 430 million fiscal 2006 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation similar hp eds offered participation defined contribution plans us nonus employees since acquisition date august 26 2008 global defined contribution expense eds plans totaled 21 million hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued fiscal 2008 hp matched employee contributions hp 401k plan cash contributions maximum 6 eligible compensation us employees hired prior august 1 2008 us employees hired august 1 2008 hp match employee contributions maximum 4 eligible compensation employer match eds plan 25 employee contribution based maximum contribution 6 employees salary effective january 1 2009 us employees participating eds 401k plan eligible 4 hp matching contribution eligible compensation similar hp 401k plan contributions invested direction employee various funds although eds 401k plan offer hp stock fund since acquisition date employer matching contributions eds employees totaled 6 million effective january 31 2004 hp designated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 9 million 9 million 10 million dividends hp common shares held hp stock fund fiscal 2008 2007 2006 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 27 million shares hp common stock october 31 2008 pension postretirement benefit expense hps net pension postretirement benefit cost gain recognized consolidated statements earnings follows following fiscal years ended october 31 fiscal 2008 hp recognized settlement gains 1 million us excess benefit plan 2 million canadian defined benefit plan special termination benefit expense 4 million incurred associated early retirement employees uk hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued weightedaverage assumptions used calculate net benefit cost follows following fiscal years ended october 31 2008 weightedaverage rates outlined table reflect inclusion eds plans since acquisition date medical cost related assumptions used calculate net postretirement benefit cost following fiscal years ended october 31 follows 10 percentage point increase medical cost trend rate would increased fiscal 2008 service interest components postretirement benefit costs 17 million 10 percentage point decrease would resulted decrease 20 million period hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets october 31 2008 october 31 2007 follows following table summarizes pretax net experience gain loss prior service cost benefit recognized accumulated comprehensive income companys defined benefit postretirement benefit plans october 31 2008 following table summarizes experience gain loss prior service cost benefit amortized accumulated comprehensive income recognized components net periodic benefit cost credit next fiscal year hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued weightedaverage assumptions used calculate benefit obligation disclosed 2008 2007 fiscal close follows 10 percentage point increase medical cost trend rate would increased total postretirement benefit obligation reported october 31 2008 22 million 10 percentage point decrease would resulted decrease 26 million defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows implementation sfas 158 sfas 158 requires funded status defined benefit postretirement plans recognized companys balance sheet changes funded status reflected comprehensive income effective fiscal years ending december 15 2006 hp adopted effective october 31 2007 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued following table summarizes financial impact stemming initial adoption sfas 158 october 31 2007 plan asset allocations weightedaverage target asset allocations across hp eds plans respective measurement dates follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment purposes hp occasionally utilizes derivatives effect asset allocation changes hedge certain investment exposures target asset allocation selected plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp regularly conducts periodic assetliability studies us plan assets order model various potential asset allocations hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds private debt private equity provide diversification higher expected returns outside united states investment objectives similarly aligned generate returns enable plan meet future obligations countries local regulations require adjustments asset allocation typically leading higher percentage fixed income would otherwise deployed hps corporate office acts governance role periodically reviewing investment strategy providing recommended list investment managers country plan basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix correlations among asset classes expected volatilities expected asset class returns reflect current yield us government bonds risk premiums asset class hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees beginning fiscal 2008 hp implemented liabilitydriven investment strategy us defined benefit pension plan frozen effective december 31 2007 part strategy hp transitioned equity allocation predominantly fixed income assets expected return plan assets used calculating net benefit cost 61 fiscal 2009 assets eds us defined benefit plan primarily invested equity related investments expected return plan assets used calculating net benefit cost eds defined benefit plan 93 fiscal 2009 approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation future contributions funding policy fiscal 2009 hp expects contribute approximately 360 million pension plans including eds approximately 35 million cover benefit payments us nonqualified plan participants hp expects pay approximately 70 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2008 1the estimated future benefits payable postretirement plans reflected net expected medicare part subsidy note 16 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense approximately 935 million fiscal 2008 767 million fiscal 2007 744 million fiscal 2006 increase fiscal 2008 rent expense primarily result acquisition eds sublease rental income approximately 37 million fiscal 2008 44 million fiscal 2007 47 million fiscal 2006 future annual minimum lease payments sublease rental income commitments october 31 2008 follows october 31 2008 hp unconditional purchase obligations approximately 33 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally inventory items future unconditional purchase obligations october 31 2008 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business accordance sfas 5 accounting contingencies hp records provision liability management believes probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies diversion managements attention creation significant expenses litigation proceedings investigations copyright levies described proceedings ongoing hp certain european union eu member countries including litigation germany seeking impose levies upon equipment multifunction devices mfds personal computers pcs printers alleging devices enable producing private copies copyrighted materials total levies due imposed would based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposing extension levies digital environment advocating compensation rights holders digital rights management systems verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted nonbinding arbitration proceedings hp june 2001 germany arbitration board patent trademark office proceedings relate whether extent copyright levies photocopiers imposed accordance copyright laws implemented germany mfds allegedly enable production copies private persons following unsuccessful arbitration vg wort filed lawsuit hp may 2004 stuttgart civil court stuttgart germany seeking levies certain mfds sold 1997 2001 december 22 2004 court held hp liable payments regarding mfds sold germany ordered hp pay vg wort amount equal 5 outstanding levies claimed plus interest mfds sold germany december 2001 vg wort appealed decision july 6 2005 stuttgart court appeals ordered hp pay vg wort levies based published tariffs photocopiers germany range eur 3835 eur 61356 per unit plus interest mfds sold germany december 2001 hp appealed stuttgart court appeals decision bundesgerichtshof german federal supreme court january 30 2008 german federal supreme court held mfds covered lawsuit photocopiers within meaning german copyright law effect december 31 2007 therefore hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued subject levies photocopiers established law hp filed claim german federal constitutional court challenging ruling september 26 2005 vg wort filed additional lawsuit hp stuttgart civil court stuttgart germany seeking levies mfds sold germany 1997 2001 well mfds sold 2002 onwards july 26 2007 court issued decision following ruling stuttgart court appeals respect initial vg wort lawsuit described hp appealed decision hp submitted comments german federal supreme court judgment initial vg wort lawsuit seeking levies mfds described required court july 2004 vg wort filed separate lawsuit hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 higher regional court baden wuerttemberg may 11 2005 higher regional court issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law court issued written decision january 25 2008 vg wort subsequently filed application german federal supreme court section 321a german code civil procedure contending court consider arguments may 9 2008 german federal supreme court denied vg worts application addition vg wort filed claim german federal constitutional court challenging ruling printers subject levies hp submitted unsolicited arguments latter court vg wort directed provide comments respect arguments september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich state court seeking levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fsc december 23 2004 munich state court held pcs subject levy fsc must pay 12 euros plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 higher regional court bavaria december 15 2005 higher regional court affirmed munich state court decision fsc filed appeal german federal supreme court february 2006 october 2 2008 german federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law vg wort filed claim german federal constitutional court challenging ruling december 29 2005 zpu joint association various german collection societies instituted nonbinding arbitration proceedings hp arbitration board patent trademark office demanding reporting every pc sold hp germany january 2002 december 2005 seeking levy 1842 euros plus tax pc sold period hp filed notice defense connection proceedings february 2006 arbitration hearing held december 2006 august 3 2007 arbitration board issued ruling proposing levy 15 euros plus tax pc sold period hp rejected ruling arbitration board arbitration proceedings concluded zpu filed claim hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued appeals court munich hp responded hearing date set court february 18 2010 based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain sky subscribers services limited british sky broadcasting limited v eds limited uk lawsuit filed august 17 2004 sky subscribers services limited british sky broadcasting limited electronic data systems corporation eds company hp acquired august 2008 eds limited uk eds uk one edss subsidiaries alleging deceit negligent misrepresentation negligent misstatement breach contract claims arose customer relationship management project awarded eds 2000 principal objective develop customer call center scotland edss main role project systems integrator november 12 2004 eds uk filed defense counterclaim denying claims seeking damages monies owed contract trial action commenced october 15 2007 final arguments concluded july 30 2008 trial plaintiffs claimed damages excess £700 million eds uk counterclaimed damages approximately £5 million decision court expected early 2009 skold et al v intel corporation hewlettpackard company lawsuit hp joined june 14 2004 pending state court santa clara county california lawsuit alleges hp along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class hearing plaintiffs renewed motion class certification held october 22 2008 trial court denied plaintiffs motion class certification without prejudice plaintiffs filing yet another motion certify different class inkjet printer litigation described hp involved several lawsuits claiming breach express implied warranty unjust enrichment deceptive advertising unfair business practices plaintiffs alleged among things hp employed smart chip certain inkjet printing products order register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contended consumers received false ink depletion warnings smart chip limits ability consumers use cartridge full capacity choose competitive products •a consolidated lawsuit captioned hp inkjet printer litigation pending united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees january 4 2008 court heard plaintiffs motions class certification add class representative hps motion summary judgment july 25 2008 hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued court denied three motions plaintiffs indicated intention seek certification class california consumers •a lawsuit captioned blennis v hp filed january 17 2007 united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees •four class actions hp subsidiary hewlettpackard canada co pending canada one commenced british columbia february 2006 two commenced quebec april 2006 may 2006 respectively one commenced ontario june 2006 plaintiffs seeking class certification restitution declaratory relief injunctive relief unspecified statutory compensatory punitive damages laserjet printer litigation described hp involved two lawsuits relating technology allegedly employed laserjet printer products •schorsch v hp consumer class action filed hp october 28 2003 illinois state court alleging hp included electrically erasable programmable read memory eeprom chip certain laserjet printers prematurely advises user drum kit needs replacing violation illinois state law plaintiffs subsequently filed amended complaint seeking expand class purchasers drum kits purchasers hp printer consumables contain eeprom chips current amended complaint seeks certification illinoisonly class seeks unspecified damages attorneys fees costs •baggett v hp consumer class action filed hp june 6 2007 united states district court central district california alleging hp employs technology laserjet color printers whereby printing process shuts prematurely thus preventing customers using toner allegedly left cartridge plaintiffs also allege hp fails disclose consumers unable utilize toner remaining cartridge printer shuts complaint seeks certification nationwide class purchasers hp laserjet color printers seeks unspecified damages restitution disgorgement injunctive relief attorneys fees costs rich v hp consumer class action filed hp may 22 2006 united states district court northern district california suit alleges hp designed color inkjet printers unnecessarily use color ink addition black ink printing black white images text plaintiffs seek injunctive monetary relief behalf nationwide class december 27 2001 cornell university cornell research foundation inc filed complaint amended september 6 2002 hp united states district court northern district new york alleging hps parisc 8000 family microprocessors servers workstations incorporating processors infringe patent assigned cornell research foundation inc describes way executing microprocessor instructions complaint sought declaratory injunctive relief unspecified damages patent issue litigation united states patent 4807115 expired february 21 2006 therefore plaintiffs longer entitled seek injunctive relief hp matter tried may 19 may 30 2008 hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued may 30 2008 jury returned verdict favor plaintiffs amount 184 million court yet entered final judgment rules hps equitable defenses hps posttrial motions vacate judgment andor reduce amount damages awarded jury depending outcome hps defenses posttrial motions hp may file appeal federal circuit court appeals csiro patent litigation microsoft corporation hewlettpackard company et al v commonwealth scientific industrial research organisation australia action filed hp two plaintiffs may 9 2005 district court northern district california seeking declaratory judgment commonwealth scientific industrial research organisation australia csiro hps products employing ieee 80211a 80211g wireless protocol standards infringe csiros united states patent 5487069 relating wireless transmission data frequencies excess 10ghz september 22 2005 csiro filed answer counterclaims alleging hp products employ wireless protocol standards infringe csiro patent seeking damages including enhanced damages attorneys fees costs injunction sales infringing products december 12 2006 csiro successfully moved case transferred district court eastern district texas court previously granted csiros motions summary judgment issues validity patent infringement permanent injunction favor csiro patent infringement action brought csiro buffalo technology usa inc third party vendor wireless networking products based patent judgment subsequently affirmed us court appeals federal circuit grounds except one theory challenging validity patent june 15 2007 csiro filed amended answer counterclaims adding allegation hp products employ draft ieee 80211n wireless protocol infringe csiro patent trial scheduled april 2009 united states america ex rel norman rille neal roberts v hewlettpackard company et al 2004 two private individuals filed civil qui tam complaint false claims act united states district court eastern district arkansas containing generalized allegations hp several companies participated industrywide practice using partnership alliance programs make improper payments cause submission false claims connection contracts provide products services federal government april 12 2007 us department justice intervened qui tam action filed complaint hp several companies separate actions behalf united states containing allegations hp violated false claims act antikickback act 1986 providing millions dollars kickbacks alliance partners including influencer fees new business opportunity rebates us complaint alleges hp violated false claims act antikickback act breached federal government contracts induced federal government make payments hp entitled receive contracts unjustly enriched expressly impliedly making false statements records certifications federal government complied would continue comply antikickback act submitting claims government allegedly inflated included amounts influencer fees new business opportunity rebates us complaint seeks treble damages plus civil penalties connection alleged violations false claims act double damages plus civil penalties connection alleged violations antikickback act disgorgement profits earned connection breach contract unjust enrichment claims hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued leak investigation proceedings described hp subject various governmental inquiries concerning processes employed investigation leaks hp confidential information members media concluded may 2006 •in august 2006 hp informally contacted attorney general state california requesting information concerning processes employed leak investigation december 7 2006 hp announced entered agreement california attorney general resolve civil claims arising leak investigation including claim made california attorney general santa clara county superior court action filed december 7 2006 hp committed unfair business practices california law connection leak investigation result agreement includes injunction california attorney general pursue civil claims hp current former directors officers employees terms agreement hp paid total 145 million agreed implement maintain five years series measures designed ensure hps corporate investigations conducted accordance california law companys high ethical standards 145 million 135 million used create privacy piracy fund assist california prosecutors investigating prosecuting consumer privacy information piracy violations 650000 used pay statutory damages 350000 reimbursed california attorney generals office investigation costs finding liability hp part settlement •beginning september 2006 hp received requests committee energy commerce us house representatives committee records information concerning leak investigation securities transactions hp officers directors including august 25 2006 securities transaction mark hurd hps chairman chief executive officer related matters hp responded requests addition mr hurd voluntarily gave testimony committee regarding leak investigation september 28 2006 •in september 2006 hp informally contacted us attorney northern district california requesting similar information concerning processes employed leak investigation hp responded request •beginning september 2006 hp received requests division enforcement securities exchange commission records information interviews current former hp directors officers relating leak investigation resignation thomas j perkins hps board directors hps may 22 2006 september 6 2006 filings sec form 8k stock repurchases hp securities transactions officers directors occurred may 1 october 1 2006 hps policies practices approval securities transactions may 2007 hp consented entry order sec ordering hp cease desist committing causing violations public reporting requirements securities exchange act 1934 amended hp advised staff division enforcement staff completed investigation intend recommend sec enforcement action brought connection matters hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued •in september 2006 hp received request us federal communications commission records information relating processes employed leak investigation hp responded request addition four stockholder derivative lawsuits filed california purportedly behalf hp stockholders seeking recover damages alleged breach fiduciary duty require hp improve corporate governance internal control procedures result activities leak investigation staehr v dunn et al filed santa clara county superior court september 18 2006 worsham v dunn et al filed santa clara county superior court september 14 2006 tansey v dunn et al filed santa clara county superior court september 20 2006 hall v dunn et al filed santa clara county superior court september 25 2006 october 19 2006 santa clara county superior court consolidated four california cases caption hewlettpackard company derivative litigation consolidated complaint filed november 19 2006 also seeks recover damages connection sales hp stock alleged made certain current former hp officers directors possession material nonpublic information two additional stockholder derivative lawsuits pifko v babbio et al filed september 19 2006 gross v babbio et al filed november 21 2006 filed chancery court county new castle delaware seek recover damages alleged breaches fiduciary duty obtain order instructing defendants refrain breaches fiduciary duty implement corrective measures prevent future occurrences alleged breaches fiduciary duty january 24 2007 delaware court consolidated two cases caption hewlettpackard company derivative litigation subsequently stayed proceedings parties reached tentative settlement hp board directors appointed special litigation committee consisting independent board members authorized investigate review evaluate facts circumstances asserted derivative matters determine hp proceed matters december 14 2007 hp plaintiffs california delaware derivative actions entered agreement settle lawsuits terms settlement hp agreed continue certain corporate governance changes december 31 2012 pay plaintiffs attorneys fees california court granted final approval settlement march 11 2008 subsequently granted plaintiffs counsels fee application dismissed action june 12 2008 delaware court granted final approval settlement plaintiffs application attorneys fees also dismissed action neither dismissal california delaware derivative action thereafter appealed cases concluded environmental hp subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content products recycling treatment disposal products including batteries particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products product takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims clean costs amount timing costs environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred product takeback legislation example european union eu adopted waste electrical electronic equipment directive january 2003 directive makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products eu member states obliged make producers participating market financially responsible implementing responsibilities note 18 segment information description segments hp leading global provider products technologies software solutions services individual consumers small medium sized businesses smbs large enterprises including public education sectors hps offerings span personal computing access devices imaging printingrelated products services enterprise information technology infrastructure including enterprise storage server technology software optimizes business technology investments financial services including leasing multivendor customer services including technology support maintenance consulting integration information technology business process outsourcing services application services hp operations organized seven business segments financial reporting purposes enterprise storage servers ess hp services hps hp software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments business operation acquired acquisition eds business unit within hps financial reporting purposes hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology business segments disclosed accompanying consolidated financial statements based organizational structure information reviewed hps management evaluate business segment results ess hps hp software reported collectively broader technology solutions group tsg order provide supplementary view hps business aggregated financial data tsg presented herein hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued hp reclassified segment operating results fiscal 2007 fiscal 2006 conform certain fiscal 2008 organizational realignments none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows technology solutions group business segments within tsg described detail •enterprise storage servers provides storage server products various server offerings range entrylevel servers highend scalable servers including superdome servers industry standard servers include primarily entrylevel midrange proliant servers run primarily windows®1 linux novell operating systems leverage intel corporation intel advanced micro devices amd processors business spans range product lines including pedestaltower servers densityoptimized rack servers hps bladesystem family server blades business critical systems include itanium®2based integrity servers running hpux windows® linux openvms nonstop operating systems including highend superdome servers faulttolerant integrity nonstop servers business critical systems also include reduced instruction set computing riscbased servers hp 9000 line running hpux operating system hp alphaservers running tru64 unix®3 openvms mipsbased nonstop servers hps storageworks offerings include entrylevel midrange highend arrays storage area networks sans network attached storage nas storage management software virtualization technologies well tape drives tape libraries optical archival storage 1windows® registered trademark microsoft corporation 2itanium® registered trademark intel corporation 3unix® registered trademark open group •hp services provides portfolio multivendor services including technology services consulting integration outsourcing services hps also offers variety services tailored particular industries communications media entertainment manufacturing distribution financial services health life sciences public sector including government services hps collaborates enterprise storage servers hp software well thirdparty system integrators software networking companies bring solutions hp customers hps also works hps imaging printing group personal systems group provide managed print services end user workplace services mobile workforce productivity solutions enterprise customers technology services provides range services including standalone product support high availability services complex global networked multivendor environments technology services also manages delivery product warranty support service organization well authorized partners consulting integration provides services architect design implement technology industryspecific solutions customers consulting integration also provides crossindustry solutions areas architecture governance infrastructure applications packaged applications security service management information management enterprise microsoft solutions outsourcing services offers variety hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued management outsourcing services support customers infrastructure applications business processes end user workplace print environment business continuity recovery requirements eds added business unit within hp services financial reporting purposes fourth quarter 2008 eds provides information technology applications business process outsourcing services customers •hp software provides enterprise management software solutions including support allow customers manage automate infrastructure operations applications services business processes hp business technology optimization bto brand portfolio bto solutions also includes tools automate data center operations processes hp software also provides opencall solutions suite comprehensive carriergrade software platforms service providers products enable develop deploy nextgeneration voice data converged network services hp software provides information management business intelligence solutions include enterprise data warehousing information business continuity data availability compliance ediscovery products enable customers extract value structured unstructured data information hps business segments described •personal systems group provides commercial pcs consumer pcs workstations handheld computing devices calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise smb customers connectivity manageability networked environments commercial pcs include hp compaq business desktops notebooks tablet pcs hp elitebook line mobile workstations professional notebooks well hp mininote pc hp blade pcs retail pos systems hp compaq neoware thin clients consumer pcs targeted home user include hp pavilion compaq presario series multimedia consumer desktops notebooks well hp pavilion elite desktops hp hdx premium notebooks touchsmart pcs voodoo gaming pcs workstations individual computing products designed users demanding enhanced performance computer animation engineering design programs requiring highresolution graphics workstations run windows® linuxbased operating systems psg provides series hp ipaq pocket pc handheld computing devices run windows® mobile software products range basic pdas advanced devices voice data capability digital entertainment products include media smart home servers hd dvd rw drives dvd writers •imaging printing group provides consumer commercial printer hardware printing supplies printing media scanning devices ipg also focused imaging solutions commercial markets managed print services solutions addressing new growth opportunities commercial printing capturing highvalue pages areas industrial applications outdoor signage graphic arts business inkjet web solutions delivers hps consumer smb inkjet solutions hardware ink media develops hps retail web businesses includes single function allinone inkjet printers targeted toward consumers smbs well retail publishing solutions snapfish logoworks laserjet enterprise solutions delivers products services enterprise segment includes hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued laserjet printers supplies edgeline scanners enterprise software solutions exstream software web jetadmin managed print services products solutions halo telepresence graphics solutions include large format printing designjet scitex colorspan nur large format supplies webpress supplies indigo printing specialty printing systems inkjet highspeed production solutions light production solutions printer supplies include laserjet toner inkjet printer cartridges printingrelated media hpbranded vivera colorsphere ink hp premium plus photo papers •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial lifecycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments includes hp labs certain business incubation projects revenue segment attributable sale certain network infrastructure products including ethernet switch products enhance computing enterprise solutions brand procurve networking well licensing specific hp technology third parties segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include primarily amortization purchased intangible assets stockbased compensation expense related hpgranted employee stock options prus employee stock purchase plan certain acquisitionrelated charges purchased iprd well certain corporate governance costs hp allocate business segments restructuring charges associated adjustments related restructuring actions hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued selected operating results information business segment follows following fiscal years ended october 31 reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hp allocates assets business segments based primary segments benefiting assets corporate unallocated assets composed primarily cash equivalents described fiscal 2008 segment asset information stated based fiscal 2008 organizational hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued structure total assets segment well tsg reconciliation segment assets hp consolidated total assets follows october 31 major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location united states single country represented 10 hps total consolidated net revenue period presented hp reports revenue net sales taxes use taxes valueadded taxes directly imposed governmental authorities hps revenue producing transactions customers october 31 2008 belgium united states 10 hps total consolidated net assets october 31 2007 single country united states 10 hps total consolidated net assets october 31 2006 belgium netherlands represented 10 hps total consolidated net assets addition united states single country united states 10 hps total consolidated net property plant equipment period presented hps longlived assets goodwill hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued purchased intangible assets hp allocate specific geographic locations impracticable hp composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 1certain fiscal 2008 organizational realignments reflected retroactively provide improved visibility comparability reclassifications resulted transfer revenue among ess hps hp software within tsg addition revenue transferred among business units within ipg among business units within psg change previously reported revenue either segment whole impact previously reported revenues hpfs corporate investments previously reported consolidated financial results company whole 2reflects revenue eds august 26 2008 october 31 2008 3the openview business unit renamed business technology optimization opencall business unit renamed software effective fiscal 2008 renamed software business unit includes primarily opencall information management business intelligence solutions hewlettpackard company subsidiaries quarterly summary unaudited 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2009 2008 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2009 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2009 2008 consolidated results operations cash flows three years period ended october 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements fiscal year 2009 hewlettpackard company changed method accounting revenue recognition adoption amendments financial accounting standards board fasb accounting standards codification asc resulting accounting standards update 200913 multipledeliverable revenue arrangements accounting standards update 200914 certain revenue arrangements include software elements adopted effective november 1 2008 method accounting measurement date provisions defined benefit postretirement plans accordance guidance provided fasb statement 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r codified primarily fasb asc topic 715 compensationretirement benefits fiscal year 2008 hewlettpackard company changed method accounting income taxes accordance guidance provided fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 codified primarily fasb asc topic 740 income taxes fiscal year 2007 hewlettpackard company changed method accounting defined benefit postretirement plans accordance guidance provided fasb statement 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r codified primarily fasb asc topic 715 compensationretirement benefits also audited accordance standards public company accounting oversight board united states effectiveness hewlettpackard companys internal control financial reporting october 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 17 2009 expressed unqualified opinion thereon ernst young llp san jose california december 17 2009 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2009 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2009 2008 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2009 report dated december 17 2009 expressed unqualified opinion thereon ernst young llp san jose california december 17 2009 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2009 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment hps management determined hps internal control financial reporting effective october 31 2009 effectiveness hps internal control financial reporting october 31 2009 audited ernst young llp hps independent registered public accounting firm stated report appears page 78 annual report form 10k mark v hurd mark v hurd chairman chief executive officer president december 17 2009 catherine lesjak catherine lesjak executive vice president chief financial officer december 17 2009 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions business combinations hp recorded acquisitions using purchase method accounting accordingly included results operations acquired businesses hps consolidated results date acquisition hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd charges based estimated fair values excess purchase price fair values recorded goodwill fair value assigned assets acquired based valuations using managements estimates assumptions hp adopt new accounting standards issued financial accounting standards board fasb business combinations first quarter fiscal 2010 changes purchase method accounting business combinations discussed accounting pronouncements note reclassifications segment reorganization certain reclassifications made prioryear amounts order conform current year presentation hp made certain organizational realignments order optimize operating structure reclassifications prior year financial information made conform current year presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share see note 19 discussion hps segment reorganization incorporated herein reference hp made certain reclassifications consolidated statements earnings fiscal years ended october 31 2008 october 31 2007 provide improved visibility comparability current year presentation change affect previously reported results operations period presented certain pursuitrelated costs previously reported cost services realigned retroactively selling general administrative expenses due organizational realignments hp revised presentation consolidated statements cash flows fiscal years ended october 31 2008 october 31 2007 reflect revisions current deferred tax provisions years related presentation tax benefits stock option plans described note 14 revisions result increase change taxes earnings decrease adjustment deferred taxes earnings within cash flows operating activities consolidated statements cash flows revisions affect previously reported results operations financial position net cash provided operating activities period presented hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued use estimates preparation financial statements accordance us generally accepted accounting principles gaap requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition net revenue derived primarily sale products services following revenue recognition policies define manner hp accounts sales transactions hp recognizes revenue persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time sale channel partners economic substance apart hp completed obligations related sale october 2009 fasb issued accounting standards update asu 200913 multipledeliverable revenue arrangements asu 200913 new standard changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price concurrently issuing asu 200913 fasb also issued asu 200914 certain revenue arrangements include software elements asu 200914 asu 200914 excludes software contained tangible product scope software revenue guidance software essential tangible products functionality hp early adopted standards beginning fiscal 2009 new materially modified deals originating november 1 2008 therefore previously reported quarterly results restated reflect impact adoption result adoption fiscal 2009 net revenues net earnings higher 255 million 55 million respectively impact due recognition revenue previously deferred certain deliverables bundled multiple element arrangements also included services hp unable demonstrate fair value pursuant previous standards new standards allow deliverables revenue previously deferred separated recognized delivered rather longest service delivery period single unit elements arrangement hp able reasonably estimate effect adopting standards future financial periods impact vary based nature volume new materially modified deals given period fiscal 2009 future periods pursuant guidance asu 200913 sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence vsoe available third party evidence tpe vsoe available estimated selling price esp neither vsoe tpe available multiple element arrangements morethanincidental software deliverables included revenue allocated separate unit accounting nonsoftware hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using guidance recognizing software revenue amended hp limits amount revenue recognition delivered elements amount contingent future delivery products services future performance obligations subject customerspecified return refund privileges hp evaluates deliverable arrangement determine whether represent separate units accounting deliverable constitutes separate unit accounting standalone value customernegotiated refund return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially hps control delivered element constitutes separate unit accounting instances aforementioned criteria met deliverable combined undelivered elements allocation arrangement consideration revenue recognition determined combined unit single unit allocation consideration determined arrangement inception basis units relative selling price hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product lifecycle consideration also given market conditions competitor pricing strategies industry technology lifecycles fiscal 2008 fiscal 2007 pursuant previous guidance revenue arrangements multiple deliverables sales arrangement multiple elements hp allocated revenue element based relative fair value software based vsoe fair value absence fair value delivered element hp first allocated revenue fair value undelivered elements residual revenue delivered elements fair value undelivered element could determined hp deferred revenue delivered elements undelivered elements delivered fair value determinable remaining undelivered elements revenue delivered item recognized separable undelivered item hp also deferred cost delivered item hp limited amount revenue recognition delivered elements amount contingent future delivery products services future performance obligations subject customerspecified return refund privileges purposes income statement classification products services revenue hp could determine fair value elements arrangement transaction accounted single unit accounting hp allocated revenue products services based rational consistent methodology utilized external internal pricing inputs derive hps best estimate fair value elements arrangement instances revenue derived sales thirdparty vendor services revenue recorded gross hp principal transaction net costs hp acting agent hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued customer vendor several factors considered determine whether hp agent principal notably whether hp primary obligator customer established pricing inventory credit risks hp reports revenue net required taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority products hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue software accordance specific guidance recognizing software revenue applicable hp recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria met termbased software license revenue recognized subscription basis term license entitlement hp uses residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied revenue generated maintenance unspecified upgrades updates whenandifavailable basis recognized period items delivered services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract hp recognizes revenue certain design build design development andor construction software andor systems projects using percentageofcompletion method hp uses cost method measurement towards completion determined percentage cost incurred date total estimated costs project hp uses completed contract method reasonable reliable cost estimates project cannot made hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued outsourcing services revenue generally recognized service provided amount earned contingent upon future event service provided evenly contract term service billings uneven revenue recognized straightline basis contract term hp recognizes revenue operating leases straightline basis service revenue rental period hp recognizes costs associated outsourcing contracts incurred unless costs relate transition phase outsourcing contract case hp defers subsequently amortizes setup costs contractual services period deferred contract costs amortized straightline basis remaining original term unless billing patterns indicate accelerated method appropriate based actual projected contract financial performance indicators recoverability deferred contract costs associated particular contract analyzed periodic basis using undiscounted estimated cash flows whole contract remaining contract term undiscounted cash flows insufficient recover longlived assets deferred contract costs deferred contract costs written based discounted cash flow model cash flow deficiency remains reducing balance deferred contract costs zero remaining longlived assets related contract evaluated impairment hp recognizes losses consulting outsourcing arrangements period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term shipping handling hp includes costs related shipping handling cost sales periods presented advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 07 billion fiscal 2009 10 billion fiscal 2008 11 billion fiscal 2007 taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents original maturity investment three months less cash equivalents consist primarily highly liquid investments time deposits hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued held major banks commercial paper october 31 2009 2008 carrying value cash equivalents approximates fair value due short period time maturity interest income approximately 119 million fiscal 2009 401 million fiscal 2008 598 million fiscal 2007 allowance doubtful accounts hp establishes allowance doubtful accounts ensure trade financing receivables overstated due uncollectability hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position circumstances related customers change hp would adjust estimates recoverability receivables inventory hp values inventory lower cost market cost computed firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolescence impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation computed using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value estimated useful lives assets used solely support customer services contract generally exceed term customer contract hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized internal use software costs using straightline method estimated useful lives software generally three five years goodwill purchased intangible assets goodwill purchased intangible assets indefinite useful lives amortized tested impairment least annually hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value reporting units consistent reportable segments identified note 19 hp determines fair value reporting units based weighting hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference fair value indefinitelived purchased intangible assets estimated compared carrying value hp estimates fair value intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years longlived asset impairment hp evaluates property plant equipment purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable hp assesses recoverability assets based undiscounted future cash flow assets expected generate recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values software development costs incurred acquire develop software resale may capitalized subsequent software product establishing technological feasibility capitalized software development costs amortized using greater straightline amortization method ratio current gross revenues product bear total current anticipated future gross revenues product estimated useful lives capitalized software resale generally three years less software development costs incurred subsequent product establishing technological feasibility usually significant instances costs expensed incurred fair value financial instruments hp measures certain financial assets liabilities fair value based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants financial instruments primarily comprised time deposits money market funds commercial paper corporate debt securities equity securities investments common stock common stock equivalents derivatives see note 9 discussion fair value financial instruments hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 10 full description hps derivative financial instrument activities related accounting policies incorporated herein reference investments hps investments consist principally time deposits money market funds commercial paper corporate debt securities equity securities publiclytraded privatelyheld companies hp classifies investments debt securities equity investments public companies availableforsale securities carries fair value hp determines fair values investments public companies using quoted market prices records charge interest net change fair values determined otherthantemporary change hp carries equity investments privatelyheld companies cost fair value hp recognizes otherthantemporary impairment charge hp monitors investment portfolio impairment periodic basis event carrying value investment debt securities exceeds fair value decline value determined otherthantemporary decline 1 hp intend sell debt security 2 likely hp required sell debt security prior recovery amortized cost basis hp records impairment charge interest net amount credit loss balance comprehensive income hp determined declines value certain investments otherthantemporary declines accordingly hp recorded impairments approximately 24 million fiscal 2009 27 million fiscal 2008 28 million fiscal 2007 hp includes impairments interest net consolidated statements earnings depending market conditions hp may record additional impairments investment portfolio future concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively concentrated primarily north america europe represented approximately 22 gross accounts receivable october 31 2009 18 october 31 2008 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances ensure receivable balance overstated due uncollectibility allowance doubtful accounts maintained required us gaap past due delinquency status receivable based contractual payment terms receivable need write receivable balance depends age size determination collectability receivable hp generally experienced longer accounts receivable collection cycles emerging markets particular asia pacific latin america compared united states european markets event accounts receivable collection cycles emerging markets significantly deteriorate one hps larger resellers enterprise customers fail hps operating results could adversely affected concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value hp recognizes compensation costs net estimated forfeiture rate recognizes compensation cost shares expected vest straightline basis requisite service period award generally vesting term sharebased payment awards hp estimated forfeiture rate based historical experience fiscal grant years majority vesting terms satisfied foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect new reporting period net revenue cost sales expenses related previously reported periods remeasured historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive loss retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans addition hp assumed additional retirement postretirement plans connection acquisition electronic data systems corporation eds august 2008 hp generally amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date hp plans october 31 fiscal 2009 september 30 fiscal 2008 except measurement date eds plans october 31 fiscal 2008 see note 16 full description plans accounting funding policies incorporated herein reference loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records provision liability believes probable liability incurred amount reasonably estimated significant judgment required determine probability estimated amount hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel updated information litigation inherently unpredictable subject significant uncertainties beyond hps control hp evaluated subsequent events occurred balance sheet date time financial statements issued december 17 2009 accounting pronouncements september 2006 fasb issued new accounting standard related fair value measurements new standard defines fair value establishes framework measuring fair value expands disclosures fair value measurements february 2008 fasb issued new provision delayed effective date fair value measurements disclosures nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually august 2009 fasb issued accounting standards update asu 200905 measuring liabilities fair value relation fair value measurement liabilities hp adopted applicable portions provisions new standards first fourth quarters fiscal 2009 adopt provision related nonfinancial assets nonfinancial liabilities first quarter fiscal 2010 although hp continue evaluate application provision nonfinancial assets nonfinancial liabilities hp expect adoption material impact consolidated financial statements see note 9 additional information pertaining fair value measurements december 2007 fasb issued new accounting standard related business combinations new standard expands definition business combination requires recognition assets acquired liabilities assumed contingent consideration fair value acquisition date subsequent changes recognized earnings requires acquisitionrelated expenses hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued restructuring costs recognized separately business combination expensed incurred requires inprocess research development capitalized fair value indefinitelived intangible asset requires changes accounting deferred tax asset valuation allowances acquired income tax uncertainties measurement period recognized component provision taxes new standard also establishes disclosure requirements enable evaluation nature financial effects business combination april 2009 fasb issued new standard clarified accounting preacquisition contingencies hp adopt new business combination standards first quarter fiscal 2010 impact adoption largely dependent size nature business combinations completed adoption statement december 2007 fasb issued new accounting standard related noncontrolling interests new standard establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parents ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated new standard also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners hp adopt new accounting standard first quarter fiscal 2010 hp expect adoption standard material effect consolidated financial statements may 2008 fasb issued new accounting standard related convertible debt instruments new standard requires issuer certain convertible debt instruments may settled cash assets conversion separately account liability debt equity conversion option components instrument manner reflects issuers nonconvertible debt borrowing rate hp adopt new accounting standard retrospective basis first quarter fiscal 2010 hp expect adoption standard material effect consolidated financial statements june 2008 fasb issued new accounting standard clarifies whether instruments granted sharebased payment transactions included computing earnings per share new standard hp required include restricted stock contains nonforfeitable rights dividends calculation basic earnings per share eps need calculate basic eps using twoclass method twoclass method computing eps earnings allocation formula determines eps class common stock participating securities according dividends declared accumulated participation rights undistributed earnings hp adopt new accounting standard retrospective basis first quarter fiscal 2010 hp expect adoption standard material effect calculation basic eps november 2008 fasb issued new accounting standard related defensive intangible assets defensive intangible assets acquired intangible assets acquirer intend actively use intends hold prevent competitors obtaining access new standard defensive intangible assets must initially recognized fair value amortized benefit period hp adopt new accounting standard first quarter fiscal 2010 impact adoption largely dependent size nature business combinations completed date adoption hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued december 2008 fasb issued new accounting standard requires additional disclosures assets held employers defined benefit pension postretirement plan hp adopt new accounting standard first quarter fiscal 2010 hp present required disclosures prescribed format prospective basis upon adoption new standard affect notes hps consolidated financial statements june 2009 fasb issued new accounting standard related transfers financial assets amends previous guidance remove concept qualifying specialpurpose entity exemption consolidation transferors financial statements new standard also establishes conditions reporting transfer portion financial asset sale modifies financialasset derecognition criteria revises interests retained transferor sale financial assets initially measured removes guaranteed mortgage securitization recharacterization provisions requires additional disclosures hp adopt new accounting standard first quarter fiscal 2011 hp expect adoption standard material effect consolidated financial statements june 2009 fasb issued new accounting standard related consolidation variable interest entities eliminates quantitative approach previously required determining primary beneficiary variable interest entity requires ongoing qualitative reassessments whether enterprise primary beneficiary variable interest entity new standard also requires additional disclosures enterprises involvement variable interest entities hp adopt new accounting standard first quarter fiscal 2011 hp currently evaluating impact adoption standard consolidated financial statements fourth quarter fiscal 2009 hp adopted fasb accounting standards codification hierarchy generally accepted accounting principles affected specific references gaap literature notes hps consolidated financial statements october 2009 fasb issued asu 200913 new standard changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price concurrently issuing asu 200913 fasb also issued asu 200914 asu 200914 excludes software contained tangible product scope software revenue guidance software essential tangible products functionality discussion financial impact asu 200913 asu 200914 appears revenue recognition note 2 stockbased compensation hps stockbased compensation plans include incentive compensation plans employee stock purchase plan espp stockbased compensation expense related income tax benefits total stockbased compensation expense income taxes fiscal 2009 2008 2007 635 million 606 million 629 million respectively resulting income tax benefit fiscal 2009 2008 2007 199 million 178 million 182 million respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued cash received option exercises purchases espp fiscal 2009 18 billion actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2009 totaled 252 million cash received option exercises purchases espp fiscal 2008 18 billion actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2008 totaled 412 million incentive compensation plans hps incentive compensation plans include principal option plans adopted 2004 2000 1995 1990 principal option plans well various stock option plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal option plans include performancebased restricted units prus stock options restricted stock awards employees meeting certain employment qualifications eligible receive stockbased awards fiscal 2009 approximately 91000 employees holding stockbased awards one option plans october 31 2009 fiscal 2008 hp implemented program provides issuance prus representing hypothetical shares hp common stock may issued hewlettpackard company 2004 stock incentive plan pru awards may granted eligible employees including hps principal executive officer principal financial officer executive officers pru award reflects target number shares may issued award recipient actual number shares recipient receives determined end threeyear performance period based results achieved versus company performance goals based hps annual cash flow operations percentage revenue average total shareholder return tsr relative sp 500 performance period depending hps results threeyear performance period actual number shares grant recipient receives end period may range 0 200 targeted shares granted based calculations described cash flow performance goals established beginning year end year portion target number shares may credited award recipients name depending achievement cash flow performance goal year number shares credited varies 0 performance minimum level 150 performance maximum level performance minimum level maximum level proportionate percentage 30 150 applied based relative performance minimum maximum levels following expiration threeyear performance period number shares credited award recipient performance period adjusted tsr modifier tsr modifier determined beginning performance period varies 0 minimum level met resulting payout pru award 133 performance maximum level performance minimum level maximum level proportionate tsr modifier 66 133 applied based relative performance minimum maximum levels number shares received pru award recipient equals number shares credited award recipient performance period multiplied tsr modifier recipients pru awards generally must remain employed hp continuous basis end applicable threeyear performance period order receive portion shares hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued subject award target shares subject pru awards dividend equivalent rights voting rights common stock earned issued following end applicable performance period stock options granted principal option plans generally nonqualified stock options principal option plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest four years date grant exercise price stock option equal fair market value hps common stock option grant date determined reported sale prices hps common stock market closes date contractual term options granted since fiscal 2003 generally eight years contractual term options granted prior fiscal 2003 generally ten years principal option plans hp may choose certain cases establish discounted exercise price less 75 fair market value grant date hp granted discounted options since fiscal 2003 principal option plans hp granted certain employees cashsettled awards restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units cashsettled awards restricted stock awards independent option grants generally subject forfeiture employment terminates prior release restrictions awards generally vest one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding hp expenses fair market value restricted stock awards determined date grant ratably period restrictions lapse performancebased restricted units hp estimated fair value target pru share using monte carlo simulation model tsr modifier contains market condition following weightedaverage assumptions used determine weightedaverage fair values pru awards fiscal years ended october 31 1reflects weightedaverage fair value second year threeyear performance period applicable prus granted fiscal 2008 first year threeyear performance period applicable prus granted fiscal 2009 estimated fair value target share third year prus granted fiscal 2008 second third years prus granted hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued fiscal 2009 determined annual cash flow goals approved expense amortized remainder applicable threeyear performance period 2reflects weightedaverage fair value first year threeyear performance period applicable prus granted fiscal 2008 3hp uses historic volatility pru awards implied volatility cannot used simulating multivariate prices companies sp 500 outstanding prus october 31 2009 2008 changes fiscal 2009 2008 follows october 31 2009 193 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expects recognize remaining weightedaverage vesting period 15 years october 31 2008 108 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expected recognize remaining weightedaverage vesting period 20 years stock options hp utilized blackscholes option pricing model value stock options granted principal option plans hp examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis hp identified three employee populations apply blackscholes model table presents weightedaverage expected life months combined three identified employee populations expected life computation based historical exercise patterns postvesting termination behavior within three populations identified riskfree interest rate periods within contractual life award based us treasury yield curve effect time grant hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued weightedaverage fair value stock options estimated using blackscholes option pricing model following weightedaverage assumptions 1the fair value calculation based stock options granted period option activity october 31 fiscal year follows fiscal 2008 approximately 8 million stock options weightedaverage exercise price 50 per share assumed acquisition eds aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options october 31 2009 2008 aggregate intrinsic value difference hps closing stock price last trading day fiscal 2009 fiscal 2008 exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal 2009 2008 2007 08 billion 11 billion 20 billion respectively total fair value options vested expensed fiscal 2009 2008 2007 172 million 264 million 297 million respectively net taxes hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued information options outstanding october 31 2009 follows october 31 2009 188 million unrecognized pretax stockbased compensation expense related stock options hp expects recognize remaining weightedaverage vesting period 11 years october 31 2008 425 million unrecognized pretax stockbased compensation expense related stock options hp expected recognize weightedaverage 16 years restricted stock awards nonvested restricted stock awards october 31 2009 2008 changes fiscal 2009 2008 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued details restricted stock awards granted assumed acquisitions follows fiscal 2008 approximately 11 million restricted stock units weightedaverage grant date fair value 45 per share assumed acquisition eds details nonvested restricted stock awards fiscal year end follows october 31 2009 117 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expects recognize weightedaverage vesting period 16 years october 31 2008 263 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expected recognize weightedaverage vesting period 12 years employee stock purchase plan hp sponsors hewlettpackard company 2000 employee stock purchase plan also known share ownership plan espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock purchases made april 30 2009 employees purchased stock pursuant espp semiannually price equal 85 fair market value purchase date hp recognized expense based 15 discount fair market value purchases effective may 1 2009 hp modified espp eliminate 15 discount applicable purchases made espp hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued espp activity october 31 fiscal year follows shares reserved shares available future grant shares reserved future issuance espp incentive compensation plans follows 1includes 24267000 shares expired november 2009 2in november 2009 hp retired assumed compaq eds plans purposes granting new awards shares reserved future awards plans returned hps pool authorized shares available issuance hp plans hp 21494000 shares common stock reserved october 31 2007 future issuances related conversion zerocoupon subordinated notes redeemed march 2008 note 3 net earnings per share hp calculates basic earnings per share using net earnings weightedaverage number shares outstanding reporting period diluted eps includes dilutive effect outstanding stock options prus restricted stock units restricted stock convertible debt hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 net earnings per share continued reconciliation numerators denominators basic diluted eps calculations follows following fiscal years ended october 31 hp excludes options exercise prices greater average market price calculation diluted eps effect would antidilutive fiscal 2009 2008 2007 hp excluded calculation diluted eps options purchase 85 million shares 54 million shares 60 million shares respectively hp also excluded calculation diluted eps options purchase additional 2 million shares 28 million shares 33 million shares fiscal 2009 2008 2007 respectively whose combined exercise price unamortized fair value excess tax benefits greater periods average market price hps common stock effect would antidilutive disclosed note 2 fiscal 2009 2008 hp granted pru awards representing target approximately 14 million shares 9 million shares respectively hp includes shares underlying pru awards calculation diluted eps become contingently issuable excludes shares contingently issuable accordingly fiscal 2009 hp included 6 million shares underlying pru awards granted fiscal 2009 2008 calculating diluted eps shares became contingently issuable upon satisfaction cash flow operations condition respect first year threeyear performance period applicable fiscal 2009 awards first second years threeyear performance period applicable fiscal 2008 awards hp excluded shares underlying fiscal 2009 2008 pru awards calculating diluted eps shares contingently issuable fiscal 2008 hp included 2 million shares underlying pru awards granted fiscal 2008 calculating diluted eps shares became contingently issuable upon satisfaction cash flow operations condition respect first year threeyear performance period applicable hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 net earnings per share continued fiscal 2008 awards hp excluded shares underlying fiscal 2008 pru awards calculating diluted eps shares contingently issuable october november 1997 hp issued us dollar zerocoupon subordinated convertible notes due 2017 lyons outstanding principal amount redeemed march 2008 lyons convertible option holders time prior maturity unless previously redeemed otherwise purchased purposes calculating diluted earnings per share interest expense net tax associated lyons added back net earnings shares issuable upon conversion lyons included weightedaverage shares used compute diluted earnings per share periods lyons outstanding note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables hp revolving trade receivablesbased facilities permitting sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs 568 million october 31 2009 hp sold 1667 million trade receivables fiscal 2009 october 31 2009 hp 269 million available programs inventory hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued current assets property plant equipment depreciation expense approximately 32 billion fiscal 2009 24 billion fiscal 2008 19 billion fiscal 2007 longterm financing receivables assets accrued liabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued liabilities longterm deferred revenue represents service product deferred revenue recognized one year balance sheet date deferred revenue represents amounts received billed advance fixedprice support maintenance contracts software customer support contracts outsourcing services startup transition work consulting integration projects product sales leasing income fixedprice support maintenance contracts include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments hp defers service amounts time hp bills customer hp recognizes amounts ratably contract life hp renders services hp also defers subsequently amortizes certain setup costs related activities enable performance customer contract deferred contract costs including setup unbilled costs amortized straightline basis remaining original contract term unless billing patterns indicate accelerated method appropriate note 5 supplemental cash flow information supplemental cash flow information consolidated statements cash flows fiscal years ended october 31 2009 october 31 2008 october 31 2007 follows note 6 acquisitions fiscal 2009 fiscal 2009 hp completed two acquisitions total consideration acquisitions 390 million includes direct transaction costs assumption certain liabilities connection transactions hp recorded 315 million goodwill 105 million purchased intangibles 7 million inprocess research development charges iprd related transactions projects qualify treatment iprd yet reached technical feasibility hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued alternative use hp expect goodwill recorded acquisitions deductible tax purposes hp presented pro forma results operations acquisitions material hps consolidated financial statements largest two acquisitions acquisition lefthand networks inc leading provider storage virtualization solutions integrated hps enterprise storage servers segment total purchase price paid 347 million cash including direct transaction costs assumption certain liabilities connection transaction hp recorded 273 million goodwill 95 million purchased intangibles 6 million iprd charges related acquisition hp amortizing purchased intangibles straightline basis weightedaverage estimated life 63 years pending acquisition november 2009 hp entered definitive agreement acquire 3com corporation 3com global enterprise provider networking switching routing security solutions price 790 per share cash enterprise value approximately 27 billion acquisition subject customary closing conditions including receipt domestic foreign regulatory approvals approval 3coms stockholders transaction expected close hps second fiscal quarter 2010 acquisitions fiscal 2008 acquisition electronic data systems corporation august 26 2008 hp completed acquisition eds leading global technology services company delivering broad portfolio information technology applications business process outsourcing services clients manufacturing financial services healthcare communications energy transportation consumer retail industries governments around world purchase price eds 130 billion comprised 127 billion cash paid outstanding common stock 328 million fair value stock options restricted stock units assumed 36 million direct transaction costs total purchase price 104 billion allocated goodwill 46 billion allocated amortizable intangible assets acquired 20 billion allocated net tangible liabilities assumed connection acquisition hp also expensed 30 million iprd charges pro forma results eds acquisition following table presents unaudited pro forma results year ended october 31 2008 unaudited pro forma financial information year ended october 31 2008 combines results operations hp eds though companies combined beginning fiscal 2008 pro forma financial information presented informational purposes indicative results operations would achieved acquisition related borrowings taken place beginning fiscal 2008 unaudited pro forma results presented include amortization charges acquired intangible assets eliminations intercompany transactions restructuring charges iprd charges adjustments incremental stockbased compensation expense related unearned portion eds stock options restricted stock units assumed adjustments hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued depreciation expense property plant equipment adjustments interest expense related tax effects acquisitions fiscal 2008 hp also completed eight acquisitions minority interest purchase fiscal 2008 total consideration acquisitions minority interest purchase 16 billion includes direct transaction costs fair value stock options assumed certain liabilities recorded connection transactions hp recorded 10 billion goodwill 600 million purchased intangibles 15 million iprd related transactions largest transactions acquisition exstream software llc integrated hps imaging printing group total purchase price paid 720 million included direct transaction costs well certain debt repaid acquisition date connection acquisition hp recorded 434 million goodwill 235 million purchased intangibles expensed 11 million iprd hp amortizing purchased intangibles straightline basis weightedaverage estimated life 68 years note 7 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2009 2008 changes carrying amount goodwill fiscal year ended october 31 2009 follows fiscal 2009 hp recorded adjustments approximately 306 million estimated fair values edss intangible assets net liabilities acquired resulting increase edss goodwill allocated services segment changes estimated fair values relate primarily restructuring liabilities fixed assets net deferred tax liabilities intangible assets addition goodwill increased approximately 255 million result currency translation related certain hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued edss foreign subsidiaries whose functional currency us dollar increases goodwill partially offset tax adjustments various previous acquisitions based results annual impairment tests hp determined impairment goodwill existed august 1 2009 august 1 2008 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed fiscal 2009 hp recorded increase 83 million purchased intangibles result currency translation related certain edss foreign subsidiaries whose functional currency us dollar hp also recorded increase 21 million estimated fair value edss intangible assets acquired based results annual impairment tests hp determined impairment compaq trade name existed august 1 2009 august 1 2008 however future impairment tests could result charge earnings hp continue evaluate compaq trade name annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weightedaverage useful lives 8 years developed core technology patents product trademarks weightedaverage useful lives 5 years hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued estimated future amortization expense related finite lived purchased intangible assets october 31 2009 follows note 8 restructuring charges fiscal 2009 restructuring plan may 2009 hps management approved initiated restructuring plan structurally change improve effectiveness imaging printing group ipg personal systems group psg enterprise storage servers ess fiscal 2009 hp recorded net charge 297 million severancerelated costs associated planned elimination approximately 5000 positions october 31 2009 approximately 2100 positions eliminated hp expects majority restructuring costs paid fourth quarter fiscal 2010 future quarters hp expects record additional charge approximately 6 million related severance costs associated plan fiscal 2008 hpeds restructuring plan connection acquisition eds august 26 2008 hps management approved initiated restructuring plan streamline combined companys services business better align structure efficiency business hps operating model restructuring plan expected implemented four years acquisition date includes changes combined companys workforce well changes corporate overhead functions real estate fourth quarter fiscal 2008 hp recorded liability approximately 18 billion related restructuring plan approximately 15 billion liability associated preacquisition eds recorded goodwill remaining approximately 03 billion associated hp recorded restructuring charge liability consisted mainly severance costs eliminate approximately 25000 positions costs vacate duplicative facilities costs associated early termination certain contractual obligations hp recorded net charges severance facilities costs 346 million twelve months ended october 31 2009 along yeartodate adjustments goodwill 276 million october 31 2009 19000 positions eliminated hp expects majority restructuring costs paid second quarter fiscal 2010 future quarters hp expects record additional charge approximately 465 million related cost vacate duplicative facilities severance costs hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued restructuring costs associated preacquisition eds reflected purchase price eds costs subject change based actual costs incurred changes estimates could decrease amount purchase price allocated goodwill prior fiscal year plans restructuring plans initiated prior 2008 substantially complete hp expects record minor revisions plans necessary summary restructuring plans adjustments accrued restructuring expenses related hps restructuring plans described twelve months ended october 31 2009 follows october 31 2009 october 31 2008 hp included longterm portion restructuring liability 356 million 670 million respectively liabilities shortterm portion accrued restructuring accompanying consolidated balance sheets workforce rebalancing part hps ongoing business operations hp incurred workforce rebalancing charges severance related costs within certain business segments fiscal 2009 workforce rebalancing activities considered part normal operations hp continues optimize cost structure workforce rebalancing costs included hps business segment results hp expects incur additional workforce rebalancing costs future note 9 fair value hp adopted certain provisions new accounting standard related fair value first fourth quarters fiscal 2009 adoption material impact hps financial statements result changes opening balance retained earnings november 1 2008 hp adopt remaining provisions related fair value nonfinancial assets nonfinancial liabilities first quarter fiscal 2010 following major categories nonfinancial assets liabilities consolidated balance sheet property plant equipment goodwill purchased intangible assets asset retirement obligations within accrued liabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued new standard codifies new framework measuring fair value expands related disclosures framework requires fair value determined based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants valuation techniques required new provisions based upon observable unobservable inputs observable market inputs reflect market data obtained independent sources unobservable inputs reflect hps assumptions market participant assumptions based best information available observable inputs preferred source values two types inputs create following fair value hierarchy level 1quoted prices unadjusted identical instruments active markets level 2quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market corroborated observable market data substantially full term assets liabilities level 3prices valuations require management inputs significant fair value measurement unobservable following section describes valuation methodologies hp uses measure financial assets liabilities fair value cash equivalents investments hp holds time deposits money market funds commercial paper debt securities primarily consisting corporate foreign government notes bonds common stock equivalents general applicable hp uses quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value hp uses quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available hp uses internally developed valuation models whose inputs include bid prices third party valuations utilizing underlying assets assumptions derivative instruments discussed note 10 hp mainly holds nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures active market quotes available hp uses industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases hp uses management judgment develop assumptions used determine fair value hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued following table presents hps assets liabilities october 31 2009 measured fair value recurring basis following tables present changes level 3 instruments fiscal 2009 measured fair value recurring basis majority level 3 balances consist investment securities classified availableforsale changes fair value recorded comprehensive income oci 1included interest net accompanying consolidated statements earnings hp measures certain assets including cost equity method investments fair value nonrecurring basis assets recognized fair value deemed otherthantemporarily impaired october 31 2009 assets total fair value hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued 39 million measured using level 3 inputs hp recorded impairment charge 18 million relating investments hp reviews carrying values investments events circumstances warrant considers available evidence evaluating declines fair value otherthantemporary declines hp determines fair values investments public companies using quoted market prices records charge interest net change fair values determined otherthantemporary change hp carries equity investments privatelyheld companies cost fair value hp recognizes otherthantemporary impairment charge hp monitors investment portfolio impairment periodic basis event carrying value investment debt securities exceeds fair value decline value determined otherthantemporary decline 1 hp intend sell debt security 2 likely hp required sell debt security prior recovery amortized cost basis hp records impairment charge interest net amount credit loss balance comprehensive income effective november 1 2008 hp adopted accounting standards related financial instruments allows entity elect measure certain financial instruments fair value contractbycontract basis subsequent election unrealized gains losses fair value measurement financial instruments recognized earnings october 31 2009 hp elect option eligible financial instruments hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments availableforsale investments cash equivalents investments fair value following fiscal years ended october 31 follows cash equivalents consist investments original maturities ninety days less availableforsale securities consist shortterm investments mature within twelve months less longterm investments maturities longer twelve months investments include time deposits consisting certificate deposits corporate commercial paper debt securities consisting primarily fixedinterest securities institutional bonds discussed note 9 hp estimated fair values investments based quoted market prices pricing models using current market rates estimated fair values may representative actual values realized future gross unrealized loss october 31 2009 due primarily declines certain debt securities gross unrealized loss includes 20 million continuous loss position twelve months gross unrealized loss october 31 2008 continuous loss position less twelve months hp intend sell debt securities likely hp required sell debt securities prior recovery amortized cost hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued contractual maturities shortterm longterm investments availableforsale securities october 31 2009 follows proceeds sales maturities availableforsale securities 171 million fiscal 2009 realized gains losses availableforsale securities fiscal 2009 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification shortterm longterm investments debt equity securities following fiscal years ended october 31 follows equity securities privatelyheld companies include cost basis equity method investments marketable trading securities investments consist primarily marketable trading securities held generate returns hp expects offset changes certain liabilities related deferred compensation arrangements hp includes gains losses changes fair value securities offset losses gains related liabilities interest net hps consolidated statements earnings net losses associated securities 14 million fiscal 2009 net gains associated securities 5 million fiscal 2008 derivative financial instruments february 1 2009 hp adopted accounting standards related derivative instruments hedging adoption requires additional disclosures hps objectives strategies using derivative instruments accounting derivative instruments related hedged items hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued effect derivative instruments related hedged items financial statements adoption financial impact consolidated financial statements hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts option contracts interest rate swaps total return swaps hedge certain foreign currency interest rate lesser extent equity exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp leveraged derivatives hp use derivative contracts speculative purposes hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivatives consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs operating activities consolidated statement cash flows result use derivative instruments hp exposed risk counterparties derivative contracts fail meet contractual obligations mitigate counterparty credit risk hp policy entering contracts carefully selected major financial institutions based upon credit ratings factors hp maintains dollar term limits correspond institutions credit rating hps established policies procedures mitigating credit risk principal transactions shortterm cash include reviewing establishing limits credit exposure continually assessing creditworthiness counterparties master agreements counterparties include master netting arrangements mitigation credit exposure counterparties arrangements permit hp net amounts due hp counterparty amounts due hp counterparty reduces maximum loss credit risk event counterparty default certain hps derivative instruments contain creditriskrelated contingent features provision whereby counterparties derivative instruments could request collateralization derivative instruments net liability positions hps credit rating falls investment grade october 31 2009 hp required post collateral hp derivative instruments creditriskrelated contingent features significant net liability position fair value hedges hp enters fair value hedges reduce exposure debt portfolio interest rate risk hp issues longterm debt us dollars based market conditions time financing hp uses interest rate swaps modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial investing fixedrate instruments hp may enter interest rate swaps convert fixed interest returns variable interest returns would classify swaps fair value hedges derivative instruments designated hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period cash flow hedges hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales operating expense intercompany lease loan denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six twelve months however certain leasing revenuerelated forward contracts intercompany lease loan forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portion gain loss derivative instrument accumulated comprehensive loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item fiscal 2009 2008 hp discontinue cash flow hedge probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity derivatives designated hedging instruments consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures hp also uses total return swaps lesser extent interest rate swaps based equity fixed income indices hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair values earnings period change hp recognizes gain loss foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities hp recognizes gain loss total return swaps interest rate swaps interest net period gain loss change market value executive deferred compensation plan liability hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt change fair value derivative foreign currency options forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings october 31 2009 portion hedging instruments gain loss excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years 2009 2008 2007 fair value derivative instruments consolidated balance sheet discussed note 9 hp estimates fair values derivatives primarily based pricing models using current market rates records derivatives balance sheet fair value gross notional fair value derivative financial instruments consolidated balance sheet october 31 2009 follows 1represents face amounts contracts outstanding october 31 2009 2represents offsetting swaps acquired previous business combination designated hedging instruments hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued effect derivative instruments consolidated statements earnings beforetax effect derivative instrument related hedged item fair value hedging relationship fiscal year ended october 31 2009 follows beforetax effect derivative instruments cash flow net investment hedging relationships fiscal 2009 follows 1amount gain recognized income derivative represents 7 million gain related amount excluded assessment hedge effectiveness fiscal 2009 hp expects reclassify net accumulated comprehensive loss 167 million net taxes earnings next twelve months along earnings effects related forecasted transactions association cash flow hedges hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued beforetax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal 2009 follows financial instruments balance hps financial instruments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps short longterm debt approximately 160 billion october 31 2009 compared carrying value 158 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 11 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting marketing hps thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued october 31 2009 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 equipment leased customers operating leases 30 billion october 31 2009 23 billion october 31 2008 included machinery equipment accumulated depreciation equipment lease 09 billion october 31 2009 05 billion october 31 2008 october 31 2009 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 note 12 guarantees indemnifications ordinary course business hp may provide certain clients subsidiary performance guarantees andor financial performance guarantees may backed standby letters credit surety bonds general hp would liable amounts guarantees event hp hps subsidiaries nonperformance permits termination related contract client likelihood hp believes remote hp believes company compliance performance obligations material service contracts performance guarantee result acquisition eds hp acquired certain service contracts supported client financing securitization arrangements specific circumstances involving nonperformance resulting service contract termination failure comply terms financing arrangement hp would required acquire certain assets hp considers possibility failure comply remote asset amounts involved immaterial ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 guarantees continued correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates repair rates post sales support costs differ estimates revisions estimated warranty liability would required changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 note 13 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 notes payable banks lines credit includes deposits associated hps bankingrelated activities approximately 326 million 262 million october 31 2009 2008 respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued longterm debt longterm debt follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued hp may redeem global notes set forth table time redemption prices described prospectus supplements relating thereto global notes senior unsecured debt hp registered sale 30 billion debt global securities common stock preferred stock depositary shares warrants shelf registration statement march 2002 shelf registration statement 2002 shelf registration statement expired december 1 2008 accordingly hp longer able issue additional securities registration statement may 2009 hp filed shelf registration statement 2009 shelf registration statement securities exchange commission sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants 2009 shelf registration statement replaced similar registration statement filed may 2006 expired may 2009 may 2008 hps board directors approved increase capacity hps us commercial paper program 100 billion 160 billion hps subsidiaries authorized issue additional 10 billion commercial paper 500 million capacity currently available used hewlettpackard international bank plc whollyowned subsidiary hp euro commercial papercertificate deposit programme october 2008 hp registered commercial paper funding facility cpff provided federal reserve bank new york facility enables hp issue threemonth unsecured commercial paper special purpose vehicle federal reserve rate established cpff program currently equal spread threemonth overnight index swap rate maximum amount commercial paper hp may issue time program 104 billion less total principal amount outstanding commercial paper hp issued cpff program currently scheduled expire february 1 2010 october 31 2009 hp issued commercial paper cpff program hp 29 billion fiveyear credit facility expiring may 2012 february july 2008 hp entered additional 364day credit facilities 30 billion 80 billion respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued february 2008 credit facility expired february 2009 time hp entered new 35 billion 364day credit facility hp terminated july 2008 credit facility june 2009 reduced total amount available credit facilities 64 billion commitment fees interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities senior unsecured committed borrowing arrangements primarily support issuance us commercial paper hps ability us commercial paper outstanding balance exceeds 64 billion supported credit facilities subject number factors including liquidity conditions business performance hp also maintains uncommitted lines credit number financial institutions available various foreign subsidiaries amount available use october 31 2009 approximately 16 billion included including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2009 carrying value assets approximated carrying value borrowings 10 million october 31 2009 hp able issue unspecified amount additional debt securities common stock preferred stock depositary shares warrants 2009 shelf registration statement date hp also approximately 178 billion available borrowing resources including 162 billion commercial paper programs 64 billion supported credit facilities approximately 16 billion programs aggregate future maturities longterm debt face value excluding fair value adjustment related hedged debt 369 million premium debt issuance 56 million discount debt issuance 28 million follows october 31 2009 interest expense borrowings approximately 597 million fiscal 2009 467 million fiscal 2008 531 million fiscal 2007 note 14 taxes earnings domestic foreign components earnings follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued provision benefit taxes earnings follows following fiscal years ended october 31 1hp revised presentation fiscal years ended october 31 2007 regarding tax benefit stock option plans comparability purposes largest impacts revision increase current us federal tax provision 428 million decrease deferred us federal tax provision 428 million change affect previously reported results operations financial position periods presented previously reported totals provision benefit taxes earnings hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 breakdown current longterm deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 october 31 2009 hp 10 billion 35 billion 305 billion federal state foreign net operating loss carryforwards respectively amounts included respective totals begin expire fiscal 2010 305 billion foreign net operating losses 241 billion relates foreign losses arising fiscal 2009 pursuant internal restructuring transactions hp provided valuation allowance 218 million deferred tax assets related federal state net hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued operating losses 80 billion deferred tax assets related foreign net operating loss carryforwards hp expect realize october 31 2009 hp recorded deferred tax assets various tax credit carryforwards 14 billion amount includes 687 million foreign tax credit carryforwards begin expire fiscal 2015 hp recorded valuation allowance 47 million hp alternative minimum tax credit carryforwards 9 million expire research development credit carryforwards 395 million begin expire fiscal 2019 hp also tax credit carryforwards 350 million various states foreign countries hp provided valuation allowance 179 million reduce related deferred tax asset credits begin expire fiscal 2010 gross deferred tax assets october 31 2009 2008 reduced valuation allowances 87 billion 18 billion respectively valuation allowance increased 69 billion fiscal 2009 valuation allowance increase consisted 70 billion associated foreign net operating loss carryovers arising fiscal 2009 pursuant internal restructuring transactions reduced 100 million valuation allowance decreases associated state foreign net operating losses gross deferred tax assets october 31 2008 2007 reduced valuation allowances 18 billion 15 billion respectively valuation allowance increased 258 million fiscal 2008 valuation allowance increases consisted 449 million recorded deferred tax assets acquired current year acquisitions 126 million recorded deferred tax assets related certain federal state net operating loss carryovers tax credits 47 million related deferred tax assets foreign tax credit carryovers increases partially offset 203 million net reduction valuation allowances due adjustments deferred tax assets related foreign net operating loss carryovers 161 million valuation allowances deferred tax assets related foreign tax credits net operating losses carryovers result adoption accounting guidance uncertainty income taxes net excess tax benefits resulting exercise employee stock options employee stock programs recorded increase stockholders equity approximately 163 million fiscal 2009 316 million fiscal 2008 530 million fiscal 2007 differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued fiscal 2009 hp recorded 547 million net income tax benefits related items unique year recorded amounts included 383 million income tax benefits attributable net deferred tax assets foreign net operating loss carryovers arising pursuant internal restructuring transactions also included net tax benefit 154 million adjustment estimated fiscal 2008 tax accruals upon filing 2008 income tax returns 60 million income tax benefit valuation allowance reversals state foreign net operating losses miscellaneous items resulted net tax charge 50 million fiscal 2008 hp recorded 251 million net income tax expense related items unique year recorded amounts consisted tax charge 205 million associated postacquisition eds integration 44 million adjustment estimated fiscal 2007 tax accruals upon filing 2007 us federal income tax return net tax charges 2 million attributable items october 2008 emergency economic stabilization act 2008 signed law included retroactive two year extension research development tax credit january 1 2008 december 31 2009 retroactive income tax benefit 45 million recorded hps financial statements fourth quarter fiscal 2008 fiscal 2007 hp recorded 80 million net income tax benefit related items unique year recorded amounts consisted income tax benefits valuation allowance reversals 154 million attributable deferred tax assets state tax credits 60 million attributable deferred tax assets foreign net operating losses offset 96 million net increase various tax reserves net tax charge 18 million adjustment estimated fiscal 2006 tax accruals upon filing 2006 us federal state income tax returns net tax charge 20 million items result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2022 gross income tax benefits attributable tax status subsidiaries estimated 853 million 035 per share fiscal year 2009 900 million 035 per share fiscal year 2008 12 billion 043 per share fiscal year 2007 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors total amount gross unrecognized tax benefits 19 billion october 31 2009 950 million would affect hps effective tax rate realized reconciliation beginning ending amount unrecognized tax benefits follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued hp recognizes interest income favorable settlements income tax receivables interest expense penalties accrued unrecognized tax benefits within income tax expense october 31 2009 hp accrued net 115 million payable interest penalties fiscal 2009 hp recognized net interest income tax overpayments deficiencies net tax 40 million hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution irs audit cycle within next 12 months however reasonably possible certain foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 120 million within next twelve months hp subject income tax united states sixty foreign countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits state foreign tax authorities hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agents reports rars fiscal 2001 2002 tax years irs began audit hps 2006 2007 income tax returns 2009 respect major foreign state tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp believes adequate reserves provided open tax years july 30 2009 hp received notice deficiency irs fiscal 2004 2005 tax years notice deficiency asserted hp owes additional tax 92 million penalties 5 million addition proposed deficiency fiscal 2004 2005 irss adjustments years sustained would reduce tax benefits net operating loss tax credit carryforwards subsequent years approximately 563 million hp plans contest certain adjustments proposed notice deficiency hp believes provided adequate reserves tax deficiencies reductions tax benefits could result irs actions tax years eds 2002 audited irs proposed adjustments resolved irs currently auditing edss tax years 2005 2006 december 5 2008 eds received rar exam years 2003 2004 proposing tax deficiency 82 million deficiency includes 12 million effect carrybacks 2000 2001 hp appealing certain issues believes adequate reserves provided years january 30 2008 hp received notice deficiency irs fiscal 2003 tax year notice deficiency asserted hp owes additional tax 21 million time hp received rar irs fiscal 2002 tax year proposed change hps tax liability year addition proposed deficiency fiscal 2003 irss adjustments years sustained would reduce tax refund claims hp filed net operating loss carrybacks earlier fiscal years reduce tax benefits tax credit carryforwards subsequent years approximately 249 million amount reflects certain transfer pricing adjustments settled fiscal 2008 hp plans contest certain remaining adjustments proposed notice deficiency rar towards end hp filed petition united states tax court april 29 2008 hp believes provided adequate reserves tax deficiencies reductions refund claims could result irs actions hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued june 28 2007 hp received notice deficiency irs fiscal 1999 2000 tax years notice deficiency asserted hp owes additional tax 13 million two years time hp received rar irs fiscal 2001 tax year proposed change hps tax liability year addition proposed deficiencies fiscal 1999 2000 irss adjustments sustained would reduce tax refund claims hp filed foreign tax credit net operating loss carrybacks earlier fiscal years reduce tax benefits carryforwards subsequent years approximately 80 million hp plans contest certain adjustments proposed notice deficiency rar towards end hp filed petition united states tax court september 25 2007 hp believes provided adequate reserves tax deficiencies reductions refund claims could result irs actions hp provided us federal income foreign withholding taxes 165 billion undistributed earnings nonus operations october 31 2009 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated determines advantageous business operations tax cash management reasons note 15 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends 032 per common share fiscal 2009 2008 2007 stock repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2009 hp executed share repurchases 120 million shares repurchases 132 million shares settled 51 billion included 14 million shares repurchased transactions executed fiscal 2008 settled fiscal 2009 hp approximately 2 million shares repurchased fourth quarter fiscal 2009 settled next fiscal year fiscal 2008 hp completed share repurchases approximately 230 million shares repurchases approximately 216 million shares settled 96 billion included approximately 1 million shares repurchased transactions executed fiscal 2007 settled fiscal 2008 fiscal 2007 hp completed share repurchases approximately 209 million shares repurchases approximately 210 million shares settled 91 billion included approximately 1 million shares repurchased transactions executed fiscal 2006 settled fiscal 2007 foregoing shares repurchased settled fiscal 2009 fiscal 2008 fiscal 2007 open market repurchase transactions addition transactions hp entered accelerated share repurchase asr program thirdparty investment bank second quarter fiscal 2007 pursuant terms asr program hp purchased 40 million shares common stock investment bank 18 billion purchase price march 30 2007 purchase date hp decreased shares outstanding reduced outstanding shares used calculate weighted hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 stockholders equity continued average common shares outstanding basic diluted eps purchase date shares delivered hp included shares investment bank borrowed third parties investment bank purchased equivalent number shares open market cover position respect borrowed shares contractually specified averaging period began purchase date ended june 6 2007 end averaging period investment banks total purchase cost based volume weightedaverage purchase price hp shares averaging period approximately 90 million less purchase price accordingly hp option either receive additional shares hps common stock cash payment amount difference investment bank june 2007 hp received approximately 2 million additional shares purchased investment bank open market value approximately equal amount hp reduced shares outstanding upon receipt shares also hp entered prepaid variable share purchase program pvspp thirdparty investment bank first quarter 2006 prepaid approximately 17 billion exchange right receive variable number shares common stock weekly oneyear period beginning second quarter fiscal 2006 ending second quarter fiscal 2007 pvspp prices hp purchased shares subject minimum maximum price determined advance repurchases completed program thereby effectively hedging hps repurchase price minimum maximum number shares hp could receive program 52 million shares 70 million shares respectively exact number shares repurchased based upon volume weightedaverage market price hps shares weekly settlement period subject minimum maximum price well regulatory limitations number shares hp permitted repurchase hp decreased shares outstanding settlement period shares physically received hp completed repurchases pvspp march 9 2007 date hp cumulatively received total 53 million shares fiscal 2009 additional authorization future share repurchases hps board directors fiscal 2008 fiscal 2007 hps board directors authorized additional 160 billion 80 billion future share repurchases respectively october 31 2009 hp remaining authorization approximately 40 billion future share repurchases 80 billion repurchase authorization approved hps board directors september 19 2008 november 19 2009 hps board directors authorized additional 80 billion future share repurchases hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 stockholders equity continued comprehensive income changes components comprehensive income net taxes follows following fiscal years ended october 31 components accumulated comprehensive loss income net taxes follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans acquisition eds august 26 2008 eds became wholly owned subsidiary hp eds sponsors qualified nonqualified defined benefit pension plans covering substantially employees majority eds defined benefit pension plans noncontributory plans employees become fully vested upon attaining two five years service benefits based many factors differ country significant years service earnings projected unit credit cost method used actuarial purposes plan assets plan obligations associated eds defined benefit pension plans included acquisition date october 31 2008 global basis eds plan assets totaled 78 billion plan obligations totaled 101 billion august 26 2008 us portion global assets obligations totaled 41 billion 50 billion respectively defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan traditional defined benefit pension plan based pay years service hp company cash account pension plan cash account pension plan benefits accrued pursuant cash accumulation account formula based upon percentage pay plus interest frozen effective january 1 2008 cash account pension plan retirement plan merged 2005 certain funding investment purposes merged plan referred hp pension plan following acquisition eds hp announced modifying eds us qualified nonqualified plans employees accruing benefits programs effective january 1 2009 eds employees us ceased accruing pension benefits final pension benefit amount calculated based pay service december 31 2008 effective october 30 2009 eds us qualified pension plan also merged hp pension plan eds us qualified pension plan like cash account pension plan retirement plan remains separate subplan within hp pension plan purposes determining benefit amounts result merger impact separate benefit structures plans hp reduces benefit payable us employee pension plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations fair value plan assets projected hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued benefit obligations us defined benefit plans combined dpsp follows following fiscal years ended october 31 12009 2008 plan assets projected benefit obligation include eds us pension plans postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required participation hp retiree medical program february 2007 hp limited future eligibility pre2003 hp retiree medical program employees within five years satisfying programs retirement criteria june 30 2007 employees meeting modified program criteria may become eligible participation hp retiree medical program november 2008 hp announced changing limits future costsharing pre2003 program whereby future cost increases paid participating retirees starting 2011 june 2008 hp modified rmsa plan provide generally employees employed hp july 31 2008 would eligible receive employer credits september 2008 hp modified rmsa plan provide employees would receive employer credits form matching contributions defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 568 million fiscal 2009 548 million fiscal 2008 481 million fiscal 2007 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued similar hp eds offered participation defined contribution plans us nonus employees fiscal 2008 hp matched employee contributions hp 401k plan cash contributions maximum 6 eligible compensation us employees hired prior august 1 2008 us employees hired august 1 2008 hp matched employee contributions maximum 4 eligible compensation employer match eds plan 25 employee contribution based maximum contribution 6 employees salary effective january 1 2009 us employees participating eds 401k plan became eligible 4 hp matching contribution eligible compensation similar hp 401k plan contributions invested direction employee various funds although eds 401k plan offer hp stock fund effective april 1 2009 hp matching contributions us hp 401k plan eds 401k plan changed quarterly discretionary performancebased match maximum 4 eligible compensation us employees determined fiscal quarter based business results hp matching contributions vary 0 100 maximum 4 match based factors quarterly earnings market share growth performance relative market economic conditions hps matching contributions quarter ended october 31 2009 100 maximum 4 match effective january 31 2004 hp designated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 8 million 9 million 9 million dividends hp common shares held hp stock fund fiscal 2009 2008 2007 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 25 million shares hp common stock october 31 2009 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued pension postretirement benefit expense hps net pension postretirement benefit cost gain recognized consolidated statements earnings follows following fiscal years ended october 31 fiscal 2009 hp recognized aggregate pension curtailment settlement losses totaling 5 million 12 million respectively resulting workforce rebalancing initiatives several nonus countries uk workforce rebalancing initiatives triggered pension termination benefits totaling 55 million us settlement gain 1 million recognized payout activity related nonqualified plans puerto rico curtailment gain 2 million recognized closure retiree medical plan weightedaverage assumptions used calculate net benefit cost follows following fiscal years ended october 31 medical cost related assumptions used calculate net postretirement benefit cost following fiscal years ended october 31 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued 10 percentage point increase medical cost trend rate would increased fiscal 2009 service interest components postretirement benefit costs 02 million 10 percentage point decrease would resulted decrease 01 million period funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets october 31 2009 october 31 2008 follows following table summarizes pretax net experience loss prior service benefit recognized accumulated comprehensive income companys defined benefit postretirement benefit plans october 31 2009 following table summarizes experience loss prior service benefit amortized accumulated comprehensive income recognized components net periodic benefit cost credit next fiscal year hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued weightedaverage assumptions used calculate benefit obligation disclosed 2009 2008 fiscal close follows stemming plan changes announced november 2008 employer subsidy us retiree medical plans freeze fiscal 2010 therefore trend rates 2010 beyond longer relevant liability calculation since excess cost picked retirees 10 percentage point increase medical cost trend rate would increased total postretirement benefit obligation reported october 31 2009 3 million 10 percentage point decrease would resulted decrease 3 million defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued plan asset allocations weightedaverage target actual asset allocations across hp eds plans respective measurement dates follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk depending funded status plan majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment liability exposures hp utilizes derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds private debt private equity provide diversification higher expected returns outside united states asset allocation decisions typically made independent board trustees us investment objectives aligned generate returns enable plan meet future obligations countries local regulations require adjustments asset allocation typically leading higher percentage fixed income would otherwise deployed hps corporate office acts consulting governance role reviewing investment strategy providing recommended list investment managers country plan final decisions asset allocation investment managers made local trustees basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued expected asset class returns reflect current yield us government bonds risk premiums asset class hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees hp closed acquisition eds august 26 2008 effective close fiscal 2009 hp merged assets hp eds us pension plans conducting asset allocation study combined plan expected return plan assets used calculating net benefit costs 8 fiscal 2010 reflects result recent asset allocation study commensurate investment strategy merged us pension plan approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation future contributions funding policy fiscal 2010 hp expects contribute approximately 745 million pension plans approximately 30 million cover benefit payments us nonqualified plan participants hp expects pay approximately 45 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2009 1the estimated future benefits payable postretirement plans reflected net expected medicare part subsidy note 17 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 commitments continued escalation clauses rent expense approximately 1112 million fiscal 2009 935 million fiscal 2008 767 million fiscal 2007 increase fiscal 2009 rent expense primarily result eds acquisition august 2008 sublease rental income approximately 53 million fiscal 2009 37 million fiscal 2008 44 million fiscal 2007 october 31 2009 property capital lease comprised primarily equipment furniture approximately 723 million included property plant equipment accompanying consolidated balance sheet accumulated depreciation property capital lease approximately 406 million october 31 2009 related depreciation included depreciation expense future annual minimum lease payments sublease rental income commitments capital lease commitments october 31 2009 follows october 31 2009 hp unconditional purchase obligations approximately 20 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally inventory items future unconditional purchase obligations october 31 2009 follows note 18 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business hp records provision liability management believes probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies diversion managements attention creation significant expenses litigation proceedings investigations copyright levies described proceedings ongoing hp certain european union eu member countries including litigation germany seeking impose levies upon equipment multifunction devices mfds personal computers pcs printers alleging devices enable producing private copies copyrighted materials total levies due imposed would based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposing extension levies digital environment advocating alternative models compensation rights holders verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted nonbinding arbitration proceedings hp june 2001 germany arbitration board patent trademark office proceedings relate whether extent copyright levies photocopiers imposed accordance copyright laws implemented germany mfds allegedly enable production copies private persons following unsuccessful arbitration vg wort filed lawsuit hp may 2004 stuttgart civil court stuttgart germany seeking levies certain mfds sold 1997 2001 december 22 2004 court held hp liable payments regarding mfds sold germany ordered hp pay vg wort amount equal 5 outstanding levies claimed plus interest mfds sold germany december 2001 vg wort appealed decision july 6 2005 stuttgart court appeals ordered hp pay vg wort levies based published tariffs photocopiers germany range eur 3835 eur 61356 per unit plus interest mfds sold germany december 2001 hp appealed stuttgart court appeals decision bundesgerichtshof german federal supreme court january 30 2008 german federal supreme court held mfds covered lawsuit photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law hp subsequently appealed decision filing claim german federal constitutional court challenging ruling application conventional photocopier levies mfds sold germany december 2001 june 4 2009 german constitutional court declined hear hps appeal september 26 2005 vg wort filed additional lawsuit hp stuttgart civil court stuttgart germany seeking assurance full payment levies mfd units sold germany 1997 2001 well mfds sold 2002 onwards july 26 2007 court issued decision following ruling stuttgart court appeals respect initial vg wort lawsuit described hp appealed decision march 25 2009 german association information technology telecommunications new media ev entered hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued settlement agreement vg wort verwertungsgesellschaft bildkunst another collection agency representing copyright holders vg bildkunst provides payment levies mfds sold 2002 2007 levies vary approximately €13 €307 per unit depending type device date sold copy speed subject reduction vg wort vg bildkunst grants favorable rates future parties within germany covered settlement hp acceded settlement paid amounts due thereunder july 2004 vg wort filed separate lawsuit hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 stuttgart court appeals may 11 2005 stuttgart court appeals issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law court issued written decision january 25 2008 vg wort subsequently filed application german federal supreme court section 321a german code civil procedure contending court consider arguments may 9 2008 german federal supreme court denied vg worts application addition vg wort appealed decision filing claim german federal constitutional court challenging ruling printers subject levies hp industry association bitkom responded vg worts claim september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich civil court munich germany seeking levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fsc december 23 2004 munich civil court held pcs subject levy fsc must pay 12 euros plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 munich court appeals december 15 2005 munich court appeals affirmed munich civil court decision fsc filed appeal german federal supreme court february 2006 october 2 2008 german federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law vg wort filed claim german federal constitutional court challenging ruling fsc bitkom responded vg worts claim december 29 2005 zpu joint association various german collection societies instituted nonbinding arbitration proceedings hp arbitration board patent trademark office demanding reporting every pc sold hp germany january 2002 december 2005 seeking levy 1842 euros plus tax pc sold period hp filed notice defense connection proceedings february 2006 arbitration hearing held december 2006 july 31 2007 arbitration board issued ruling proposing levy 15 euros plus tax pc sold period hp rejected ruling arbitration board arbitration proceedings concluded zpu filed claim munich court appeals hp responded hearing date set court february 18 2010 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain sky subscribers services limited british sky broadcasting limited v eds limited uk lawsuit filed august 17 2004 sky subscribers services limited british sky broadcasting limited electronic data systems corporation eds company hp acquired august 2008 eds limited uk eds uk one edss subsidiaries alleging deceit negligent misrepresentation negligent misstatement breach contract claims arose customer relationship management project awarded eds 2000 principal objective develop customer call center scotland edss main role project systems integrator november 12 2004 eds uk filed defense counterclaim denying claims seeking damages monies owed contract trial action commenced october 15 2007 final arguments concluded july 30 2008 trial plaintiffs claimed damages excess £700 million eds uk counterclaimed damages approximately £5 million hp expects receive decision court january 2010 skold et al v intel corporation hewlettpackard company lawsuit hp joined june 14 2004 pending state court santa clara county california lawsuit alleges hp along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class february 27 2009 court denied prejudice plaintiffs motion nationwide class certification third time plaintiffs appealed courts decision inkjet printer litigation described hp involved several lawsuits claiming breach express implied warranty unjust enrichment deceptive advertising unfair business practices plaintiffs alleged among things hp employed smart chip certain inkjet printing products order register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contended consumers received false ink depletion warnings smart chip limits ability consumers use cartridge full capacity choose competitive products •a consolidated lawsuit captioned hp inkjet printer litigation pending united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees january 4 2008 court heard plaintiffs motions class certification add class representative hps motion summary judgment july 25 2008 court denied three motions march 30 2009 plaintiffs filed renewed motion class certification hearing plaintiffs motion class certification scheduled january 8 2010 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued •a lawsuit captioned blennis v hp filed january 17 2007 united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees class certification hearing scheduled april 23 2010 •four class actions hp subsidiary hewlettpackard canada co pending canada one commenced british columbia february 2006 two commenced quebec april 2006 may 2006 respectively one commenced ontario june 2006 plaintiffs seeking class certification restitution declaratory relief injunctive relief unspecified statutory compensatory punitive damages class authorization hearing one cases pending quebec tentatively scheduled december 10 2009 hearing postponed new date set court baggett v hp consumer class action filed hp june 6 2007 united states district court central district california alleging hp employs technology laserjet color printers whereby printing process shuts prematurely thus preventing customers using toner allegedly left cartridge plaintiffs also allege hp fails disclose consumers unable utilize toner remaining cartridge printer shuts complaint seeks certification nationwide class purchasers hp laserjet color printers seeks unspecified damages restitution disgorgement injunctive relief attorneys fees costs september 29 2009 court granted hps motion summary judgment named plaintiff denied plaintiffs motion class certification moot november 3 2009 court entered judgment named plaintiff november 17 2009 plaintiff filed appeal courts summary judgment ruling united states court appeals ninth circuit rich v hp consumer class action filed hp may 22 2006 united states district court northern district california suit alleges hp designed color inkjet printers unnecessarily use color ink addition black ink printing black white images text plaintiffs seeking certify nationwide injunctive class californiaonly damages class certification hearing scheduled february 5 2010 december 27 2001 cornell university cornell research foundation inc filed complaint amended september 6 2002 hp united states district court northern district new york alleging hps parisc 8000 family microprocessors servers workstations incorporating processors infringe patent assigned cornell research foundation inc describes way executing microprocessor instructions complaint sought declaratory injunctive relief unspecified damages patent issue litigation united states patent 4807115 expired february 21 2006 therefore plaintiffs longer entitled seek injunctive relief hp matter tried may 19 may 30 2008 may 30 2008 jury returned verdict favor plaintiffs amount 184 million march 30 2009 trial court issued four posttrial decisions court denied several hps posttrial motions granted hps motion reduce damages award court reduced award approximately 53 million subsequently entered judgment favor plaintiffs amount april 10 2009 hp filed notice appeal judgment united states court appeals federal circuit may 15 2009 court awarded approximately 17 million prejudgment interest approximately 1 million costs subsequently entered hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued amended judgment reflecting awards june 2 2009 court entered final amended judgment reflecting total amount damages prejudgment interest taxable costs june 4 2009 hp filed amended notice appeal fair labor standards act litigation described hp involved several lawsuits plaintiffs seeking unpaid overtime compensation damages based allegations various employees eds hp misclassified exempt employees fair labor standards act andor violation california labor code state laws •cunningham et al v electronic data systems corporation purported collective action filed may 10 2006 us district court southern district new york claiming current former eds employees involved installing andor maintaining computer software hardware misclassified exempt employees two purported collective actions steavens et al v electronic data systems corporation filed october 23 2007 azar v electronic data systems corporation filed february 20 2009 also pending court alleging similar facts •heffelfinger et al v electronic data systems corporation class action filed november 2006 california superior court claiming certain eds information technology workers california misclassified exempt employees case subsequently transferred us district court central district california january 7 2008 certified class information technology workers california june 6 2008 court granted defendants motion summary judgment plaintiffs subsequently filed appeal us court appeals ninth circuit three purported class actions originally filed california superior court jameson et al v electronic data systems corporation filed july 16 2008 karlbom et al v electronic data systems corporation filed march 16 2009 george et al v electronic data systems corporation filed april 2 2009 pending us district court central southern district california alleging similar facts •mathias v hewlettpackard company purported collective action filed august 21 2009 united states district court northern district georgia atlanta division lawsuit alleges mathias represents similarly situated employees misclassified exempt employees united states america ex rel norman rille neal roberts v hewlettpackard company et al 2004 two private individuals filed civil qui tam complaint false claims act united states district court eastern district arkansas containing generalized allegations hp several companies participated industrywide practice using partnership alliance programs make improper payments cause submission false claims connection contracts provide products services federal government april 12 2007 us department justice intervened qui tam action filed complaint hp several companies separate actions behalf united states containing allegations hp violated false claims act antikickback act 1986 providing millions dollars kickbacks alliance partners including influencer fees new business opportunity rebates us complaint alleges hp violated false claims act antikickback act breached federal government contracts induced federal government make payments hp hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued hp entitled receive contracts unjustly enriched expressly impliedly making false statements records certifications federal government complied would continue comply antikickback act submitting claims government allegedly inflated included amounts influencer fees new business opportunity rebates us complaint seeks treble damages plus civil penalties connection alleged violations false claims act double damages plus civil penalties connection alleged violations antikickback act disgorgement profits earned connection breach contract unjust enrichment claims leak investigation proceedings described hp subject various governmental inquiries concerning processes employed investigation leaks hp confidential information members media concluded may 2006 •in august 2006 hp informally contacted attorney general state california requesting information concerning processes employed leak investigation december 7 2006 hp announced entered agreement california attorney general resolve civil claims arising leak investigation including claim made california attorney general santa clara county superior court action filed december 7 2006 hp committed unfair business practices california law connection leak investigation result agreement includes injunction california attorney general pursue civil claims hp current former directors officers employees terms agreement hp paid total 145 million agreed implement maintain five years series measures designed ensure hps corporate investigations conducted accordance california law companys high ethical standards 145 million 135 million used create privacy piracy fund assist california prosecutors investigating prosecuting consumer privacy information piracy violations 650000 used pay statutory damages 350000 reimbursed california attorney generals office investigation costs finding liability hp part settlement •beginning september 2006 hp received requests committee energy commerce us house representatives committee records information concerning leak investigation securities transactions hp officers directors including august 25 2006 securities transaction mark hurd hps chairman chief executive officer related matters hp responded requests addition mr hurd voluntarily gave testimony committee regarding leak investigation september 28 2006 •in september 2006 hp informally contacted us attorney northern district california requesting similar information concerning processes employed leak investigation hp responded request •beginning september 2006 hp received requests division enforcement securities exchange commission records information interviews current former hp directors officers relating leak investigation resignation thomas j perkins hps board directors hps may 22 2006 september 6 2006 filings sec form 8k stock repurchases hp securities transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued officers directors occurred may 1 october 1 2006 hps policies practices approval securities transactions may 2007 hp consented entry order sec ordering hp cease desist committing causing violations public reporting requirements securities exchange act 1934 amended hp advised staff division enforcement staff completed investigation intend recommend sec enforcement action brought connection matters •in september 2006 hp received request us federal communications commission records information relating processes employed leak investigation hp responded request addition four stockholder derivative lawsuits filed california purportedly behalf hp stockholders seeking recover damages alleged breach fiduciary duty require hp improve corporate governance internal control procedures result activities leak investigation staehr v dunn et al filed santa clara county superior court september 18 2006 worsham v dunn et al filed santa clara county superior court september 14 2006 tansey v dunn et al filed santa clara county superior court september 20 2006 hall v dunn et al filed santa clara county superior court september 25 2006 october 19 2006 santa clara county superior court consolidated four california cases caption hewlettpackard company derivative litigation consolidated complaint filed november 19 2006 also seeks recover damages connection sales hp stock alleged made certain current former hp officers directors possession material nonpublic information two additional stockholder derivative lawsuits pifko v babbio et al filed september 19 2006 gross v babbio et al filed november 21 2006 filed chancery court county new castle delaware seek recover damages alleged breaches fiduciary duty obtain order instructing defendants refrain breaches fiduciary duty implement corrective measures prevent future occurrences alleged breaches fiduciary duty january 24 2007 delaware court consolidated two cases caption hewlettpackard company derivative litigation subsequently stayed proceedings parties reached tentative settlement hp board directors appointed special litigation committee consisting independent board members authorized investigate review evaluate facts circumstances asserted derivative matters determine hp proceed matters december 14 2007 hp plaintiffs california delaware derivative actions entered agreement settle lawsuits terms settlement hp agreed continue certain corporate governance changes december 31 2012 pay plaintiffs attorneys fees california court granted final approval settlement march 11 2008 subsequently granted plaintiffs counsels fee application dismissed action june 12 2008 delaware court granted final approval settlement plaintiffs application attorneys fees also dismissed action neither dismissal california delaware derivative action thereafter appealed cases concluded hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued environmental hp subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content products recycling treatment disposal products including batteries particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products product takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims clean costs amount timing costs environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred product takeback legislation example european union eu adopted waste electrical electronic equipment directive january 2003 directive makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products eu member states obliged make producers participating market financially responsible implementing responsibilities note 19 segment information description segments hp leading global provider products technologies software solutions services individual consumers small medium sized businesses smbs large enterprises including customers government health education sectors hps offerings span personal computing access devices imaging printingrelated products services enterprise information technology infrastructure including enterprise storage server technology networking products software optimizes business technology investments financial services including leasing multivendor customer services including technology support maintenance consulting integration information technology business process outsourcing services application services hp operations organized seven business segments financial reporting purposes services ess hp software psg ipg hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued run business operations include limited customer base homogeneity products technology business segments disclosed accompanying consolidated financial statements based organizational structure information reviewed hps management evaluate business segment results services ess hp software reported collectively broader hp enterprise business order provide supplementary view hps business aggregated financial data hp enterprise business presented herein hp reclassified segment operating results fiscal 2008 fiscal 2007 conform certain fiscal 2009 organizational realignments none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows hp enterprise business segments within hp enterprise business described detail •services formerly hp services renamed reorganization business units subsequent acquisition eds august 2008 services provides consulting outsourcing technology services across infrastructure applications business process domains services divided four main business units infrastructure technology outsourcing applications services business process outsourcing technology services infrastructure technology outsourcing delivers comprehensive services encompass data center workplace desktop network communications security compliance business continuity hp also offers set managed services providing crosssection broader infrastructure services smaller discrete engagements applications services help clients revitalize manage applications assets flexible projectbased consulting services longerterm outsourcing contracts full lifecycle services encompass application development testing modernization system integration maintenance management business process outsourcing solutions include broad array enterprise shared services customer relationship management services financial process management services administrative services technology services include consulting support services mission critical services converged infrastructure services networking services data center transformation services infrastructure services well warranty support across hps product lines •enterprise storage servers provides storage server products various server offerings range entrylevel servers highend scalable servers including superdome servers industry standard servers include primarily entrylevel midrange proliant servers run primarily windows®1 linux novell operating systems leverage intel corporation intel advanced micro devices amd processors business spans range product lines including pedestaltower servers densityoptimized rack servers hps bladesystem family server blades business critical systems include itanium®2based integrity servers running hpux windows® linux openvms nonstop operating systems including highend superdome servers faulttolerant integrity nonstop servers business critical systems also include reduced instruction set computing riscbased servers hp 9000 line running hpux operating system hp alphaservers running tru64 unix®3 openvms mipsbased nonstop servers hps storageworks hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued offerings include entrylevel midrange highend arrays storage area networks sans network attached storage nas storage management software virtualization technologies well tape drives tape libraries optical archival storage 1windows® registered trademark microsoft corporation 2itanium® registered trademark intel corporation 3unix® registered trademark open group •hp software provides enterprise management software solutions including professional services support allow customers manage automate infrastructure operations applications services business processes hp business technology optimization bto brand portfolio bto solutions also includes tools automate data center operations processes solutions reported bto software hp software also provides comprehensive suite solutions enables communication service providers deploy revenue generating infrastructure applications customer intelligence billing systems operational support systems addition media companies distributors hp software provides solutions address content management streamlining digital media workflows hp software provides information management business intelligence solutions include enterprise data warehousing business continuity data availability records management compliance ediscovery products services enable customers extract value structured unstructured data information solutions reported software hps business segments described •personal systems group provides commercial pcs consumer pcs workstations handheld computing devices calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise smb customers connectivity manageability networked environments commercial pcs include hp compaq business desktops notebooks hp elitebook tablet pcs hp elitebook probook lines professional notebooks well hp mininote pc hp blade pcs retail pos systems hp thin clients consumer pcs targeted home user include hp pavilion compaq presario series multi media consumer desktops notebooks well hp pavilion elite desktops hp envy premium notebooks touchsmart pcs hp compaq mini notebooks voodoo gaming pcs media smart home server hps z series desktop workstations hp elitebook mobile workstations provide advanced graphics computing large modeling capabilities certified applications wide range industries running windows® linux operating systems psg provides series hp ipaq pocket pc handheld computing devices run windows® mobile software products range basic pdas advanced devices voice data capability •imaging printing group provides consumer commercial printer hardware printing supplies printing media scanning devices ipg also focused imaging solutions commercial markets managed print services solutions addressing new growth opportunities commercial printing capturing highvalue pages areas industrial applications outdoor signage graphic arts business inkjet web solutions delivers hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued hps consumer smb inkjet solutions hardware ink media develops hps retail web businesses includes single function allinone inkjet printers targeted toward consumers smbs well retail publishing solutions snapfish logoworks laserjet enterprise solutions delivers products services enterprise segment includes laserjet printers supplies multifunction printers scanners enterprise software solutions exstream software web jetadmin managed print services products solutions halo telepresence graphics solutions include large format printing designjet scitex colorspan nur large format supplies webpress supplies indigo printing specialty printing systems inkjet highspeed production solutions light production solutions printer supplies include laserjet toner inkjet printer cartridges printingrelated media •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial lifecycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments includes hp labs certain business incubation projects revenue segment attributable sale certain network infrastructure products including ethernet switch products enhance computing enterprise solutions sold brand procurve networking segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include primarily amortization purchased intangible assets stockbased compensation expense related hpgranted employee stock options prus employee stock purchase plan certain acquisitionrelated charges purchased iprd well certain corporate governance costs hp allocate business segments restructuring charges associated adjustments related restructuring actions hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued selected operating results information business segment follows following fiscal years ended october 31 1includes results eds acquired august 26 2008 date acquisition 2certain fiscal 2009 organizational reclassifications reflected retroactively provide improved visibility comparability fiscal 2008 2007 reclassifications resulted transfer revenue operating profit among services hp software imaging printing group financial reporting segments addition certain previously allocated costs reclassified unallocated costs related stockbased compensation expense impact previously reported financial results enterprise storage servers personal systems group hp financial services corporate investments segments hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hp allocates assets business segments based primary segments benefiting assets corporate unallocated assets composed primarily cash equivalents described fiscal 2009 segment asset information stated based fiscal 2009 organizational structure total assets segment well hp enterprise business reconciliation segment assets hp consolidated total assets follows october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location united states single country represented 10 hps total consolidated net revenue period presented hp reports revenue net sales taxes use taxes valueadded taxes directly imposed governmental authorities hps revenue producing transactions customers october 31 2009 2008 belgium united states 10 hps total consolidated net assets october 31 2007 single country united states 10 hps total consolidated net assets single country united states 10 hps total consolidated net property plant equipment period presented hps longlived assets goodwill purchased intangible assets composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 1includes results eds acquired august 26 2008 date acquisition businesses included former hp consulting integration business unit divided among application services technology services business units hp software hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued segment businesses included former outsourcing services business unit divided among infrastructure technology outsourcing business process outsourcing business units infrastructure technology outsourcing application services business process outsourcing business units added technology services business unit four business units comprise services segment 2certain fiscal 2009 organizational reclassifications reflected retroactively provide improved visibility comparability fiscal 2008 2007 reclassifications resulted transfer revenue among services hp software imaging printing group financial reporting segments addition revenue transferred among business units within services hp software imaging printing group personal systems group segments impact previously reported financial results enterprise storage servers hp financial services corporate investments segments hewlettpackard company subsidiaries quarterly summary unaudited millions except per share amounts previously reported hps quarterly reports form 10q fiscal 2009 restated adoption asu 200913 asu 200914 discussed fully note 1 impact adoption follows 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year 3as result adoption asu 200913 asu 200914 fourth quarter net revenue net earnings higher 82 million 19 million respectively 4certain pursuitrelated costs previously reported cost sales realigned retroactively selling general administrative expenses due organizational realignments item 9item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated statements comprehensive income consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements note 1 summary significant accounting policies note 2 stockbased compensation note 3 net earnings per share note 4 balance sheet details note 5 acquisitions note 6 goodwill intangible assets note 7 restructuring note 8 fair value note 9 financial instruments note 10 financing receivables operating leases note 11 guarantees note 12 borrowings note 13 taxes earnings note 14 stockholders equity note 15 retirement postretirement benefit plans note 16 commitments note 17 litigation contingencies note 18 segment information quarterly summary report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2013 2012 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2013 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2013 2012 consolidated results operations cash flows three years period ended october 31 2013 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states hewlettpackard companys internal control financial reporting october 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated december 27 2013 expressed unqualified opinion thereon ernst young llp san jose california december 27 2013 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2013 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2013 2012 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2013 report dated december 27 2013 expressed unqualified opinion thereon ernst young llp san jose california december 27 2013 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2013 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 1992 framework based assessment hps management determined hps internal control financial reporting effective october 31 2013 effectiveness hps internal control financial reporting october 31 2013 audited ernst young llp hps independent registered public accounting firm stated report appears page 78 annual report form 10k margaret c whitman margaret c whitman president chief executive officer december 27 2013 catherine lesjak catherine lesjak executive vice president chief financial officer december 27 2013 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company hp subsidiaries affiliates hp controlling financial interest primary beneficiary hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp presents noncontrolling interests separate component within total stockholders equity consolidated balance sheets net earnings attributable noncontrolling interests eliminated within interest net consolidated statements earnings presented separately material period presented hp eliminated significant intercompany accounts transactions reclassifications segment reorganization hp made certain segment business unit realignments order optimize operating structure reclassifications certain prioryear segment business unit financial information made conform currentyear presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share see note 18 discussion hps segment reorganization use estimates preparation financial statements accordance us generally accepted accounting principles gaap requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition hp derives net revenue primarily sale products services following revenue recognition policies define manner hp accounts sales transactions hp recognizes revenue persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time delivery channel partners economic substance apart hp completed obligations related sale hp generally recognizes revenue standalone software sales channel partners upon receiving evidence software sold specific end user sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence vsoe selling price available third party evidence tpe vsoe selling price available estimated selling price esp neither vsoe selling price tpe available hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority hp establishes tpe selling price hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers hp establishes esp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles arrangements multiple elements hp determines allocation transaction price inception arrangement based relative selling price unit accounting multiple element arrangements morethanincidental software deliverables included hp allocates transaction price individual units accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based selling price hierarchy arrangement contains one software deliverable transaction price allocated group software deliverables allocated component software deliverable hp limits amount revenue recognized delivered elements amount contingent future delivery products services future performance obligations subject customerspecified return refund privileges hp evaluates deliverable arrangement determine whether represents separate unit accounting deliverable constitutes separate unit accounting standalone value customernegotiated refund return rights contingencies present delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially within hps control delivered element constitutes separate unit accounting instances aforementioned criteria met deliverable combined undelivered elements allocation arrangement consideration method revenue recognition determined combined unit single unit accounting hp records estimated reductions revenue customer distributor programs incentive offerings including price protection promotions volumebased incentives expected returns future market conditions product transitions may require hp take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally certain incentive programs require hp estimate based historical experience specific terms conditions incentive number customers actually redeem incentive instances revenue derived sales thirdparty vendor services hp records revenue gross basis hp principal transaction net costs hp acting agent customer vendor hp considers several factors determine whether principal agent notably whether hp primary obligor customer established pricing inventory credit risks hp reports revenue net required taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued products revenue hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue software hp recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria met termbased software license revenue generally recognized ratably term license hp uses residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied hp recognizes revenue generated maintenance unspecified upgrades updates whenandifavailable basis ratably period items delivered hp recognizes revenue software hosting softwareasaservice saas arrangements service delivered generally straightline basis contractual period performance software hosting arrangements licenses sold hp recognizes associated software revenue according whether perpetual licenses term licenses sold subject guidance software hosting arrangements hp considers rights provided customer eg ownership license contract termination provisions feasibility customer operate software determining account software license fees saas arrangements software licenses sold hp recognizes entire arrangement ratably term subscription arrangement services revenue hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue services rendered costs incurred hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date compared estimated total contract labor costs hp recognizes revenue certain design build projects design develop construct software systems using percentageofcompletion method hp uses costtocost method measurement towards completion determined percentage cost incurred date compared total estimated costs project estimates project costs fixedprice contracts regularly revised life contract hp records revisions cost estimates overall contract losses applicable period facts give rise hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued changes become known hp uses completed contract method reasonable reliable cost estimates project cannot made hp generally recognizes outsourcing services revenue service provided amount earned contingent upon future event service provided evenly contract term service billings uneven hp generally recognizes revenue straightline basis contract term losses outsourcing arrangements recognized period contractual losses become probable estimable hp recognizes revenue operating leases straightline basis service revenue rental period hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced services contracts trade receivables financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term deferred revenue deferred costs deferred revenue represents amounts received advance product support contracts software customer support contracts outsourcing startup services work consulting integration projects product sales leasing income product support contracts include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well highavailability services complex global networked multivendor environments hp defers support service amounts time hp bills customer hp generally recognizes amounts ratably support contract term hp delivers services hp recognizes costs associated outsourcing contracts incurred unless costs relate startup phase outsourcing contract considered direct incremental contract case hp defers subsequently amortizes costs contractual services period hp amortizes deferred contract costs straightline basis remaining original term contract unless facts circumstances contract indicate shorter period appropriate based actual projected contract financial performance indicators hp analyzes recoverability deferred contract costs associated particular contract periodic basis using undiscounted estimated cash flows contract remaining term undiscounted cash flows insufficient recover longlived assets deferred contract costs deferred contract costs written based discounted cash flow model cash flow deficiency remains reducing balance deferred contract costs zero hp evaluates remaining longlived assets related contract impairment shipping handling hp includes costs related shipping handling cost sales hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 878 million fiscal 2013 10 billion fiscal 2012 12 billion fiscal 2011 software development costs hp capitalizes costs incurred acquire develop software resale subsequent software product establishing technological feasibility significant hp amortizes capitalized software development costs using greater straightline amortization method ratio current gross revenues product bear total current anticipated future gross revenues product estimated useful lives capitalized software resale generally three years less software development costs incurred subsequent product establishing technological feasibility usually significant instances hp expenses costs incurred stockbased compensation hp determines stockbased compensation expense sharebased payment awards based measurement date fair value hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience restructuring hp records restructuring charges associated managementapproved restructuring plans reorganize one hps business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determing severance accruals based existing plans historical experiences negotiated settlements foreign currency translation hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses remeasured monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statement earnings certain nonus subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive loss consolidated balance sheets hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued debt marketable equity securities debt marketable equity securities generally considered availableforsale reported fair value unrealized gains losses net applicable taxes recorded accumulated comprehensive loss consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included interest net consolidated statement earnings hp monitors investment portfolio impairment quarterly basis carrying value investment debt securities exceeds fair value decline value determined otherthantemporary decline ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss balance accumulated comprehensive loss consolidated balance sheets allowance doubtful accounts receivable hp establishes allowance doubtful accounts account receivables hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolete impaired balances derivatives hp uses derivative financial instruments primarily nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 9 full description hps derivative financial instrument activities related accounting policies property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation computed using straightline accelerated methods estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value estimated useful lives assets used solely support customer services contract generally exceed term customer contract upon retirement disposition asset cost related accumulated depreciation removed gain loss recognized consolidated statements earnings hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized internal use software costs using straightline method estimated useful lives software generally three five years business combinations hp includes results operations businesses acquired hps consolidated results prospectively respective dates acquisition hp allocates fair value purchase consideration assets acquired liabilities assumed noncontrolling interests acquired entity generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquired entity recorded goodwill primary items generate goodwill include value synergies acquired companies hp acquired assembled workforce neither qualifies recognition intangible asset acquisitionrelated expenses restructuring costs recognized separately business combination expensed incurred goodwill hp reviews goodwill impairment annually whenever events changes circumstances indicate carrying amount goodwill may recoverable hp permitted conduct qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2013 hp performed quantitative test reporting units goodwill tested impairment reporting unit level except enterprise group eg enterprise services es hps reporting units consistent reportable segments identified note 18 enterprise group includes two reporting units enterprise servers storage networking essn technology services ts es also consists two reporting units mphasis limited remainder es fiscal 2013 hp made two changes reporting units hp identified mphasis limited reporting unit apart remainder es connection integration activities combined autonomy reporting unit legacy hp software business reporting unit first step impairment test hp compares fair value reporting unit carrying amount hp estimates fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections managements estimates revenue growth rates operating margins taking consideration industry market conditions hp bases hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued discount rate used weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting units ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach 50 concluded reporting unit fair value depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach mphasis limited reporting unit hp used quoted market price active market estimate fair value order assess reasonableness estimated fair values hps reporting units hp compares aggregate reporting unit fair values hps market capitalization calculates implied control premium excess sum reporting units fair values hps market capitalization hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium believed reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could reduce estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount hp must perform second step impairment test measure amount impairment loss second step hp measures reporting units assets including unrecognized intangible assets liabilities noncontrolling interests fair value hypothetical analysis calculate implied fair value goodwill reporting unit implied fair value reporting units goodwill less carrying amount difference recorded impairment loss intangible assets longlived assets hp reviews intangible assets finite lives longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable hp assesses recoverability assets based undiscounted future cash flows expected result use asset eventual disposition asset undiscounted future cash flows less carrying amount asset impaired hp measures amount impairment loss difference carrying amount asset fair value using income approach available appropriate using market approach hp amortizes intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants cases hp amortizes hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued actuarial gains losses using corridor approach see note 15 full description plans accounting funding policies taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related net interest penalties concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate exposures contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers aggregated accounts deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 21 14 gross accounts receivable october 31 2013 2012 respectively single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances hp utilizes outsourced manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components outsourced manufacturers creating receivable balances outsourced manufacturers three largest hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued outsourced manufacturer receivable balances represented approximately 82 69 hps supplier receivables 10 billion 12 billion october 31 2013 2012 respectively hp includes supplier receivables current assets consolidated balance sheets hps credit risk associated receivables partially mitigated amounts hp owes outsourced manufacturers hp generally legal right offset payables outsourced manufacturers receivables hp reflect sale components revenue recognize profits sales related products sold hp time profit recognized reduction cost sales concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hps relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability believes probable liability incurred amount loss reasonably estimated see note 17 full description hps loss contingencies related accounting policies accounting pronouncements july 2013 financial accounting standards board fasb issued new accounting standard require presentation certain unrecognized tax benefits reductions deferred tax assets rather liabilities consolidated balance sheets net operating loss carryforward similar tax loss tax credit carryforward exists hp required adopt new standard prospective basis first quarter fiscal 2015 however early adoption permitted retrospective application hp currently evaluating timing transition method impact new standard consolidated financial statements july 2013 fasb issued guidance permit fed funds effective swap rate overnight index swap rate used us benchmark interest rate hedge accounting purposes guidance also removes restriction using different benchmark rates similar hedges guidance effective prospectively qualifying new redesignated hedging relationships entered july 17 2013 adoption guidance effect hps consolidated financial statements note 2 stockbased compensation hps stockbased compensation plans include incentive compensation plans employee stock purchase plan espp hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued stockbased compensation expense related income tax benefits stockbased compensation expense resulting tax benefits follows cash received option exercises purchases espp 03 billion fiscal 2013 07 billion fiscal 2012 09 billion fiscal 2011 benefit realized tax deduction option exercises sharebased payment awards fiscal 2013 2012 2011 13 million 57 million 220 million respectively incentive compensation plans hps incentive compensation plans include equity plans adopted 2004 amended 2013 2010 2000 1995 principal equity plans well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased restricted units prus employees meeting certain employment qualifications eligible receive stockbased awards principal equity plans hp granted certain employees restricted stock awards cashsettled awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior release restrictions awards generally vest one three years date grant period ownership restricted stock cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding however shares underlying restricted stock units included calculation diluted net earnings per share eps hp expenses fair value restricted stock awards ratably period restrictions lapse stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal fair market value hps stock option grant date determined reported sale prices hps stock market closes date majority stock options issued hp contain service vesting conditions however starting fiscal 2011 hp began granting performancecontingent stock options vest upon satisfaction service market conditions prior expiration awards hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued hps pru program provides issuance prus representing hypothetical shares hp stock pru award reflects target number shares target shares may issued award recipient adjusting performance market conditions actual number shares recipient receives determined end threeyear performance period based results achieved versus company performance goals may range 0 200 target shares granted prus granted fiscal 2013 performance goals prus granted fiscal 2012 based hps adjusted annual cash flow operations percentage revenue hps adjusted annual revenue growth performance goals prus granted prior fiscal 2012 based hps adjusted annual cash flow operations percentage revenue market condition based total shareholder return tsr relative sp 500 threeyear performance period recipients pru award generally must remain employed hp continuous basis end applicable threeyear performance period order receive shares subject award target shares subject pru awards dividend equivalent rights voting rights common stock earned issued following end applicable performance period expense awards net estimated forfeitures recorded requisite service period based number target shares expected earned achievement performance goals performance period restricted stock awards nonvested restricted stock awards october 31 2013 2012 2011 changes fiscal 2013 2012 2011 follows october 31 2013 2012 2011 330 million 508 million 526 million respectively unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expected recognize remaining weightedaverage vesting period 13 years 13 years 14 years respectively stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions granted principal equity plans hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued weightedaverage fair value assumptions used measure fair value follows 1the fair value calculation based stock options granted period 2determined using implied volatility traded options hps stock 3determined using yield us treasury zerocoupon issues 4determined using constant dividend yield expected term option 5determined using historical exercise postvesting termination patterns option activity october 31 fiscal year follows 1in connection fiscal 2011 acquisitions hp assumed options purchase approximately 6 million shares weightedaverage exercise price 14 per share aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options october 31 2013 2012 2011 aggregate intrinsic value difference hps closing stock price last trading day fiscal 2013 2012 2011 exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal 2013 2012 2011 36 million 176 million 673 million respectively total grant date fair value options vested fiscal 2013 2012 2011 64 million 104 million 95 million respectively net taxes hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued information options outstanding october 31 2013 follows october 31 2013 2012 2011 112 million 157 million 264 million respectively unrecognized pretax stockbased compensation expense related stock options hp expected recognize weightedaverage vesting period 22 years 18 years 23 years respectively performancebased restricted units pru awards granted fiscal 2012 hp estimates fair value target shares using hps closing stock price measurement date weightedaverage fair value prus follows 1reflects weightedaverage fair value second year threeyear performance period applicable prus granted fiscal 2012 estimated fair value target shares third year prus granted fiscal year 2012 determined measurement date applicable prus occur period annual performance goals approved prus expense amortized remainder applicable threeyear performance period 2reflects weightedaverage fair value first year threeyear performance period applicable prus granted fiscal 2012 pru awards granted prior fiscal 2012 hp estimates fair value target shares subject awards using monte carlo simulation model tsr modifier represents market condition weightedaverage fair values pru awards following weighted hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued average assumptions addition projections market conditions used measure weightedaverage fair values follows fiscal years ended october 31 1reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2011 weightedaverage fair value per unit zero based result montecarlo simulation model using weightedaverage assumptions measurement date 2reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2010 second year threeyear performance period applicable prus granted fiscal 2011 3reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2009 second year threeyear performance period applicable prus granted fiscal 2010 first year threeyear performance period applicable prus granted fiscal 2011 4hp uses historic volatility pru awards simulating multivariate prices companies sp 500 nonvested prus october 31 2013 2012 2011 changes fiscal 2013 2012 2011 follows 1the minimum level tsr met prus granted fiscal 2011 2010 2009 resulted cancellation target shares 2excludes target shares third year prus granted fiscal 2012 measurement date yet established measurement date related fair value excluded prus established annual performance goals approved 3excludes target shares third year prus granted fiscal 2011 second third years prus granted fiscal 2012 measurement dates yet established hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued 4excludes target shares third year prus granted fiscal 2010 second third years prus granted fiscal 2011 measurement dates yet established october 31 2013 2012 2011 3 million 17 million 82 million respectively unrecognized pretax stockbased compensation expense related prus assigned fair value hp expected recognize remaining weightedaverage vesting period 1 year 11 years 14 years respectively employee stock purchase plan hp sponsors hewlettpackard company 2011 employee stock purchase plan 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock purchases made october 31 2011 employees purchased stock 2011 espp price equal 95 fair market value purchase date criteria noncompensatory plan met stockbased compensation expense recorded connection purchases shares reserved shares available future grant shares reserved future issuance espp incentive compensation plans follows note 3 net earnings per share hp calculates basic net eps using net earnings weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock options prus hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 net earnings per share continued reconciliation numerators denominators basic diluted net eps calculations follows following fiscal years ended october 31 1net earnings loss available participating securities significant fiscal 2013 2012 2011 hp considers restricted stock provides holder nonforfeitable right receive dividends participating security 2for fiscal 2012 hp excluded calculation diluted net loss per share 10 million shares potentially issuable employee stock plans effect included would antidilutive hp excludes options exercise prices greater average market price calculation diluted net eps effect would antidilutive fiscal 2013 2012 2011 hp excluded calculation diluted net eps options purchase 51 million shares 56 million shares 25 million shares respectively addition hp also excluded calculation diluted net eps options purchase additional 1 million shares fiscal 2013 2012 2011 combined exercise price unamortized fair value excess tax benefits greater periods average market price hps stock hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts receivable net hp thirdparty financing arrangements consisting revolving shortterm financing intended facilitate working capital requirements certain customers financing arrangements one case provides partial recourse result transfer hps trade receivables risk third party transfers qualify sales accounting treatment trade receivables derecognized consolidated balance sheets upon transfer hp receives payment trade receivables third party within mutually agreed upon time period arrangement involving element recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets recourse obligations october 31 2013 october 31 2012 material fiscal 2013 2012 trade receivables sold facilities 49 billion 43 billion respectively amount trade receivables sold approximates amount cash received resulting costs associated sales trade accounts receivable year ended october 31 2013 2012 material maximum program capacity available program capacity arrangements follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued inventory current assets property plant equipment depreciation expense 32 billion 33 billion 34 billion fiscal 2013 2012 2011 respectively twelve months ended october 31 2013 change gross property plant equipment due primarily investments 32 billion partially offset sales retirements totaling 30 billion accumulated depreciation associated assets sold retired 25 billion hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued longterm financing receivables assets accrued liabilities note 5 acquisitions fiscal 2013 mphasis limited majorityowned subsidiary hp acquired digital risk llc 174 million hp recorded 112 million goodwill related acquisition es segment acquisitions prior years fiscal 2011 hp completed four acquisitions total fair value purchase consideration acquisitions 114 billion includes cash paid outstanding common stock convertible bonds vestedinthemoney stock awards estimated fair value earned unvested stock awards assumed connection acquisitions hp recorded approximately 69 billion goodwill 47 billion intangibles assumed 206 million net liabilities hps largest acquisition fiscal 2011 acquisition autonomy total fair value purchase consideration 110 billion hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 goodwill intangible assets goodwill allocated hps reportable segments october 31 2013 2012 changes carrying amount goodwill fiscal years ended october 31 2013 2012 follows 1goodwill october 31 2011 net accumulated impairment losses 813 million related corporate investments segment 2goodwill october 31 2013 october 31 2012 net accumulated impairment losses 14518 million amount 7961 million relates es 5744 million relates software remaining 813 million relates corporate investments 3goodwill october 31 2013 includes 9280 million 7800 million related ts reporting unit essn reporting unit respectively 4all goodwill october 31 2013 relates mphasis reporting unit first quarter fiscal 2013 hp implemented certain organizational realignments result realignments hp reevaluated reportable segment structure effective first quarter fiscal 2013 created two new reportable segments eg segment es segment eliminated two reportable segments essn segment services segment eg segment consists business units within former essn segment services offerings ts business unit previously part former services segment es segment consists applications business services abs infrastructure technology outsourcing ito business units former services segment along enduser workplace support services business previously part ts result reportable hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 goodwill intangible assets continued segment changes described net goodwill balance october 31 2012 october 31 2011 includes reclassification 93 billion goodwill related movement ts business unit former services segment eg segment see note 18 full description segment realignments based results annual impairment tests hp determined impairment goodwill existed august 1 2013 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment fiscal 2012 hp determined sufficient indicators potential impairment existed require interim goodwill impairment analysis es reporting unit indicators included trading values hps stock time impairment test coupled market conditions business trends within es fair value es reporting unit based income approach decline fair value es reporting unit resulted lower projected revenue growth rates profitability levels well increase risk factor included discount rate used calculate discounted cash flows increase discount rate due implied control premium resulting trading values hp stock time impairment test resulting adjustments discount rates caused significant reduction fair value es reporting unit based step one step two analyses hp recorded 80 billion goodwill impairment charge fiscal 2012 remaining goodwill es reporting unit october 31 2012 prior completing goodwill impairment test hp tested recoverability es longlived assets goodwill concluded assets impaired also fiscal 2012 software segment included two reporting units autonomy legacy hp software business hp initiated annual goodwill impairment analysis fourth quarter fiscal 2012 concluded fair value carrying amount autonomy reporting unit fair value autonomy reporting unit based income approach decline estimated fair value autonomy reporting unit resulted lower projected revenue growth rates profitability levels well increase risk factor included discount rate used calculate discounted cash flows increase discount rate due implied control premium resulted trading values hp stock time impairment test lower projected operating results reflected changes assumptions related organic revenue growth rates market trends business mix cost structure expected deal synergies expectations anticipated shortterm longterm operating results autonomy business assumptions incorporated hps analysis believes accounting improprieties incomplete disclosures misrepresentations autonomy occurred prior autonomy acquisition respect autonomys preacquisition business related operating results addition noted estimating fair value reporting unit hp may need adjust discount rates andor assumptions order derive reasonable implied control premium comparing sum fair values hps reporting units hps market capitalization due trading values hp stock time impairment test resulting adjustments discount rate arrive appropriate control premium caused significant reduction fair value autonomy reporting unit well fair values hps reporting units hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 goodwill intangible assets continued prior conducting step one goodwill impairment test autonomy reporting unit hp first evaluated recoverability longlived assets including intangible assets indicators impairment present hp tests longlived assets goodwill recoverability comparing carrying amount asset group undiscounted cash flows hp considered lowerthanexpected revenue profitability levels sustained period time trading values hp stock downward revisions managements shortterm longterm forecast autonomy business indicators impairment autonomy longlived assets based results recoverability test hp determined carrying amount autonomy asset group exceeded undiscounted cash flows therefore recoverable hp compared fair value asset group carrying amount determined impairment loss impairment loss allocated carrying values longlived assets individual fair values based analysis hp recorded impairment charge 31 billion intangible assets resulted remaining carrying amount approximately 08 billion october 31 2012 decline fair value autonomy intangible assets attributable factors discussed fair value autonomy reporting unit decline fair value autonomy reporting unit autonomy intangibles well fair value changes assets liabilities step two goodwill impairment test resulted implied fair value goodwill substantially carrying amount goodwill autonomy reporting unit result hp recorded goodwill impairment charge 57 billion resulted 12 billion remaining carrying amount autonomy goodwill october 31 2012 goodwill impairment charge intangible assets impairment charge totaling 88 billion included impairment goodwill intangible assets line item consolidated statements earnings subsequent autonomy purchase price allocation period concluded first quarter fiscal 2012 conjunction hps annual goodwill impairment testing hp identified certain indicators impairment indicators impairment included lowerthanexpected revenue profitability levels sustained period time trading values hp stock downward revisions managements shortterm longterm forecast autonomy business hp revised multiyear forecast autonomy business timing forecast revision coincided timing hps overall forecasting process reporting units completed year fourth fiscal quarter conjunction annual goodwill impairment analysis change assumptions used revised forecast fair value estimates utilized impairment testing autonomy goodwill longlived assets incorporated insights gained owned autonomy business preceding year revised forecast reflected changes related organic revenue growth rates current market trends business mix cost structure expected deal synergies expectations anticipated shortterm longterm operating results autonomy business driven hps analysis regarding certain accounting improprieties incomplete disclosures misrepresentations autonomy occurred prior autonomy acquisition respect autonomys preacquisition business related operating results accordingly change fair values represented change accounting estimate occurred outside purchase price allocation period resulting recorded impairment charge based results annual impairment test reporting units hp concluded goodwill impairment existed august 1 2012 apart impairment charges discussed hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 goodwill intangible assets continued intangible assets hps intangible assets associated completed acquisitions following fiscal years ended october 31 composed fiscal 2013 majority decrease gross intangibles related 17 billion fully amortized intangible assets eliminated gross accumulated amounts fiscal 2012 hp recorded total intangible asset impairment charges 43 billion 31 billion related autonomy reporting unit described remaining 12 billion related change compaq branding strategy may 2012 hp approved change branding strategy personal computers resulted limited focused use compaq trade name acquired fiscal 2002 conjunction change branding strategy hp revised assumption useful life intangible asset resulted reclassification asset indefinitelived intangible finitelived intangible changes triggered impairment review compaq trade name intangible asset conducting impairment review intangible asset hp compares fair value asset carrying amount fair value asset less carrying amount difference recorded impairment loss hp estimated fair value compaq trade name calculating present value royalties saved would paid third party hp owned trade name following completion analysis hp determined fair value trade name asset less carrying amount due primarily change useful life assumption decrease expected future revenues related compaqbranded products resulting focused branding strategy result hp recorded impairment charge 12 billion third quarter fiscal 2012 included impairment goodwill intangible assets line item consolidated statements earnings hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 goodwill intangible assets continued weightedaverage useful lives intangible assets time acquisition follows estimated future amortization expense related finitelived intangible assets october 31 2013 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 restructuring summary restructuring plans hps restructuring activities summarized plan twelve months ended october 31 2013 follows october 31 2013 2012 hp included shortterm portion restructuring liability 901 million 771 million respectively accrued restructuring longterm portion 216 million 256 million respectively liabilities accompanying consolidated balance sheets timing associated cash payments dependent upon type restructuring charge extend multiyear period fiscal 2012 restructuring plan may 23 2012 hp adopted multiyear restructuring plan 2012 plan designed simplify business processes accelerate innovation deliver better results customers employees stockholders july 31 2013 hp estimated would eliminate approximately 29000 positions connection 2012 plan fiscal year 2014 portion employees exiting company part voluntary enhanced early retirement eer programs united states certain countries majority us eer program funded hp pension plan date hp estimated would recognize approximately 36 billion total costs connection 2012 plan hp also estimated number positions ultimately eliminated total expense 2012 plan could vary much 15 estimates due continued market business pressures october 31 2013 hp expects eliminate additional 15 29000 positions total approximately 34000 positions record additional 15 36 billion total costs approximately 41 billion aggregate charges hp expects record charges end hps 2014 fiscal year accounting recognition hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 restructuring continued criteria met hp expects approximately 35 billion relate workforce reductions including eer programs approximately 06 billion relate infrastructure including data center real estate consolidation items hp recorded charge approximately 12 billion fiscal 2013 relating 2012 plan 141 million related data center real estate consolidations october 31 2013 hp eliminated approximately 24600 positions severance payment made part 2012 plan cash payments associated 2012 plan expected paid fiscal 2017 fiscal 2010 acquisitions connection acquisitions palm inc palm 3com corporation 3com fiscal 2010 hps management approved initiated plans restructure operations acquired companies including severance employees contract cancellation costs vacate duplicative facilities items total combined cost plans 91 million october 31 2011 hp recorded costs plans based upon anticipated timing planned terminations facility closure costs second quarter fiscal 2013 10 million credited restructuring expense close palm 3com plans restructuring costs payments anticipated fiscal 2010 enterprise services business restructuring plan june 1 2010 hps management announced plan restructure enterprise services business included ito abs business units multiyear restructuring program included plans consolidate commercial data centers tools applications total expected cost plan approximately 803 million includes severance costs eliminate approximately 8200 positions infrastructure charges october 31 2012 8200 positions plan eliminated fiscal year ended october 31 2013 hp reversed 189 million restructuring accrual reflect updated estimate expected cash payments severance majority infrastructure charges paid fiscal 2012 remaining charges expected paid first half fiscal 2015 plan closed restructuring charges anticipated hp expects majority remaining severance plan paid fiscal 2014 fiscal 2008 hpeds restructuring plan connection acquisition electronic data systems corporation eds august 2008 hps management approved initiated restructuring plan combine align hps services businesses eliminate duplicative overhead functions consolidate vacate duplicative facilities restructuring plan expected implemented total expected cost 33 billion restructuring plan included severance costs related eliminating approximately 25000 positions october 31 2011 actions occurred associated severance costs paid infrastructure charges restructuring plan included facility closure consolidation costs associated early termination certain related contractual obligations hp recorded majority costs based anticipated execution site closure consolidation plans associated cash payments expected paid fiscal 2016 hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy valuation techniques used hp based upon observable unobservable inputs observable market inputs reflect market data obtained independent sources unobservable inputs reflect hps assumptions market participant assumptions based best information available assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices active markets similar assets liabilities quoted prices identical similar assets liabilities markets active modelbased valuation techniques significant assumptions observable market corroborated observable market data substantially full term assets liabilities level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 fair value continued following table presents hps assets liabilities measured fair value recurring basis twelve months ended october 31 2013 october 31 2012 material transfers levels within fair value hierarchy valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including net asset value models utilizing market observable inputs fair value debt instruments based quoted market prices model driven valuations using inputs primarily derived corroborated observable market data certain instances internally developed valuation models utilize assumptions cannot corroborated observable market data derivative instruments discussed note 9 hp mainly holds nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures prices active markets available identical asset liability hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices currencies hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 fair value continued fair value disclosures short longterm debt hp calculates estimated fair value debt primarily using expected present value technique based upon observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considers hps credit risk portion hps fixedrate debt obligations hedged reflected consolidated balance sheets amount equal debts carrying amount includes fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates estimated fair value hps short longterm debt approximately 227 billion october 31 2013 compared carrying value 226 billion date estimated fair value hps short longterm debt approximated carrying value 284 billion october 31 2012 measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hps financial instruments primarily accounts receivable accounts payable financial liabilities accrued liabilities carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets hps nonmarketable equity investments nonfinancial assets intangible assets goodwill property plant equipment recorded fair value impairment charge recognized fiscal year ended october 31 2012 hp recognized goodwill intangible asset impairment charge 88 billion associated autonomy reporting unit within software segment goodwill impairment charge 80 billion associated es reporting unit within services segment intangible asset impairment charge 12 billion associated compaq trade name within personal systems segment fair value hps reporting units classified level 3 fair value hierarchy due significance unobservable inputs developed using companyspecific information hp used income approach measure fair value es autonomy reporting units income approach hp calculated fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows discount rate also reflected adjustments required comparing sum fair values hps reporting units hps market capitalization discussed note 6 unobservable inputs used estimate fair value reporting units included projected revenue growth rates profitability risk factor added discount rate inputs used estimate fair value intangible assets autonomy compaq trade name largely unobservable accordingly measurements classified level 3 fair value hierarchy fair value intangible assets autonomy estimated using income approach based managements cash flow projections revenue growth rates operating margins taking consideration industry market conditions hp estimated fair value compaq trade name calculating present value royalties saved would paid third party hp owned trade name discount rates used fair hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 fair value continued value calculations autonomy intangibles compaq trade name based weighted average cost capital adjusted relevant risk associated assets unobservable inputs used valuations include projected revenue growth rates operating margins royalty rates risk factor added discount rate discount rates ranged 11 16 projected revenue growth rates ranged 61 13 61 rate reflected significant decline expected future revenues compaqbranded products fiscal 2013 fiscal 2014 due change branding strategy discussed note 6 note 9 financial instruments cash equivalents availableforsale investments cash equivalents availableforsale investments october 31 2013 october 31 2012 follows highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2013 2012 carrying value cash equivalents approximates fair value due short period time maturity interest income hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued related cash equivalents approximately 148 million fiscal 2013 155 million fiscal 2012 167 million fiscal 2011 time deposits primarily issued institutions outside united states october 31 2013 october 31 2012 estimated fair values availableforsale investments may representative actual values realized future gross unrealized loss october 31 2013 october 31 2012 due primarily decline fair value debt security 15 million 17 million respectively continuous loss position twelve months hp intend sell debt security likely hp required sell debt security prior recovery amortized cost contractual maturities shortterm longterm investments availableforsale debt securities follows equity securities privately held companies include cost basis equity method investments amounted 50 million 51 million october 31 2013 october 31 2012 respectively included longterm financing receivables assets derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts option contracts interest rate swaps total return swaps hedge certain foreign currency interest rate lesser extent equity exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp leveraged derivatives use derivative contracts speculative purposes hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivatives gross basis consolidated balance sheets fair value hp classifies cash flows derivative programs operating activities consolidated statements cash flows result use derivative instruments hp exposed risk counterparties fail meet contractual obligations mitigate counterparty credit risk hp policy entering contracts carefully selected major financial institutions based upon credit ratings factors hp maintains dollar risk limits correspond institutions credit rating factors hps established policies procedures mitigating credit risk include reviewing establishing limits credit exposure periodically reassessing hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued creditworthiness counterparties master agreements counterparties include master netting arrangements mitigation credit exposure counterparties arrangements permit hp net amounts due hp counterparty amounts due hp counterparty hp offset fair value derivative instruments fair value cash collateral receivable payable master netting arrangements mitigate credit exposure counterparties hp collateral security arrangements cover vast majority counterparty risk arrangements require hp post collateral hold collateral counterparties derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hps counterpartys credit rating falls specified credit rating either party right request full collateralization derivatives net liability position funds generally transferred within two business days due date october 31 2013 hp held 30 million collateral posted 283 million collateralized arrangements 30 million reuse counterparty cash collateral 253 million cash october 31 2012 hp held 198 million collateral posted 72 million collateralized arrangements 49 million reuse counterparty cash collateral 23 million cash hps agreements counterparties counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hps financial position october 31 2013 october 31 2012 fair value hedges hp enters fair value hedges reduce exposure debt portfolio interest rate risk hp issues longterm debt us dollars based market conditions time financing hp uses interest rate swaps mitigate market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial investing fixedrate instruments hp may enter interest rate swaps convert fixed interest payments variable interest payments would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings period change cash flow hedges hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales operating expenses intercompany loans denominated currencies us dollar hps foreign currency cash flow hedges mature generally within twelve months however certain leasing revenuerelated forward contracts intercompany loan forward contracts extend duration lease loan term five years hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued derivative instruments designated qualify cash flow hedges hp initially records effective portion gain loss derivative instrument accumulated comprehensive loss separate component stockholders equity consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item fiscal 2013 2012 significant impact results operations result discontinued cash flow hedges fiscal 2011 hp discontinue cash flow hedge probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity consolidated balance sheets derivatives designated hedging instruments consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures hp also uses total return swaps lesser extent interest rate swaps based equity fixed income indices hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair values earnings period change hp recognizes gain loss foreign currency forward contracts used hedge balance sheet exposures interest net consolidated statements earnings period remeasurement gain loss related foreign currency denominated assets liabilities hp recognizes gain loss total return swaps interest rate swaps interest net period gain loss change market value executive deferred compensation plan liability hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged instrument change fair value derivative foreign currency options forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued fair value derivative instruments consolidated balance sheets discussed note 8 hp estimates fair values derivatives primarily based pricing models using current market rates records derivatives balance sheet fair value gross notional fair value derivative financial instruments consolidated balance sheets follows 1represents face amounts contracts outstanding october 31 2013 october 31 2012 respectively 2represents offsetting swaps acquired previous business combinations designated hedging instruments effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2013 october 31 2012 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued pretax effect derivative instruments cash flow net investment hedging relationships fiscal 2013 2012 follows october 31 2013 portion hedging instruments gain loss excluded assessment effectiveness fair value cash flow net investment hedges october 31 2012 portion hedging instruments gain loss excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal 2013 2012 2011 october 31 2013 hp expects reclassify estimated net accumulated comprehensive loss approximately 177 million net taxes earnings next twelve months along earnings effects related forecasted transactions associated cash flow hedges hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 financial instruments continued pretax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal 2013 2012 follows note 10 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting placement hp thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components financing receivables included financing receivables net longterm financing receivables assets accompanying consolidated balance sheets follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financing receivables operating leases continued october 31 2013 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 credit quality indicators due homogenous nature leasing transactions hp manages financing receivables aggregate basis assessing monitoring credit risk credit risk generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp evaluates credit quality obligor lease inception monitors credit quality term transaction hp assigns risk ratings lease based creditworthiness obligor variables augment mitigate inherent credit risk particular transaction variables include underlying value liquidity collateral essential use equipment term lease inclusion guarantees letters credit security deposits credit enhancements credit risk profile gross financing receivables based internally assigned ratings follows accounts rated low risk typically equivalent standard poors rating bbb higher accounts rated moderate risk generally equivalent bb lower hp classifies accounts high risk considers financing receivable impaired management believes nearterm risk impairment allowance doubtful accounts financing receivables allowance doubtful accounts comprised general reserve specific reserve hp maintains general reserve percentages regional basis bases percentages several factors including consideration historical credit losses portfolio delinquencies trends overall weightedaverage risk rating portfolio current economic conditions information derived competitive benchmarking hp excludes accounts evaluated part specific reserve general reserve analysis hp establishes specific reserve leases identified exposures customer defaults bankruptcy events make unlikely hp recover investment lease individually evaluated receivables hp determines expected cash flow hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financing receivables operating leases continued receivable includes consideration estimated proceeds disposition collateral calculates estimate potential loss probability loss accounts loss probable hp records specific reserve hp generally records writeoff specific reserve account reaches 180 days past due sooner hp determines account collectible allowance doubtful accounts financing receivables follows allowance related gross financing receivables collectively individually evaluated loss follows nonaccrual pastdue financing receivables hp considers financing receivable past due minimum payment received contractually specified due date hp generally places financing receivables nonaccrual status suspension interest accrual considers receivables nonperforming earlier time full payment principal interest becomes doubtful receivable becomes contractually 90 days past due subsequently hp may recognize revenue nonaccrual financing receivables payments received ie cash basis hp deems recorded financing receivable fully collectible however doubt regarding ultimate collectability recorded financing receivable hp applies cash receipts reduce carrying amount financing receivable ie cost recovery method certain circumstances hp deems delinquency administrative nature financing receivables may accrue interest reach 90 days past due nonaccrual status financing receivable may impact customers risk rating customers delinquent principal interest balances settled hp may return related financing receivable accrual status hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financing receivables operating leases continued following table summarizes aging nonaccrual status gross financing receivables 1includes billed operating lease receivables billed salestype directfinancing lease receivables 2includes billed operating lease receivables billed unbilled salestype directfinancing lease receivables operating leases operating lease assets included machinery equipment follows october 31 2013 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 note 11 guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 guarantees continued triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote hp entered service contracts certain clients supported financing arrangements service contract terminated result hps nonperformance contract failure comply terms financing arrangement hp could certain circumstances required acquire certain assets related service contract hp believes likelihood required acquire material amount assets arrangements remote indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors claims intellectual property infringement made third parties arising vendors use hps software products certain matters indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hps baseline experience affect estimated warranty obligation changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 1commercial paper includes 327 million 365 million notes payable banks lines credit includes 368 million 465 million october 31 2013 october 31 2012 respectively borrowing funding related activity associated hp financial services hpfs subsidiaries hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued longterm debt longterm debt follows following fiscal years ended october 31 1other including capital lease obligations includes 244 million 225 million october 31 2013 october 31 2012 respectively borrowing funding related activity associated hpfs subsidiaries disclosed note 9 hp uses interest rate swaps mitigate interest rate risk connection certain fixedrate global notes order achieve primarily us dollar liborbased floating interest expense interest rates table adjusted reflect impact interest rate swaps hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued hp may redeem fixedrate us dollar global notes set forth table time accordance terms thereof us dollar global notes senior unsecured debt may 2012 hp filed shelf registration statement 2012 shelf registration statement securities exchange commission sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants 2012 shelf registration statement replaced registration statement filed may 2009 hps board directors authorized issuance 160 billion aggregate principal amount commercial paper hp hps subsidiaries authorized issue additional 10 billion aggregate principal amount commercial paper hp maintains two commercial paper programs wholly owned subsidiary maintains third program hps us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 160 billion hps euro commercial paper program established september 2012 provides issuance commercial paper outside united states denominated us dollars euros british pounds maximum aggregate principal amount 30 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 160 billion authorized hps board directors hp subsidiarys euro commercial papercertificate deposit programme provides issuance commercial paper various currencies maximum aggregate principal amount 500 million hp maintains senior unsecured committed credit facilities primarily support issuance commercial paper hp 30 billion fiveyear credit facility expires march 2017 45 billion fouryear credit facility expires february 2015 facilities support us commercial paper program euro commercial paper program addition fiveyear credit facility amended september 2012 permit borrowings euros british pounds amounts available euros pounds limited us dollar equivalent 22 billion 300 million respectively commitment fees interest rates terms borrowing credit facilities vary based hps external credit ratings hps ability outstanding us commercial paper balance exceeds 75 billion supported credit facilities subject number factors including liquidity conditions business performance within including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2013 october 31 2012 carrying value assets approximated carrying amount borrowings 244 million 225 million respectively october 31 2013 hp capacity issue unspecified amount additional debt securities common stock preferred stock depositary shares warrants 2012 shelf registration statement date hp also 178 billion available borrowing resources including 162 billion available capacity commercial paper programs 16 billion relating uncommitted lines credit extent hp able utilize 2012 shelf registration statement commercial paper programs sources liquidity given time subject number factors including market demand hp securities commercial paper hps financial performance hps credit ratings market conditions generally hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued aggregate future maturities longterm debt face value excluding fair value adjustment related hedged debt 147 million premium debt issuance 14 million discount debt issuance 16 million follows october 31 2013 interest expense borrowings follows note 13 taxes earnings provision taxes domestic foreign components earnings loss taxes follows following fiscal years ended october 31 provision benefit taxes earnings follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued net excess tax benefit recorded result exercise employee stock options employee stock programs fiscal 2013 deficits approximately 149 million 175 million recorded decrease stockholders equity fiscal 2013 2012 respectively excess tax benefits 128 million recorded fiscal 2011 differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 1positive numbers represent tax benefits negative numbers represent tax expense hp recorded income tax expense pretax loss jurisdictions favorable tax rates significant effective tax rate impact periods presented include china ireland netherlands puerto rico singapore hp plans reinvest earnings jurisdictions indefinitely outside united states therefore provided us taxes indefinitely reinvested earnings fiscal 2013 hp recorded 471 million net income tax charges related items unique year amounts included 214 million net increases valuation allowances 406 million tax charges adjustments uncertain tax positions settlement tax audit matters 47 million tax charges various prior period adjustments addition hp recorded 146 million tax benefits adjustments prior year foreign income tax accruals tax benefit 50 million arising retroactive research development credit resulting american taxpayer relief act 2012 signed law january 2013 fiscal 2012 hp recorded 13 billion income tax charge record valuation allowances certain us deferred tax assets related enterprise services business unique year unique items included charges 297 million various foreign valuation allowances well 26 million income tax benefits related adjustments prior year foreign income tax accruals settlement tax audit matters miscellaneous items fiscal 2011 hp recorded 325 million net income tax charges related items unique year amounts included 468 million tax charges increases foreign state valuation allowances offset 78 million income tax benefits adjustments prior year foreign income tax accruals 63 million income tax benefits uncertain tax position reserve adjustments settlement tax audit matters 2 million tax benefits associated miscellaneous prior period items hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2024 gross income tax benefits attributable actions investments estimated 827 million 042 diluted net earnings per share fiscal 2013 900 million 046 diluted net earnings per share fiscal 2012 13 billion 062 diluted net earnings per share fiscal 2011 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors uncertain tax positions reconciliation unrecognized tax benefits follows 19 billion 14 billion 11 billion hps unrecognized tax benefits october 31 2013 2012 2011 respectively would affect hps effective tax rate realized hp recognizes interest income favorable settlements income tax receivables interest expense penalties accrued unrecognized tax benefits within income tax expense october 31 2013 hp accrued 196 million interest penalties hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution us internal revenue service irs audit cycle within next 12 months however reasonably possible certain federal foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 11 billion within next 12 months hp subject income tax united states approximately 80 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits state foreign tax authorities irs conducting audit hps 2009 2010 2011 income tax returns hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agents reports rar fiscal 2001 2002 2006 2007 2008 tax years proposed irs adjustments tax years would sustained reduce benefits tax refund claims hp filed net operating loss carrybacks earlier fiscal years tax credit carryforwards subsequent years approximately 446 million hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued hp filed petitions us tax court regarding certain proposed irs adjustments regarding tax years 1999 2003 continuing contest additional adjustments proposed irs tax years us tax court ruled may 2012 hp regarding one irs adjustments hp intends appeal decision tax years hps us group subsidiaries providing enterprise services 2002 audited irs proposed adjustments resolved rars received exam years 2003 2004 2005 2006 2007 short period ended august 26 2008 proposing total tax deficiencies 320 million hp contesting certain issues irs began audit 2013 2010 income tax return hps us group subsidiaries providing enterprise services issued rar short period ended october 31 2008 period ending october 31 2009 proposing total tax deficiency 62 million hp contesting certain issues respect major foreign state tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp subject foreign tax audit concerning intercompany transaction fiscal 2009 relevant taxing authority proposed assessment approximately 680 million hp contesting proposed assessment hp believes provided adequate reserves tax deficiencies reductions tax benefits could result irs foreign state tax audit matters hp provided us federal income foreign withholding taxes 382 billion undistributed earnings nonus operations october 31 2013 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated determines advantageous business operations tax cash management reasons hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued deferred income taxes significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 current longterm deferred tax assets liabilities presented consolidated balance sheets follows following fiscal years ended october 31 october 31 2013 hp 14 billion 56 billion 308 billion federal state foreign net operating loss carryforwards respectively amounts included respective totals begin expire fiscal 2014 hp also capital loss carryforward approximately 272 million expire fiscal 2015 hp provided valuation allowance 162 million deferred tax assets related state net operating losses 104 million deferred tax assets related capital loss carryforwards 89 billion deferred tax assets related foreign net operating loss carryforwards hp expect realize hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 taxes earnings continued october 31 2012 hp 29 billion 62 billion 257 billion federal state foreign net operating loss carryforwards respectively hp capital loss carryforward approximately 286 million october 31 2012 hp provided valuation allowance 166 million deferred tax assets related federal state net operating losses 104 million deferred tax assets related capital loss carryforwards 76 billion deferred tax assets related foreign net operating loss carryforwards hp expect realize october 31 2012 october 31 2013 hp recorded deferred tax assets various tax credit carryforwards follows deferred tax asset valuation allowance valuation allowance balance october 31 2013 2012 2011 changes fiscal 2013 2012 2011 follows total valuation allowances increased 12 billion fiscal 2013 associated primarily foreign net operating losses total valuation allowances increased 11 billion fiscal 2012 associated primarily net effects increases 13 billion 317 million 669 million respectively valuation allowances certain us deferred tax assets related legal entities within enterprise services business us deferred tax assets certain foreign deferred tax assets respectively 11 billion decrease foreign valuation allowance attributable foreign currency translation note 14 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends declared 055 per common share fiscal 2013 050 per common share fiscal 2012 040 per common share fiscal 2011 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 stockholders equity continued share repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2013 hp executed share repurchases 77 million shares settled 15 billion fiscal 2012 hp executed share repurchases 67 million shares settled 16 billion fiscal 2011 hp executed share repurchases 259 million shares repurchases 262 million shares settled 101 billion included 3 million shares repurchased transactions executed fiscal 2010 settled fiscal 2011 foregoing shares repurchased settled fiscal 2013 fiscal 2012 fiscal 2011 open market repurchase transactions fiscal 2013 2012 additional authorization future share repurchases hps board directors fiscal 2011 hps board directors authorized additional 100 billion future share repurchases october 31 2013 hp remaining authorization approximately 76 billion future share repurchases taxes related comprehensive incomeloss hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 stockholders equity continued components accumulated comprehensive loss net taxes follows following fiscal years ended october 31 note 15 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan traditional defined benefit pension plan based pay years service hp company cash account pension plan cash account pension plan benefits accrued pursuant cash accumulation account formula based upon percentage pay plus interest frozen effective january 1 2008 cash account pension plan retirement plan merged 2005 certain funding investment purposes effective october 30 2009 eds us qualified pension plan also merged hp pension plan hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset retirement plan hp calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp follows following fiscal years ended october 31 postretirement benefit plans hp sponsors retiree health welfare benefit plans americas significant united states hp retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partiallysubsidized medical coverage based years service retirement former grandfathered employees digital equipment corporation also receive partiallysubsidized medical benefits servicebased hps share premium cost capped subsidized medical coverage provided hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued hp retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered programs well employees hired 2002 august 2008 eligible credits hp retirement medical savings account plan rmsa upon attaining age 45 credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association upon retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 603 million fiscal 2013 628 million fiscal 2012 626 million fiscal 2011 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation effective beginning fiscal 2011 quarterly employer matching contributions hp 401k plan set equal 100 employees contributions maximum 4 eligible compensation pension postretirement benefit expense hps net pension postretirement benefit cost credit recognized consolidated statements earnings follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued weightedaverage assumptions used calculate net benefit credit cost follows following fiscal years ended october 31 funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued weightedaverage assumptions used calculate projected benefit obligations follows fiscal years ended october 31 2013 2012 net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets october 31 2013 october 31 2012 follows following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans october 31 2013 following table summarizes net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss income recognized components net periodic benefit cost credit next fiscal year hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows settlements first quarter fiscal 2012 hp completed transfer substitutional portion japan pension obligation japanese government transfer resulted recognizing net gain 28 million comprised net settlement loss 150 million gain government subsidy 178 million government subsidy consisted elimination 344 million pension obligations transfer 166 million pension assets japanese government retirement incentive program part 2012 restructuring plan company announced voluntary enhanced early retirement program us employees participation eer program limited employees whose combined age years service equaled 65 approximately 8500 employees elected participate eer program left company dates designated company majority eer participants left company august 31 2012 others exiting august 31 2013 hp pension plan amended provide eer benefit plan electing eer participants current participants plan retirement incentive benefit calculated lump sum ranged five fourteen months pay depending years service time retirement program result retirement incentive hp recognized special termination benefit stb 833 million reflected present value additional benefits hp would distribute hp pension plan hp recorded expenses restructuring charge addition hp pension plan remeasured june 30 2012 resulted material change 2012 net periodic benefit cost funded status hp extended employees participating eer program opportunity continue health care coverage active employee contribution rates 24 months following retirement hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued addition employees grandfathered certain employersubsidized retiree medical plans hp provided 12000 employer credits rmsa items resulted additional stb expense 227 million offset net curtailment gains 37 million due primarily resulting accelerated recognition existing prior service costcredits entire stb approximately 30 million curtailment gains recognized second half fiscal 2012 hp reported net expense restructuring charge fair value plan assets table sets forth fair value plan assets october 31 2013 asset category within fair value hierarchy 1includes debt issued national state local governments agencies 2includes limited partnerships venture capital partnerships well equity buyout funds venture capital real estate similar funds invest united states internationally foreign currencies hedged 3includes fund invests private public equities primarily united states united kingdom well emerging markets across sectors fund also holds fixed income derivative instruments hedge interest rate inflation risk addition fund includes units transferable securities collective investment schemes money market funds cash deposits 4includes invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 5department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships 6includes publicly privately traded rics 7includes cash equivalents shortterm marketable securities 8includes international insured contracts derivative instruments unsettled transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued changes fair value measurements level 3 investments year ended october 31 2013 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued table sets forth fair value plan assets october 31 2012 asset category within fair value hierarchy 1includes debt issued national state local governments agencies certain us treasury debt securities aggregate 16 billion reclassified level 1 level 2 based upon analysis investments 2includes limited partnerships venture capital partnerships well equity buyout funds venture capital real estate similar funds invest united states internationally foreign currencies hedged 3includes fund invests private public equities primarily united states united kingdom well emerging markets across sectors fund also holds fixed income derivative instruments hedge interest rate inflation risk addition fund includes units transferable securities collective investment schemes money market funds cash deposits 4includes invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 5department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships 6includes publicly privately traded rics 7includes cash equivalents shortterm marketable securities 8includes international insured contracts derivative instruments unsettled transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued changes fair value measurements level 3 investments year ended october 31 2012 follows following description valuation methodologies used plan assets measured fair value changes methodologies used reporting period investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded corporate government assetbacked debt securities fair value based upon observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based upon observable quoted prices valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based net asset value nav reported asset manager adjusted management determines nav representative fair value making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager depending amount management judgment lack nearterm liquidity absence quoted market prices assets classified level 2 level 3 fair value hierarchy depending quickly hp redeem hedge fund investments extent adjustments nav hedge funds classified within either level 2 level 3 fair value hierarchy common collective trusts interest 10312 entities registered investment companies valued nav valuation assets requires judgment due absence quoted market prices assets generally classified level 2 fair value hierarchy cash equivalents includes money market funds valued based nav assets classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued plan asset allocations weightedaverage target actual asset allocations across benefit plans respective measurement dates follows investment policy hps investment strategy seek competitive rate return relative appropriate level risk depending funded status plan majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp believes appropriate relative plans liability structure return goals hp conducts periodic assetliability studies us plans order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside united states asset allocation decisions typically made independent board trustees specific plan us investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixed income securities would otherwise deployed hp reviews investment strategy provides recommended list investment managers country plan final decisions asset allocation investment managers made board trustees specific plan basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 retirement postretirement benefit plans continued real returns considers countrys specific inflation outlook hps investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees future contributions funding policy fiscal 2014 hp expects contribute approximately 617 million nonus pension plans approximately 33 million cover benefit payments us nonqualified plan participants hp expects pay approximately 109 million cover benefit claims hps postretirement benefit plans hps funding policy fund pension plans meets least minimum contribution requirements established local government funding taxing authorities estimated future benefits payable hp estimates future benefits payable retirement postretirement plans follows october 31 2013 1decrease future benefits payable due winding 2012 eer program note 16 commitments lease commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense 10 billion fiscal 2013 2012 2011 sublease rental income 30 million fiscal 2013 37 million fiscal 2012 38 million fiscal 2011 property capital lease comprised primarily equipment furniture 437 million 482 million october 31 2013 october 31 2012 respectively included property plant equipment consolidated balance sheets accumulated depreciation property capital lease 404 million 418 million october 31 2013 october 31 2012 respectively related depreciation included depreciation expense hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 commitments continued future annual lease commitments sublease rental income october 31 2013 follows unconditional purchase obligations october 31 2013 hp unconditional purchase obligations approximately 22 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally inventory items future unconditional purchase obligations october 31 2013 follows note 17 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2013 reasonably possible additional material loss incurred amount excess amounts already recognized hps financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued litigation proceedings investigations copyright levies described proceedings ongoing concluded involving hp certain european union eu member countries including litigation germany belgium austria seeking impose modify levies upon equipment multifunction devices mfds personal computers pcs printers alleging devices enable producing private copies copyrighted materials descriptions ongoing proceedings included levies generally based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted legal proceedings hp stuttgart civil court seeking impose levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 stuttgart court appeals may 11 2005 stuttgart court appeals issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law vg wort appealed decision filing claim german federal constitutional court challenging ruling printers subject levies september 21 2010 constitutional court published decision holding german federal supreme court erred referring questions interpretation german copyright law court justice european union cjeu therefore revoked german federal supreme court decision remitted matter july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive june 27 2013 cjeu issued decision responding questions german federal supreme court subsequently scheduled joint hearing matter cases relating reprographic levies printers pcs held october 31 2013 expected followed decision january 2014 september 2003 vg wort filed lawsuit fujitsu technology solutions gmbh fujitsu munich civil court munich germany seeking impose levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fujitsu december 23 2004 munich civil court held pcs subject levy fujitsu must pay €12 plus compound interest pc sold germany since march 2001 fujitsu appealed decision january 2005 munich court appeals december 15 2005 munich court appeals affirmed munich civil court decision fujitsu filed appeal german federal supreme court february 2006 october 2 2008 german federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law vg wort subsequently filed claim german federal constitutional court challenging ruling january 2011 constitutional court published decision holding german federal supreme hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued court decision inconsistent german constitution revoking german federal supreme court decision constitutional court also remitted matter german federal supreme court action july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive june 27 2013 cjeu issued decision responding questions german federal supreme court subsequently scheduled joint hearing matter cases relating reprographic levies printers held october 31 2013 expected followed decision january 2014 reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based copying speed operated normal print mode set default device november 16 2012 court issued decision holding belgium law conformity eu law number respects ordered november 2013 reprobel substantiate amounts claimed reprobel commensurate harm resulting legitimate copying reprographic exception hp subsequently appealed court decision courts appeal brussels seeking confirm belgian law conformity eu law belgian law interpreted manner consistent eu law payments hp required alternatively payments already made hp sufficient comply obligations belgian law october 23 2013 court appeal brussels stayed proceedings referred several questions cjeu relating whether belgian reprographic copyright levies system conformity eu law based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates number units impacted amounts levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed remains uncertain fair labor standards act litigation hp involved several lawsuits plaintiffs seeking unpaid overtime compensation damages based allegations various employees eds hp misclassified exempt employees fair labor standards act andor violation california labor code state laws matters include following •cunningham et al v electronic data systems corporation purported collective action filed may 10 2006 united states district court southern district new york claiming current former eds employees allegedly involved installing andor maintaining computer software hardware misclassified exempt employees another purported collective action steavens et al v electronic data systems corporation filed october 23 2007 also pending court alleging similar facts steavens case consolidated pretrial purposes cunningham hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued case december 14 2010 court granted conditional certification class consisting employees 20 legacy eds job codes consolidated cunningham steavens matter approximately 2600 current former eds employees filed consents opt litigation plaintiffs alleged separate optout classes based overtime laws states california washington massachusetts new york plaintiffs dismissed claims •salva v hewlettpackard company purported collective action filed june 15 2012 united states district court western district new york alleging certain information technology employees allegedly involved installing andor maintaining computer software hardware misclassified exempt employees fair labor standards act august 31 2012 hp filed answer plaintiffs complaint filed counterclaims two three named plaintiffs also august 31 2012 hp filed motion transfer venue united states district court eastern district texas hearing hps motion transfer venue scheduled november 21 2012 postponed court •karlbom et al v electronic data systems corporation class action filed march 16 2009 california superior court alleging facts similar cunningham steavens matters march 2010 court stayed matter stay lifted october 2012 •blake et al v hewlettpackard company purported nationwide collective action filed february 17 2011 united states district court southern district texas claiming class information technology support personnel misclassified exempt employees fair labor standards act february 10 2012 plaintiffs filed motion requesting court conditionally certify case collective action july 11 2013 court denied plaintiffs motion conditional certification entirety one optin plaintiff joined named plaintiff lawsuit time motion filed •benedict v hewlettpackard company purported collective action filed january 10 2013 united states district court northern district california alleging certain technical support employees allegedly involved installing maintaining andor supporting computer software andor hardware hp misclassified exempt employees fair labor standards act plaintiff also alleged hp violated california law among things allegedly improperly classifying employees exempt september 20 2013 plaintiffs filed motion conditional class certification state south carolina department social services contract dispute october 2012 state south carolina department social services related government agencies scdss filed proceeding south carolinas chief procurement officer cpo hewlettpackard state local enterprise services inc subsidiary hp hpsles dispute arises contract scdss hpsles design implementation maintenance child support enforcement family court case management system cfs system scdss seeks aggregate damages approximately 275 million declaration hpsles material breach contract therefore termination contract cause scdss would appropriate declaration hpsles required perform certain additional disputed work expands scope original contract november 2012 hpsles filed responsive pleadings asserting defenses seeking payment pastdue invoices totaling 12 million july 10 2013 hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued scdss terminated contract hpsles cause termination notice scdss asserted hpsles responsible future federal penalties cfs system achieves federal certification sought immediate order requiring hpsles transfer scdss work completed progress indicated intends seek suspension debarment hpsles contracting state south carolina hpsles disputing termination improper defective addition august 9 2013 hpsles filed affirmative claim within proceeding alleging scdss materially breached contract improper termination scdss primary material cause project delays september 4 2013 cpo denied scdsss motion injunctive relief seeking immediate transfer system assets scdss indicated cpo would address request following hearing merits hearing merits cpo commenced october 21 2013 expected continue early january 2014 india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence dri issued show cause notices hewlettpackard india sales private ltd hpi subsidiary hp seven current hp employees one former hp employee alleging hp underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp deposited approximately 16 million dri agreed post provisional bond exchange dris agreement seize hp products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hpi named individuals approximately 386 million hpi already deposited 9 million december 11 2012 hpi voluntarily deposited additional 10 million connection productsrelated show cause notice april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hpi certain named individuals approximately 17 million hpi already deposited 7 million order hpi deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hpi filed appeals commissioners orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hpi deposit additional 24 million products order hpi deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hpi filed applications customs tribunal seeking early hearing appeals well extension stay already granted final disposition appeals applications currently pending customs tribunal russia gpo fcpa investigations german public prosecutors office german ppo conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued ise gmbh germany former subsidiary hp general prosecutors office russian federation approximately €35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network german ppo issued indictment four individuals including one current two former hp employees charges including bribery breach trust tax evasion german ppo also requested hp made associated party case request granted hp would participate portion court proceedings could ultimately bear question whether hp subject potential disgorgement profits based conduct indicted current former employees us department justice sec conducting investigation russia gpo deal potential violations foreign corrupt practices act fcpa us enforcement agencies well polish central anticorruption bureau also conducting investigations potential fcpa violations employee hewlettpackard polska sp z oo indirect subsidiary hp connection certain publicsector transactions poland addition us enforcement agencies conducting investigations certain publicsector transactions russia poland commonwealth independent states mexico among countries hp cooperating investigating agencies addition hp advanced discussions us enforcement agencies resolve investigations fcpa person entity could subject fines civil penalties 725000 per violation equitable remedies including disgorgement profits prejudgment interest injunctive relief addition criminal penalties could range greater 25 million per violation twice gross pecuniary gain loss violation ect proceedings january 2011 postal service brazil empresa brasileira de correios e telégrafos ect notified hp subsidiary brazil hp brazil initiated administrative proceedings consider whether suspend hp brazils right bid contract ect related alleged improprieties bidding contracting processes whereby employees hp brazil employees several companies allegedly coordinated bids fixed results three ect contracts 2007 2008 late july 2011 ect notified hp brazil decided apply penalties hp brazil suspend hp brazils right bid contract ect five years based upon evidence august 2011 hp brazil appealed ects decision april 2013 ect rejected hp brazils appeal administrative proceedings closed penalties hp brazil remaining place parallel september 2011 hp brazil filed civil action ect seeking etcs decision revoked hp brazil also requested injunction suspending application penalties final ruling merits case court first instance issued decision merits case denied hp brazils request injunctive relief hp brazil appealed denial request injunctive relief intermediate appellate court issued preliminary ruling denying request injunctive relief reducing length sanctions five two years hp brazil appealed decision december 2011 obtained ruling staying enforcement ects sanctions final ruling merits case hp expects court first instance issue decision merits case end first six months calendar year 2014 subsequent appeal merits last several years hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued stockholder litigation described hp involved various stockholder litigation matters commenced certain current former hp executive officers andor certain current former members hp board directors plaintiffs seeking recover damages related hps allegedly inflated stock price certain compensation paid hp defendants damages andor injunctive relief •saginaw police fire pension fund v marc l andreessen et al lawsuit filed october 19 2010 united states district court northern district california alleging among things defendants breached fiduciary duties unjustly enriched consciously disregarding hps alleged violations fcpa august 15 2011 defendants filed motion dismiss lawsuit march 21 2012 court granted defendants motion dismiss court entered judgment defendants favor closed case may 29 2012 june 28 2012 plaintiff filed appeal united states court appeals ninth circuit •aj copeland v raymond j lane et al lawsuit filed march 7 2011 united states district court northern district california alleging among things defendants breached fiduciary duties wasted corporate assets connection hps alleged violations fcpa hps severance payments made mark hurd former hp chairman chief executive officer hps acquisition 3par inc lawsuit also alleges violations section 14a securities exchange act 1934 exchange act connection hps 2010 2011 proxy statements february 8 2012 defendants filed motion dismiss lawsuit october 10 2012 court granted defendants motion dismiss leave file amended complaint november 1 2012 plaintiff filed amended complaint adding unjust enrichment claim claims defendants violated section 14a exchange act breached fiduciary duties connection hps 2012 proxy statement december 13 14 17 2012 defendants moved dismiss amended complaint december 28 2012 plaintiff moved leave file third amended complaint may 6 2013 court denied motion leave amend granted motions dismiss prejudice entered judgment defendants favor may 31 2013 plaintiff filed appeal united states court appeals ninth circuit •richard gammel v hewlettpackard company et al putative securities class action filed september 13 2011 united states district court central district california alleging among things november 22 2010 august 18 2011 defendants violated sections 10b 20a exchange act concealing material information making false statements hps business model future webos operating system hps commitment developing integrating webos products including touchpad tablet pc april 11 2012 defendants filed motion dismiss lawsuit september 4 2012 court granted defendants motion dismiss gave plaintiff 30 days file amended complaint october 19 2012 plaintiff filed amended complaint asserting causes action dropping one defendants shortening period alleged violations exchange act occurred february 9 2011 august 18 2011 december 3 2012 defendants moved dismiss amended complaint may 8 2013 court granted defendants motion dismiss part denied part result courts ruling alleged class period action runs hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued june 1 2011 august 18 2011 parties commenced mediation private mediator december 3 2013 •ernesto espinoza v léo apotheker et al larry salat v léo apotheker et al consolidated lawsuits filed september 21 2011 united states district court central district california alleging among things defendants violated section 10b 20a exchange act concealing material information making false statements hps business model future webos touchpad hps pc business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched authorized hps repurchase stock august 29 2010 july 21 2011 lawsuits previously stayed pending developments gammel matter stays lifted plaintiffs filed amended consolidated complaint august 21 2013 october 28 2013 defendants filed motion stay matters •luis gonzalez v léo apotheker et al richard tyner v léo apotheker et al consolidated lawsuits filed september 29 2011 october 5 2011 respectively california superior court alleging among things defendants breached fiduciary duties wasted corporate assets unjustly enriched concealing material information making false statements hps business model future webos touchpad hps pc business authorizing hps repurchase stock august 29 2010 july 21 2011 lawsuits currently stayed pending resolution espinozasalat consolidated action federal court •cement concrete workers district council pension fund v hewlettpackard company et al putative securities class action filed august 3 2012 united states district court northern district california alleging among things november 13 2007 august 6 2010 defendants violated sections 10b 20a exchange act making statements regarding hps standards business conduct sbc false misleading mr hurd serving hps chairman chief executive officer period violating sbc concealing misbehavior manner jeopardized continued employment hp february 7 2013 defendants moved dismiss amended complaint august 9 2013 court granted defendants motion dismiss leave amend complaint september 9 2013 plaintiffs filed amended complaint september 9 2013 defendants moved dismiss complaint october 24 2013 hearing defendants motion dismiss scheduled january 23 2014 autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hps acquisition autonomy november 21 2012 representatives us department justice advised hp opened investigation relating autonomy february 6 2013 representatives uk serious fraud office advised hp hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued also opened investigation relating autonomy hp cooperating three investigating agencies litigation described hp involved various stockholder litigation relating among things november 20 2012 announcement recorded noncash charge impairment goodwill intangible assets within software segment approximately 88 billion fourth quarter 2012 fiscal year hps statements based hps findings ongoing investigation majority impairment charge related accounting improprieties misrepresentations market disclosure failures autonomy occurred prior connection hps acquisition autonomy impact improprieties failures misrepresentations expected future financial performance autonomy business long term stockholder litigation commenced among others certain current former hp executive officers certain current former members hp board directors certain advisors hp plaintiffs litigation matters seeking recover certain compensation paid hp defendants andor damages matters include following •in hp securities litigation consists two consolidated putative class actions filed november 26 30 2012 united states district court northern district california alleging among things august 19 2011 november 20 2012 defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business may 3 2013 lead plaintiff filed consolidated complaint alleging period defendants violated sections 10b 20a exchange act sec rule 10b5b concealing material information making false statements related hps acquisition autonomy certain defendants violated sec rule 10b5a c engaging scheme defraud investors july 2 2013 hp filed motion dismiss lawsuit november 26 2013 court granted part denied part hps motion dismiss allowing claims proceed hp margaret c whitman based alleged statements andor omissions made may 23 2012 court dismissed plaintiffs claims based alleged statements andor omissions made august 19 2011 may 22 2012 •in hewlettpackard shareholder derivative litigation consists seven consolidated lawsuits filed beginning november 26 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 one lawsuit alleges certain individual defendants engaged assisted insider trading thereby breached fiduciary duties unjustly enriched violated sections 25402 25403 california corporations code may 3 2013 lead plaintiff filed consolidated complaint alleging among things defendants concealed material information made false statements related hps acquisition hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued autonomy autonomys idol technology thereby violated sections 10b 20a exchange act breached fiduciary duties engaged abuse control hp corporate waste unjustly enriched litigation stayed agreement july 31 2013 july 30 2013 hp filed motion stay litigation hps board directors decides whether pursue claims asserted litigation court rules hps motion dismiss consolidated complaint hp securities litigation matter september 6 2013 court extended stay litigation january 17 2014 •in hp erisa litigation consists three consolidated putative class actions filed beginning december 6 2012 united states district court northern district california alleging among things august 18 2011 november 22 2012 defendants breached fiduciary obligations hps 401k plan participants thereby violated sections 404a1 405a employee retirement income security act 1974 amended concealing negative information regarding financial performance autonomy hps enterprise services business failing restrict participants investing hp stock august 16 2013 hp filed motion dismiss lawsuit •vincent ho v margaret c whitman et al lawsuit filed january 22 2013 california superior court alleging among things defendants breached fiduciary duties wasted corporate assets connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 april 22 2013 court stayed lawsuit pending resolution hewlettpackard shareholder derivative litigation matter federal court two additional derivative actions james gould v margaret c whitman et al leroy noel v margaret c whitman et al filed california superior court july 26 2013 august 16 2013 respectively containing substantially similar allegations seeking substantially similar relief actions stayed pending resolution hewlettpackard shareholder derivative litigation matter environmental hps operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hps products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred product takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 litigation contingencies continued sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies note 18 segment information description segments hp leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers government health education sectors hps offerings span personal computing access devices imaging printingrelated products services multivendor customer services including infrastructure technology business process outsourcing application development support services consulting integration services enterprise information technology infrastructure including enterprise server storage technology networking products solutions technology support maintenance management software information management solutions security intelligencerisk management solutions hps operations organized seven reportable business segments financial reporting purposes personal systems printing enterprise group enterprise services software hp financial services corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology reportable business segments based organizational structure information reviewed hps management evaluate business segment results personal systems segment printing segment structured beneath broader printing personal systems group pps reportable segment hp sometimes provides financial data aggregating personal systems printing segments within order provide supplementary view business hp implemented certain organizational realignments result realignments hp reevaluated reportable segment structure effective first quarter fiscal 2013 created two new reportable segments eg segment es segment eliminated two reportable segments essn segment services segment eg segment consists business units within former essn segment services offerings ts business unit previously part former services segment es segment consists abs ito business units former services segment along enduser workplace support services business previously part ts business unit also result realignments financial results personal systems commercial products support business previously reported part ts business unit hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued reported part business unit within personal systems segment financial results portion business intelligence services business continued reported part corporate investments segment following implementation prior realignment actions reported part abs business unit addition enduser workplace support business noted previously part ts business unit part es segment reported part ito business unit within segment description types products services provided business segment follows printing personal systems groups mission leverage respective strengths personal systems business printing business creating unified business customerfocused poised capitalize rapidly shifting industry trends business segments within pps described detail personal systems provides commercial personal computers pcs consumer pcs workstations thin clients tablets retail pointofsale pos systems calculators related accessories software support services commercial consumer markets hp groups commercial notebooks commercial desktops commercial tablets workstations commercial clients consumer notebooks consumer desktops consumer tablets consumer clients describing performance markets described hps global business capabilities within personal systems •commercial pcs optimized use commercial customers including enterprise smb customers connectivity reliability manageability networked environments commercial pcs include hp probook hp elitebook lines notebooks hp pro hp elite lines business desktops allinones retail pos systems hp thin clients hp elitepad tablet pcs commercial pcs also include workstations designed optimized reliably operate high performance demanding application environments including z desktop workstations z allinones z mobile workstations •consumer pcs include hp spectre hp envy hp pavilion hp chromebooks hp split series multimedia consumer notebooks consumer tablets hybrids detachable tablets desktops including touchsmart line touchenabled notebooks allinone desktops consumer pcs also use compaq slate subbrands certain product offerings printing provides consumer commercial printer hardware supplies media software services well scanning devices printing also focused imaging solutions commercial markets hp groups laserjet large format indigo printers commercial hardware inkjet printers consumer hardware describing performance markets described hps global business capabilities within printing •inkjet printing solutions delivers hps consumer smb inkjet solutions hardware supplies media webconnected hardware services includes singlefunction allinone inkjet printers ongoing initiatives programs ink office ink advantage new initiatives instant ink meant provide innovative printing solutions consumers smbs include hps officejet premium officejet pro inkjet product portfolios hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued •laserjet enterprise solutions delivers hps commercial laserjet products services solutions smb enterprise segments including laserjet printers supplies toner multifunction devices scanners webconnected hardware managed services enterprise software solutions exstream software web jetadmin hp managed services include managed service products support solutions delivered smb enterprise customers partnering thirdparty software providers offer workflow solutions •graphics solutions offers large format printing designjet scitex supplies indigo digital presses supplies inkjet highspeed production solutions supplies specialty printing systems graphics services •software web services delivers suite offerings including photostorage printing offerings snapfish document storage entertainment services webconnected printing pc backup related services enterprise group provides servers storage networking technology services combined hps cloud solutions enable customers manage applications across public cloud virtual private cloud private cloud traditional environments described hps business units capabilities within eg •industry standard servers offers proliant servers running primarily windows linux virtualization platforms software providers microsoft corporation vmware inc open sourced software major vendors leveraging x86 processors intel corporation advanced micro devices inc business spans range server product lines including microservers towers traditional rack densityoptimized rack blades well hyperscale solutions large distributed computing companies buy deploy nodes massive scale fiscal 2013 hp launched hp moonshot servers operate armbased intel atombased processors offer reduced cost space energy complexity compared traditional servers •business critical systems offers hp integrity servers based intel itaniumbased processor hp integrity nonstop solutions mission critical x86 proliant servers •storage offers traditional storage converged storage solutions traditional storage includes tape storage networking legacy external disk products eva xp converged storage solutions include 3par storeserv storeonce storevirtual storeall products •networking offers switches routers span data center campus branch environments deliver network management unified communications hps wireless networking offerings include wireless lan access points controllersswitches •technology services provides technology consulting support services focused cloud mobility big data provides organizations advice design implementation migration optimization hps enterprise group platforms servers storage networking converged infrastructure support services includes datacenter care foundation care proactive care lifecycle event services available form service contracts prepackaged offerings customized basis hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued enterprise services provides technology consulting outsourcing support services across infrastructure applications business process domains es divided infrastructure technology outsourcing application business services •infrastructure technology outsourcing delivers comprehensive services encompass management data centers security cloud computing workplace technology network unified communications enterprise service management •application business services helps clients develop revitalize manage applications information assets portfolio also includes intellectual propertybased industry solutions services technologies help clients better manage critical business processes services customer relationship management finance administration human resources payroll document processing software provides management big data security solutions businesses enterprises sizes hps management solutions help customers deliver applications services perform defined standards automate assure underlying infrastructure traditional cloud hybrid hps big data solutions include hp big data platform together autonomy vertica products designed help customers structured unstructured information hps security solutions provide security infrastructure applications information hps software offerings include licenses support professional services saas hp financial services acts strategic enabler hp providing financing customers purchase complete solutions including hardware software services hp hpfs offers financial solutions customers manage lowest total cost ownershipfrom planning acquiring technology way replacing retiring hpfs offers leasing financing utility programs asset management services large enterprise customers hpfs also helps customers manage risks dealing older surplus equipment helps provide full life cycle coverage hpfs customers corporate investments includes hp labs webos business certain business incubation projects segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include restructuring charges amortization intangible assets impairment goodwill intangible assets certain stockbased compensation expense acquisitionrelated charges well certain corporate governance costs segment revenue includes revenues sales external customers intersegment revenues reflect transactions segments carried armslength transfer price intersegment revenues primarily consist sales hardware software sourced internally majority cases classified operating leases within hpfs hps consolidated net hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued revenue derived reported elimination intersegment revenues arrangements accordance us gaap provide improved visibility comparability hp reflected 2013 changes effective first quarter fiscal 2013 reporting structure prior financial reporting periods asif basis resulted transfer revenue operating profit among personal systems eg es corporate investments segments changes impact previously reported financial results printing software hpfs segments addition none changes impacted hps previously reported consolidated net revenue earnings operations net earnings net earnings per share selected operating results information business segment follows following fiscal years ended october 31 1includes results autonomy date acquisition october 2011 2includes impact decision wind webos device business quarter ended october 31 2011 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued reconciliation segment operating results hp consolidated results follows fiscal years ended october 31 hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets follows october 31 assets allocated personal systems segment fiscal 2012 decreased compared fiscal 2011 result impairment charge impacting compaq trade name described note 6 assets allocated es segment decreased fiscal 2012 due primarily goodwill impairment charge described note 6 addition assets allocated software segment decreased fiscal 2012 due primarily intangible asset goodwill impairment charges related autonomy reporting unit described note 6 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location fiscal years ended october 31 2013 2012 2011 united states country represented 10 hps total consolidated net revenue hp reports revenue net sales taxes use taxes valueadded taxes directly imposed governmental authorities hps revenue producing transactions customers october 31 2013 2012 united states cayman islands ireland 10 hps consolidated net assets october 31 2011 united states netherlands 10 hps consolidated net assets net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 segment information continued net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 1includes results autonomy date acquisition october 2011 2includes impact decision wind webos device business quarter ended october 31 2011 hewlettpackard company subsidiaries quarterly summary unaudited millions except per share amounts 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2014 2013 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2014 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2014 2013 consolidated results operations cash flows three years period ended october 31 2014 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states hewlettpackard companys internal control financial reporting october 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated december 17 2014 expressed unqualified opinion thereon ernst young llp san jose california december 17 2014 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2014 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2014 2013 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2014 report dated december 17 2014 expressed unqualified opinion thereon ernst young llp san jose california december 17 2014 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2014 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 1992 framework based assessment hps management determined hps internal control financial reporting effective october 31 2014 effectiveness hps internal control financial reporting october 31 2014 audited ernst young llp hps independent registered public accounting firm stated report appears page 82 annual report form 10k margaret c whitman margaret c whitman chairman president chief executive officer december 17 2014 catherine lesjak catherine lesjak executive vice president chief financial officer december 17 2014 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company hp subsidiaries affiliates hp controlling financial interest primary beneficiary hp accounts investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp presents noncontrolling interests separate component within total stockholders equity consolidated balance sheets net earnings attributable noncontrolling interests eliminated within interest net consolidated statements earnings presented separately material period presented hp eliminated intercompany accounts transactions reclassifications hp made certain segment business unit realignments order optimize operating structure reclassifications certain prioryear segment business unit financial information made conform currentyear presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share eps see note 2 discussion hps segment reorganization use estimates preparation financial statements accordance united states us generally accepted accounting principles gaap requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates foreign currency translation hp predominately uses us dollar functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses denominated nonus dollars recorded us dollars monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statements earnings certain nonus subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet date translation adjustments includes component accumulated comprehensive loss consolidated balance sheets accounting pronouncements may 2014 financial accounting standards board fasb amended existing accounting standards revenue recognition amendments based principle revenue recognized depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services hp required adopt amendments first quarter fiscal 2018 early adoption hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued permitted amendments may applied retrospectively prior period presented retrospectively cumulative effect recognized date initial application hp currently evaluating impact amendments transition alternatives consolidated financial statements april 2014 fasb issued guidance changes criteria identifying discontinued operation guidance limits definition discontinued operation disposal component group components disposed classified held sale represents strategic shift major effect entitys operations financial results hp required adopt guidance first quarter fiscal 2016 early adoption permitted transactions reported financial statements previously issued july 2013 fasb issued new accounting standard requiring presentation certain unrecognized tax benefits reductions deferred tax assets rather liabilities consolidated balance sheets net operating loss carryforward similar tax loss tax credit carryforward exists hp required adopt new standard prospective basis first quarter fiscal 2015 however early adoption permitted retrospective application hp adopt new standard first fiscal quarter 2015 prospective basis adoption new standard expected material effect hps consolidated financial statements revenue recognition general hp recognizes revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time delivery channel partners economic substance apart hp completed obligations related sale hp generally recognizes revenue standalone software sales channel partners receipt evidence software sold specific end user hp limits amount revenue recognized delivered elements amount contingent future delivery products services future performance obligations subject customerspecified refund return rights hp reduces revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns future market conditions product transitions may require hp take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs hp estimates number customers expected redeem incentive based historical experience specific terms conditions incentive instances revenue derived sales thirdparty vendor products services hp records revenue gross basis hp principal transaction net basis hp acting agent customer vendor hp considers several factors determine whether acting principal agent notably whether hp primary obligor customer established pricing inventory credit risks hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp reports revenue net taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority multiple element arrangements sales arrangement contains multiple elements deliverables hardware software products andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence vsoe selling price available third party evidence tpe vsoe selling price available estimated selling price esp neither vsoe selling price tpe available hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority hp establishes tpe selling price evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers hp establishes esp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies technology life cycles arrangements multiple elements hp allocates transaction price individual units accounting inception arrangement based relative selling price multiple element arrangements include software morethanincidental hp allocates transaction price individual units accounting nonsoftware deliverables software deliverables group using relative selling price deliverables arrangement based selling price hierarchy arrangement contains one software deliverable transaction price allocated group software deliverables allocated component software deliverable hp evaluates deliverable arrangement determine whether represents separate unit accounting deliverable constitutes separate unit accounting standalone value customer elements standalone value hp recognizes revenue consistent pattern associated deliverables arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within hps control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price elements may impact timing revenue recognition contract change total revenue recognized contract product revenue hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations customer remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued estimated cost postsale obligations including standard product warranties based historical experience time hp recognizes revenue software hp recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria satisfied termbased software license revenue generally recognized ratably term license hp uses residual method allocate revenue software licenses inception arrangement vsoe fair value undelivered elements postcontract support exists revenue recognition criteria satisfied hp recognizes revenue maintenance unspecified upgrades updates provided whenandifavailable basis ratably period items delivered hp recognizes revenue hosting softwareasaservice saas arrangements service delivered generally straightline basis contractual period performance hosting arrangements software licenses sold hp recognizes license revenue according whether perpetual term licenses sold revenue recognition criteria satisfied hosting arrangements include software licenses hp considers rights provided customer eg ownership license contract termination provisions feasibility customer operate software determining recognize revenue licenses services revenue hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue services rendered recognizes costs incurred hp recognizes revenue certain fixedprice contracts consulting arrangements work progresses contract period proportional performance basis determined percentage labor costs incurred date compared total estimated contract labor costs contract hp recognizes revenue fixedprice contracts design build projects design develop construct software systems using percentageofcompletion method hp uses costtocost method measure progress toward completion determined percentage cost incurred date compared total estimated costs project estimates total project costs fixedprice contracts regularly revised life contract provisions estimated losses fixedpriced contracts recognized period losses become known reasonable reliable cost estimates project cannot made hp uses completed contract method recognizes revenue costs upon service completion hp generally recognizes outsourcing services revenue period service provided amount earned contingent occurrence future event hp recognizes revenue using objective measure output unitpriced contracts revenue fixedprice outsourcing contracts periodic billings recognized straightline basis service provided evenly contract term provisions estimated losses outsourcing arrangements recognized period losses become probable estimable hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp recognizes revenue operating leases straightline basis service revenue rental period financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term deferred revenue deferred costs hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria satisfied hp records revenue earned recognized excess amounts invoiced services contracts trade receivables deferred revenue represents amounts invoiced advance product support contracts software customer support contracts outsourcing startup services work consulting integration projects product sales leasing income hp recognizes costs associated outsourcing contracts incurred unless costs considered direct incremental startup phase contract case hp defers costs startup phase subsequently amortizes costs period outsourcing services provided services commence hp amortizes deferred contract costs straightline basis remaining term contract unless facts circumstances contract indicate shorter period appropriate based actual projected contract financial performance indicators hp analyzes recoverability deferred contract costs using undiscounted estimated cash flows contract remaining term undiscounted cash flows insufficient recover carrying amount deferred contract costs longlived assets directly associated contract deferred contract costs first impaired cash flow deficiency remains reducing carrying amount deferred contract costs zero hp evaluates remaining longlived assets related contract impairment shipping handling hp includes costs related shipping handling cost sales stockbased compensation hp determines stockbased compensation expense based measurement date fair value award hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants cases hp amortizes actuarial hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued gains losses using corridor approach see note 4 full description plans accounting funding policies advertising costs produce advertising expensed incurred production costs communicate advertising expensed advertising first run costs totaled approximately 784 million fiscal 2014 878 million fiscal 2013 10 billion fiscal 2012 restructuring hp records charges associated managementapproved restructuring plans reorganize one hps business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determing severance accruals based existing plans historical experiences negotiated settlements taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related interest penalties accounts receivable hp establishes allowance doubtful accounts receivable hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filing deterioration customers operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp thirdparty revolving shortterm financing arrangements intended facilitate working capital requirements certain customers financing arrangements certain cases provide partial recourse result transfer hps trade receivables third party hp reflects amounts transferred yet collected third party accounts receivable consolidated balance sheets arrangements involving element recourse fair value recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets concentrations risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments receivables trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographic regions hps policy designed limit exposure particular institution part risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate exposures contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers aggregated business deteriorates substantially hps operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 20 21 gross accounts receivable october 31 2014 2013 respectively single customer accounts 10 gross accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographic regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers may require collateral letters credit bank guarantees certain circumstances hp utilizes outsourced manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components outsourced manufacturers thereby creating receivable balances outsourced manufacturers three largest outsourced manufacturer receivable balances collectively represented 90 82 hps supplier receivables 10 billion 10 billion october 31 2014 2013 respectively hp includes supplier receivables current assets consolidated balance sheets gross basis hps credit risk associated receivables mitigated wholly part amount hp owes outsourced manufacturers hp generally legal right offset payables outsourced manufacturers receivables hp reflect sale components revenue recognize profit component sales related products sold hp time profit recognized reduction cost sales hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hps relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolete impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation expense recognized straightline basis estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value estimated useful lives assets used solely support customer services contract generally exceed term customer contract retirement disposition asset cost related accumulated depreciation removed consolidated balance sheets gain loss recognized consolidated statements earnings hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized internal use software costs using straightline method estimated useful lives software generally three five years software development costs hp capitalizes costs incurred acquire develop software resale subsequent establishing technological feasibility software significant hp amortizes capitalized software development costs using greater straightline amortization method ratio current gross revenues product bear total current anticipated future gross revenues product estimated useful life capitalized software resale generally three years less software development costs incurred subsequent establishing technological feasibility generally significant hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued business combinations hp includes results operations acquired businesses hps consolidated results prospectively date acquisition hp allocates fair value purchase consideration assets acquired liabilities assumed noncontrolling interests acquired entity generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquired entity recorded goodwill primary items generate goodwill include value synergies acquired company hp value acquired assembled workforce neither qualifies recognition intangible asset acquisitionrelated expenses postacquisition restructuring costs recognized separately business combination expensed incurred goodwill hp reviews goodwill impairment annually whenever events changes circumstances indicate carrying amount goodwill may recoverable hp permitted conduct qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2014 hp performed quantitative test reporting units goodwill tested impairment reporting unit level beginning first quarter fiscal 2014 hp made change reporting units connection continued operational synergies interdependencies enterprise servers storage networking reporting unit technology services ts reporting unit within enterprise group eg segment hp combined reporting units create eg reporting unit october 31 2014 hps reporting units consistent reportable segments identified note 2 except enterprise services es consists two reporting units mphasis limited remainder es first step impairment test hp compares fair value reporting unit carrying amount hp estimates fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections managements estimates revenue growth rates operating margins taking consideration industry market conditions hp bases discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting units ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach mphasis limited reporting unit hp utilized quoted market price active market estimate fair value order assess reasonableness estimated fair value hps reporting units hp compares aggregate reporting unit fair value hps market capitalization calculates implied control premium excess sum reporting units fair value hps market hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued capitalization hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium believed reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount hp performs second step goodwill impairment test measure amount impairment loss second step hp measures reporting units assets including unrecognized intangible assets liabilities noncontrolling interests fair value hypothetical analysis calculate implied fair value goodwill reporting unit manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying amount difference recorded impairment loss intangible assets longlived assets hp reviews intangible assets finite lives longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable hp assesses recoverability assets based estimated undiscounted future cash flows expected result use eventual disposition asset undiscounted future cash flows less carrying amount asset impaired hp measures amount impairment loss difference carrying amount asset fair value using income approach available appropriate using market approach hp amortizes intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years debt marketable equity securities investments debt marketable equity securities generally considered availableforsale reported fair value unrealized gains losses net applicable taxes accumulated comprehensive loss consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included interest net consolidated statements earnings hp monitors investment portfolio potential impairment quarterly basis carrying amount investment debt securities exceeds fair value decline value determined otherthantemporary ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss balance recorded accumulated comprehensive loss consolidated balance sheets derivatives hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued use derivative financial instruments speculative purposes see note 11 full description hps derivative financial instrument activities related accounting policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability contingencies believes probable liability incurred amount loss reasonably estimated see note 15 full description hps loss contingencies related accounting policies note 2 segment information hp leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers government health education sectors hps offerings span personal computing access devices imaging printingrelated products services enterprise information technology infrastructure including enterprise server storage technology networking products solutions technology support maintenance multivendor customer services including technology consulting outsourcing support services across infrastructure applications business process domains management software application testing delivery software information management solutions big data analytics security intelligence risk management solutions hps operations organized seven segments financial reporting purposes personal systems printing eg es software hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology segments based organizational structure information reviewed hps management evaluate segment results personal systems segment printing segment structured beneath broader printing personal systems group pps reportable segment hp may provide financial data aggregating personal systems printing segments order provide supplementary view business summary description segment follows printing personal systems groups mission leverage respective strengths personal systems business printing business creating unified organization customerfocused poised capitalize rapidly shifting industry trends segments within pps described personal systems provides commercial personal computers pcs consumer pcs workstations thin clients tablets retail pointofsale systems calculators related accessories software support services commercial consumer markets hp groups commercial notebooks commercial desktops commercial tablets workstations thin clients commercial clients consumer notebooks consumer desktops consumer tablets consumer clients describing performance markets described hps global business capabilities within personal systems hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 segment information continued •commercial pcs optimized use customers including enterprise smb customers connectivity reliability manageability networked environments •consumer pcs include hp spectre hp envy hp pavilion hp chromebook hp split hp slate series multimedia consumer notebooks consumer tablets hybrids desktops printing provides consumer commercial printer hardware supplies media software services well scanning devices printing also focused imaging solutions commercial markets hp groups laserjet large format printers commercial inkjet printers commercial hardware consumer inkjet printers consumer hardware describing performance markets described hps global business capabilities within printing •laserjet enterprise solutions deliver hps laserjet enterprise products services solutions smb enterprise segments managed print services provides printing equipment supplies support workflow optimization security services smb enterprise customers around world utilizing proprietary hp tools fleet management solutions well thirdparty software •inkjet printing solutions deliver hps consumer smb inkjet solutions hardware supplies media webconnected hardware services ongoing initiatives programs ink office ink advantage newer initiatives instant ink provide innovative printing solutions consumers smbs •graphics solutions delivers large format printers designjet large format production scitex industrial specialty printing digital press solutions indigo inkjet webpress supplies services print service providers design rendering customers •software web services delivers suite offerings including photostorage printing offerings snapfish document storage entertainment services webconnected printing pc backup related services enterprise group provides servers storage networking technology services combined hps cloud solutions enable customers manage applications across public cloud virtual private cloud private cloud traditional environments described hps business units capabilities within eg •industry standard servers offers range products entrylevel servers premium proliant servers run primarily windows linux virtualization platforms software providers microsoft vmware open sourced software major vendors leveraging x86 processors intel amd •business critical systems offers hp integrity servers based intel® itanium® processor hp integrity nonstop solutions missioncritical x86 proliant servers •storage offers traditional storage converged storage solutions traditional storage includes tape storage networking legacy external disk products eva xp converged storage solutions include 3par storeserv storeonce storevirtual products •networking offers switches routers wireless local area network management products span data center campus branch environments deliver softwaredefined networking unified communications capabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 segment information continued •technology services provides support services technology consulting optimizing egs hardware platforms focuses cloud mobility big data services available form service contracts prepackaged offerings customized basis enterprise services provides technology consulting outsourcing support services across infrastructure applications business process domains es comprised infrastructure technology outsourcing application business services •infrastructure technology outsourcing delivers comprehensive services encompass management data centers security cloud computing workplace technology networks unified communications enterprise service management •application business services helps clients develop revitalize manage applications information assets software provides management application testing delivery information management big data analytics security intelligence risk management solutions businesses enterprises sizes software offerings include licenses support professional services saas hp financial services provides flexible investment solutions leasing financing utility programs asset management services customers enable creation unique technology deployment models acquire complete solutions including hardware software services hp others providing flexible services capabilities support entire lifecycle hpfs partners customers globally help build investment strategies enhance business agility support business transformation hpfs offers wide selection investment solution capabilities large enterprise customers channel partners along array financial options smbs educational governmental entities corporate investments includes hp labs certain cloudrelated business incubation projects among others segment policy hp derives results business segments directly internal management reporting system accounting policies hp uses derive segment results substantially consolidated company uses management measures performance segment based several metrics including earnings operations management uses results part evaluate performance allocate resources segments segment revenue includes revenues sales external customers intersegment revenues reflect transactions segments armslength basis intersegment revenues primarily consist sales hardware software sourced internally majority cases financed operating leases hpfs hps consolidated net revenue derived reported elimination intersegment revenues arrangements hp periodically engages intercompany licensing arrangements may result advance payments subsidiaries revenues intercompany licensing arrangements deferred recognized ratably term arrangement legal entities involved transactions however payments eliminated revenues reported hp business segments disclosed note 6 fiscal 2014 hp executed multiyear intercompany licensing hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 segment information continued arrangement advanced royalty payments 104 billion received us foreign consolidated affiliate deferred intercompany royalty revenues 99 billion recognized life arrangement 2029 respective legal entities eliminated hp consolidated segment revenues financing interest consolidated statements earnings reflects interest expense debt attributable hpfs debt attributable hpfs consists intercompany equity treated debt segment reporting purposes intercompany debt borrowing fundingrelated activity associated hpfs subsidiaries hp allocate segments certain operating expenses manages corporate level unallocated costs include certain corporate governance costs stockbased compensation expense amortization intangible assets impairment goodwill intangible assets restructuring charges acquisitionrelated charges segment realignment effective beginning first quarter fiscal 2014 hp implemented certain organizational changes align segment financial reporting closely current business structure organizational changes include • transferring hp exstream business commercial hardware business unit within printing segment software segment • transferring personal systems trade warranty support business ts business unit within eg segment business unit within personal systems segment • transferring spare replacement parts business supporting personal systems printing segments ts business unit within eg segment business unit within personal systems segment commercial hardware business unit within printing segment respectively • transferring certain cloudrelated incubation activities previously reported corporate unallocated costs eliminations eg segment corporate investments segment addition hp transferred certain intrasegment eliminations es segment eg segment corporate intersegment revenue eliminations hp reflected changes segment information retrospectively earliest period presented resulted transfer revenue among printing personal systems eg es software segments transfer operating profit among printing personal systems eg software corporate investments segments changes impact previously reported financial results hpfs segment addition none changes impacted hps previously reported consolidated net revenue earnings operations net earnings net eps hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 segment information continued segment operating results reconciliation segment operating results hp consolidated results follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 segment information continued segment assets hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets follows 1hp revised presentation fiscal year ended october 31 2013 order present comparable information current year period major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue country based upon sales location predominately represents customer location fiscal years 2014 2013 2012 us country represented 10 hp net revenue net revenue country hp operates follows october 31 2014 us netherlands ireland represented 10 net assets october 31 2013 us cayman islands ireland represented 10 net assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 segment information continued net property plant equipment country hp operates follows net revenue segment business unit follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 restructuring summary restructuring plans hps restructuring activities fiscal 2014 summarized plan follows fiscal 2012 restructuring plan may 23 2012 hp adopted multiyear restructuring plan 2012 plan designed simplify business processes accelerate innovation deliver better results customers employees stockholders october 31 2013 hp estimated would eliminate approximately 34000 positions connection 2012 plan fiscal 2014 portion employees exiting company part voluntary enhanced early retirement eer programs us certain countries october 31 2013 hp estimated would recognize approximately 41 billion aggregate charges connection 2012 plan fiscal 2014 hp increased expected number positions eliminated 55000 hp continued optimize workforce reengineer business processes competitive meet objectives result october 31 2014 hp estimates recognize approximately 55 billion aggregate charges connection 2012 plan october 31 2014 hp recorded 49 billion aggregate charges 44 billion related workforce reductions 515 million related infrastructure including data center real estate consolidation items october 31 2014 hp eliminated approximately 40900 positions severance payment made part 2012 plan severance infrastructurerelated cash payments associated 2012 plan expected paid fiscal 2021 hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 restructuring continued plans restructuring plans initiated hp fiscal 2008 2010 substantially completed october 31 2014 severance infrastructurerelated cash payments associated plans expected paid fiscal 2019 note 4 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp pension plan pension plan defined benefit pension plan benefits based pay years service hp company cash account pension plan cash account pension plan benefits accrued pursuant formula based percentage pay plus interest frozen effective january 1 2008 cash account pension plan merged hp pension plan 2005 certain funding investment purposes effective october 30 2009 electronic data systems corporation eds us qualified pension plan also merged pension plan eds pension plan frozen effective january 1 2009 hp reduces benefit payable certain us employees pension plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued postretirement benefit plans hp sponsors retiree health welfare benefit plans significant us hp retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partiallysubsidized medical coverage based years service retirement former grandfathered employees digital equipment corporation also receive partiallysubsidized medical benefits servicebased hps share premium cost capped subsidized medical coverage provided hp retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered programs well employees hired 2002 august 2008 eligible credits hp retirement medical savings account plan rmsa upon attaining age 45 credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 573 million fiscal 2014 603 million fiscal 2013 628 million fiscal 2012 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation quarterly employer matching contributions hp 401k plan 100 employees contributions maximum 4 eligible compensation hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued pension postretirement benefit expense hps net pension postretirement benefit credit cost recognized consolidated statements earnings follows weightedaverage assumptions used calculate net benefit credit cost follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued funded status funded status defined benefit postretirement benefit plans follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued weightedaverage assumptions used calculate projected benefit obligations follows us defined benefit plan hp adopted new mortality rate table fiscal 2014 better reflect expected lifetimes us plan participants table used based historical demographic study plans increased projected benefit obligation approximately 870 million increase projected benefit obligation recognized part net actuarial loss included comprehensive loss amortized remaining estimated life plan participants approximately 265 years net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets follows following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued following table summarizes net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss income recognized components net periodic benefit cost credit next fiscal year defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows retirement incentive program part 2012 restructuring plan company announced voluntary enhanced early retirement program us employees participation eer program limited employees whose combined age years service equaled 65 approximately 8500 employees elected participate eer program left company dates designated company majority eer participants left company august 31 2012 others exiting august 31 2013 hp pension plan amended provide eer benefit plan electing eer participants current participants plan retirement incentive benefit calculated lump sum ranged five fourteen months pay depending years service time retirement program result retirement incentive hp recognized special termination benefit stb 833 million reflected present value additional benefits hp would distribute hp pension plan hp recorded expenses restructuring charge addition hp pension plan remeasured june 30 2012 resulted material change 2012 net periodic benefit cost funded status hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued hp extended employees participating eer program opportunity continue health care coverage active employee contribution rates 24 months following retirement addition employees grandfathered certain employersubsidized retiree medical plans hp provided 12000 employer credits rmsa items resulted additional special termination benefit stb expense 227 million offset net curtailment gains 37 million due primarily resulting accelerated recognition existing prior service benefit entire stb approximately 30 million curtailment gains recognized fiscal 2012 hp reported net expense restructuring charge consolidated statements earnings fair value plan assets table sets forth fair value plan assets asset category within fair value hierarchy 1includes debt issued national state local governments agencies 2includes limited partnerships equity buyout venture capital real estate similar funds invest us internationally foreign currencies hedged 3includes fund invests private public equities primarily us united kingdom well emerging markets across sectors fund also holds fixed income derivative instruments hedge interest rate inflation risk addition fund includes units transferable securities collective investment schemes money market funds cash deposits 4includes limited partnerships invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 5department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships 6includes publicly privately traded registered investment entities 7includes cash equivalents shortterm marketable securities 8includes international insured contracts derivative instruments unsettled transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued changes fair value measurements level 3 investments follows table sets forth fair value plan assets asset category within fair value hierarchy 1includes debt issued national state local governments agencies 2includes limited partnerships equity buyout venture capital real estate similar funds invest us internationally foreign currencies hedged hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued 3includes fund invests private public equities primarily us united kingdom well emerging markets across sectors fund also holds fixed income derivative instruments hedge interest rate inflation risk addition fund includes units transferable securities collective investment schemes money market funds cash deposits 4includes limited partnerships invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 5department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships 6includes publicly privately traded registered investment entities 7includes cash equivalents shortterm marketable securities 8includes international insured contracts derivative instruments unsettled transactions changes fair value measurements level 3 investments follows following description valuation methodologies used measure plan assets fair value changes methodologies used reporting period investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded corporate government assetbacked debt securities fair value based observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based observable quoted prices valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based net asset value nav reported asset manager adjusted cash flows necessary making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager depending amount management judgment lack nearterm liquidity absence quoted market prices assets classified level 2 level 3 fair value hierarchy depending quickly hp redeem hedge fund investments extent adjustments nav hedge funds classified either level 2 level 3 fair value hierarchy common collective trusts interests 10312 entities registered investment companies valued nav valuation assets requires judgment due hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued absence quoted market prices assets generally classified level 2 fair value hierarchy cash equivalents includes money market funds valued based nav assets including insurance group annuity contracts classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety plan asset allocations weightedaverage target actual asset allocations across benefit plans respective measurement dates follows investment policy hps investment strategy seek competitive rate return relative appropriate level risk depending funded status plan timing expected benefit payments majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp believes appropriate relative plans liability structure return goals hp conducts periodic assetliability studies us plans order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside us asset allocation decisions typically made independent board trustees specific plan us investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixed income securities would otherwise deployed hp reviews investment strategy provides recommended list investment managers country plan final decisions asset allocation investment managers made board trustees specific plan hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected real returns considers countrys specific inflation outlook hps investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees future contributions funding policy fiscal 2015 hp expects contribute approximately 686 million nonus pension plans approximately 35 million cover benefit payments us nonqualified plan participants hp expects pay approximately 47 million cover benefit claims hps postretirement benefit plans hps policy fund pension plans makes least minimum contribution required local government funding taxing authorities estimated future benefits payments october 31 2014 hp estimates future benefits payments retirement postretirement plans follows note 5 stockbased compensation hps stockbased compensation plans include incentive compensation plans employee stock purchase plan espp hewlettpackard company subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued stockbased compensation expense related income tax benefits stockbased compensation expense resulting tax benefits follows cash received option exercises purchases hewlettpackard company 2011 employee stock purchase plan 2011 espp 03 billion fiscal 2014 03 billion fiscal 2013 07 billion fiscal 2012 benefit realized tax deduction option exercises fiscal 2014 2013 2012 51 million 13 million 57 million respectively stockbased incentive compensation plans hps stockbased incentive compensation plans include equity plans adopted 2004 2000 1995 amended principal equity plans well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased awards employees meeting certain employment qualifications eligible receive stockbased awards restricted stock awards nonvested stock awards may include grants restricted stock restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior lapse restrictions awards generally vest one three years date grant vesting period ownership restricted stock cannot transferred restricted stock dividend voting rights common stock considered issued outstanding upon grant dividends paid restricted stock nonforfeitable restricted stock units forfeitable dividend equivalent rights equal dividend paid common stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding upon grant however shares underlying restricted stock units included calculation diluted net eps hp expenses fair value restricted stock awards ratably period restrictions lapse stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal closing price hps stock option grant date majority stock options issued hp contain service vesting conditions however starting fiscal 2011 hp began granting performancecontingent stock options vest satisfaction service market conditions prior expiration awards hewlettpackard company subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued restricted stock awards summary restricted stock awards activity follows total grant date fair value restricted stock awards vested fiscal 2014 2013 2012 234 million 247 million 229 million respectively net taxes october 31 2014 total unrecognized pretax stockbased compensation expense related nonvested restricted stock awards 511 million expected recognized remaining weightedaverage vesting period 14 years stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value assumptions used measure fair value follows 1the weightedaverage fair value based stock options granted period 2for awards granted fiscal 2014 expected volatility awards subject servicebased vesting estimated using implied volatility derived options traded hps common stock whereas performancecontingent awards expected volatility estimated using historical volatility hps common stock awards granted fiscal 2013 fiscal 2012 expected hewlettpackard company subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued volatility awards estimated using implied volatility derived options traded hps common stock 3the riskfree interest rate estimated based yield us treasury zerocoupon issues 4the expected dividend yield represents constant dividend yield applied duration expected term award 5for awards subject servicebased vesting expected term estimated using historical exercise postvesting termination patterns performancecontingent awards expected term represents output lattice model summary stock option activity follows aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options last trading day fiscal 2014 2013 2012 aggregate intrinsic value difference hps closing stock price last trading day fiscal year exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal 2014 2013 2012 151 million 36 million 176 million respectively total grant date fair value options vested fiscal 2014 2013 2012 53 million 64 million 104 million respectively net taxes hewlettpackard company subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued following table summarizes significant ranges outstanding exercisable stock options october 31 2014 total unrecognized pretax stockbased compensation expense related stock options 61 million expected recognized weightedaverage vesting period 20 years employee stock purchase plan hp sponsors 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock pursuant terms 2011 espp employees purchase stock 2011 espp price equal 95 hps closing stock price purchase date stockbased compensation expense recorded connection purchases criteria noncompensatory plan met shares reserved shares available future grant shares reserved future issuance stockbased incentive compensation plans 2011 espp follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 taxes earnings provision taxes domestic foreign components earnings loss taxes follows provision benefit taxes earnings follows differences us federal statutory income tax rate hps effective tax rate follows 1positive numbers represent tax benefits negative numbers represent tax expense hp recorded income tax expense pretax loss hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued jurisdictions favorable tax rates significant impact hps effective tax rate periods presented include puerto rico singapore netherlands china ireland hp plans reinvest earnings jurisdictions indefinitely outside us therefore provided us taxes indefinitely reinvested earnings fiscal 2014 hp recorded 53 million net income tax charges related items unique year fiscal 2013 hp recorded 471 million net income tax charges related items unique year amounts included 214 million net increases valuation allowances 406 million tax charges adjustments uncertain tax positions settlement tax audit matters 47 million tax charges various prior period adjustments addition hp recorded 146 million tax benefits adjustments prior year foreign income tax accruals tax benefit 50 million arising retroactive research development credit resulting american taxpayer relief act 2012 signed law january 2013 fiscal 2012 hp recorded 13 billion income tax charge record valuation allowances certain us deferred tax assets related es segment unique year unique items included charges 297 million various foreign valuation allowances well 26 million income tax benefits related adjustments prior year foreign income tax accruals settlement tax audit matters miscellaneous items result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2024 gross income tax benefits attributable actions investments estimated 12 billion 061 diluted net eps fiscal 2014 827 million 042 diluted net eps fiscal 2013 900 million 046 diluted net eps fiscal 2012 uncertain tax positions reconciliation unrecognized tax benefits follows 22 billion 19 billion 14 billion hps unrecognized tax benefits october 31 2014 2013 2012 respectively would affect hps effective tax rate realized hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued hp recognizes interest income favorable settlements interest expense penalties accrued unrecognized tax benefits provision taxes consolidated statements earnings hp accrued 254 million 196 million interest penalties october 31 2014 october 31 2013 respectively hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution us internal revenue service irs audit cycle within next 12 months however reasonably possible certain federal foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 14 billion within next 12 months hp subject income tax us approximately 105 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits federal state foreign tax authorities irs conducting audit hps 2009 2010 2011 income tax returns hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agent reports rar fiscal 2001 2002 2006 2007 2008 tax years proposed irs adjustments tax years would sustained reduce benefits tax refund claims hp filed net operating loss carrybacks earlier fiscal years tax credit carryforwards subsequent years approximately 445 million addition hp expects irs issue rar 2009 relating certain tax positions taken filed tax returns including matters related us taxation certain intercompany loans rar may material amount hp believes valid positions supporting tax returns necessary vigorously defend matters hp filed petitions us tax court regarding certain proposed irs adjustments regarding tax years 1999 2003 continuing contest additional adjustments proposed irs tax years us tax court ruled may 2012 hp regarding one irs adjustments hp filed formal notice appeal court proceedings expected begin fiscal 2015 preacquisition tax years hps us group subsidiaries providing enterprise services 2004 audited irs proposed adjustments resolved rars received tax years 2005 2006 2007 short period ended august 26 2008 proposing total tax deficiencies 274 million hp contesting certain issues irs began audit fiscal 2013 2010 income tax return hps us group subsidiaries providing enterprise services issued rar short period ended october 31 2008 period ending october 31 2009 proposing total tax deficiency 62 million hp contesting certain issues respect major foreign state tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp subject foreign tax audit concerning intercompany transaction fiscal 2009 relevant taxing authority proposed assessment approximately 680 million hp contesting proposed assessment hp believes provided adequate reserves tax deficiencies reductions tax benefits could result federal state foreign tax audits hp regularly assesses likely outcomes audits order determine appropriateness hps tax provision hp adjusts uncertain hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued tax positions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular audit however income tax audits inherently unpredictable assurance hp accurately predict outcome audits amounts ultimately paid resolution audit could materially different amounts previously included provision taxes therefore resolution one uncertainties particular period could material impact net income cash flows hp provided us federal income foreign withholding taxes 429 billion undistributed earnings nonus operations october 31 2014 hp intends reinvest earnings indefinitely outside us hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated hp determines advantageous business operations tax cash management reasons deferred income taxes significant components deferred tax assets deferred tax liabilities follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued current longterm deferred tax assets liabilities included consolidated balance sheets follows tax deficits approximately 43 million 149 million 175 million recorded result employee stock program activity exercise employee stock options decrease stockholders equity fiscal 2014 2013 2012 respectively hp periodically engages intercompany licensing arrangements may result advance payments subsidiaries different tax jurisdictions local tax treatment intercompany licensing arrangements differs us gaap treatment deferred taxes recognized fiscal 2014 hp executed multiyear intercompany licensing arrangement advanced royalty payments 104 billion received us result recognition net us longterm deferred tax assets 13 billion remaining intercompany royalty revenues 99 billion recognized life arrangement 2029 respective legal entities eliminated consolidation amortization expense related licensing rights also eliminated consolidation decrease deferred tax assets credit carryforwards increase deferred tax assets intercompany transactions excluding inventory include deferred tax attributable transaction results increase longterm deferred tax assets presented component hps longterm deferred tax liabilities due effects jurisdictional netting october 31 2014 hp 858 million 42 billion 297 billion federal state foreign net operating loss carryforwards respectively amounts included federal net operating loss carryforwards begin expire fiscal 2021 amounts included state foreign net operating loss carryforwards begin expire 2015 hp also capital loss carryforward approximately 272 million expire fiscal 2015 hp provided valuation allowance 133 million 87 billion deferred tax assets related state foreign net operating losses carryforwards respectively 104 million deferred tax assets related capital loss carryforwards hp expect realize hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued october 31 2014 hp recorded deferred tax assets various tax credit carryforwards follows deferred tax asset valuation allowance deferred tax asset valuation allowance changes follows total valuation allowances increased 525 million 12 billion fiscal 2014 2013 respectively increases associated primarily foreign net operating losses note 7 balance sheet details balance sheet details follows accounts receivable net hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued allowance doubtful accounts related accounts receivable changes follows hp thirdparty revolving shortterm financing arrangements intended facilitate working capital requirements certain customers second quarter fiscal 2014 hp expanded revolving shortterm financing arrangements adding 16 billion capacity maximum utilized available program capacity revolving shortterm financing arrangements follows 1utilized capacity represents receivables sold third parties collected customer third parties transferred trade receivables included utilized capacity hp collected third parties follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued activity related hps revolving shortterm financing arrangements follows 1beginning ending balance represents amounts trade receivables sold yet collected 2hp revised presentation trade receivables sold cash received shortterm financing arrangements fiscal years ended october 31 2013 2012 order present comparable information current year period inventory current assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued property plant equipment depreciation expense 33 billion 32 billion 33 billion fiscal 2014 2013 2012 respectively change gross property plant equipment due primarily purchases 39 billion partially offset sales retirements totaling 35 billion accumulated depreciation associated assets sold retired fiscal 2014 29 billion longterm financing receivables assets accrued liabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued liabilities note 8 financing receivables operating leases financing receivables represent salestype directfinancing leases hp thirdparty products receivables typically terms ranging two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components financing receivables follows 1hp includes current portion financing receivables amounts due one year net longterm financing receivables assets accompanying consolidated balance sheets october 31 2014 scheduled maturities hps minimum lease payments receivable follows fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued credit quality indicators due homogenous nature leasing transactions hp manages financing receivables aggregate basis assessing monitoring credit risk credit risk generally diversified due large number entities comprising hps customer base dispersion across many different industries geographic regions hp evaluates credit quality obligor lease inception monitors credit quality term transaction hp assigns risk ratings lease based creditworthiness obligor variables augment mitigate inherent credit risk particular transaction variables include underlying value liquidity collateral essential use equipment term lease inclusion credit enhancements guarantees letters credit security deposits credit risk profile gross financing receivables based internally assigned ratings follows accounts rated low risk typically equivalent standard poors rating bbb higher accounts rated moderate risk generally equivalent bb lower hp classifies accounts high risk considers financing receivable impaired management believes significant nearterm risk impairment allowance doubtful accounts allowance doubtful accounts financing receivables comprised general reserve specific reserve hp maintains general reserve percentages regional basis bases percentages several factors including consideration historical credit losses portfolio delinquencies trends overall weightedaverage risk rating portfolio current economic conditions information derived competitive benchmarking hp excludes accounts evaluated part specific reserve general reserve analysis hp establishes specific reserve financing receivables identified exposures customer defaults bankruptcy events make unlikely hp recover investment individually evaluated receivables hp determines expected cash flow receivable includes consideration estimated proceeds disposition collateral calculates estimate potential loss probability loss accounts loss considered probable hp records specific reserve hp generally writes receivable records specific reserve receivable becomes 180 days past due sooner hp determines receivable collectible hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued allowance doubtful accounts related financing receivables changes follows gross financing receivables related allowance evaluated loss follows nonaccrual pastdue financing receivables hp considers financing receivable past due minimum payment received contractually specified due date hp generally places financing receivables nonaccrual status suspension interest accrual considers receivables nonperforming earlier time full payment principal interest becomes doubtful receivable becomes 90 days past due subsequently hp may recognize revenue nonaccrual financing receivables payments received cash basis hp deems recorded financing receivable fully collectible however doubt regarding ultimate collectability recorded financing receivable cash receipts applied carrying amount financing receivable cost recovery method certain circumstances hp deems delinquency administrative nature financing receivables may accrue interest becoming 90 days past due nonaccrual status financing receivable may impact customers risk rating customers delinquent principal interest balances settled hp may return related financing receivable accrual status hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued following table summarizes aging nonaccrual status gross financing receivables 1includes billed operating lease receivables billed salestype directfinancing lease receivables 2includes billed operating lease receivables billed unbilled salestype directfinancing lease receivables operating leases operating lease assets included machinery equipment consolidated balance sheets follows october 31 2014 minimum future rentals noncancelable operating leases related leased equipment follows fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 acquisitions goodwill intangible assets acquisitions fiscal 2014 hp completed two acquisitions combined purchase price 55 million 12 million recorded goodwill 25 million recorded intangible assets related acquisitions fiscal 2013 mphasis limited majorityowned subsidiary hp acquired digital risk llc 174 million hp recorded 112 million goodwill 48 million intangible assets related acquisition goodwill allocated hps reportable segments changes carrying amount goodwill follows 1goodwill net accumulated impairment losses 145 billion amount 80 billion relates es segment 57 billion relates software remaining 08 billion relates corporate investments 2effective beginning first quarter fiscal 2014 hp implemented certain organizational changes align segment financial reporting closely current business structure result organizational realignments hp transferred 126 million goodwill related transfer printing spare replacement parts business eg segment printing segment 48 million goodwill related transfer personal systems spare replacement parts business eg segment personal systems segment 42 million goodwill related transfer personal systems trade warranty support business eg segment personal systems segment 22 million goodwill related transfer hp exstream business printing segment software segment see note 2 full description segment realignments 3goodwill relates mphasis limited reporting unit hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 acquisitions goodwill intangible assets continued goodwill tested impairment reporting unit level beginning first quarter fiscal 2014 hp made change reporting units connection continued operational synergies interdependencies enterprise servers storage networking reporting unit ts reporting unit within eg segment hp combined reporting units create eg reporting unit october 31 2014 hps reporting units consistent reportable segments identified note 2 except es includes two reporting units mphasis limited remainder es based results annual impairment tests hp determined impairment goodwill existed august 1 2014 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment goodwill impairments goodwill impairments fiscal 2014 2013 fiscal 2012 hp determined sufficient indicators potential impairment existed require interim goodwill impairment analysis es reporting unit indicators included trading values hps stock time impairment test coupled market conditions business trends within es fair value es reporting unit based income approach decline fair value es reporting unit resulted lower projected revenue growth rates profitability levels well increase risk factor included discount rate used calculate discounted cash flows increase discount rate due implied control premium resulting trading values hp stock time impairment test resulting adjustments discount rates caused significant reduction fair value es reporting unit based step one step two analyses hp recorded 80 billion goodwill impairment charge fiscal 2012 remaining goodwill es reporting unit october 31 2012 prior completing goodwill impairment test hp tested recoverability es longlived assets goodwill concluded assets impaired also fiscal 2012 software segment included two reporting units autonomy legacy hp software business hp initiated annual goodwill impairment analysis fourth quarter fiscal 2012 concluded fair value carrying amount autonomy reporting unit fair value autonomy reporting unit based income approach decline estimated fair value autonomy reporting unit resulted lower projected revenue growth rates profitability levels well increase risk factor included discount rate used calculate discounted cash flows increase discount rate due implied control premium resulted trading values hp stock time impairment test lower projected operating results reflected changes assumptions related organic revenue growth rates market trends business mix cost structure expected deal synergies expectations anticipated shortterm longterm operating results autonomy business assumptions incorporated hps analysis believes accounting improprieties incomplete disclosures misrepresentations autonomy occurred prior autonomy acquisition respect autonomys preacquisition business related operating results addition noted estimating fair value reporting unit hp may need adjust hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 acquisitions goodwill intangible assets continued discount rates andor assumptions order derive reasonable implied control premium comparing sum fair values hps reporting units hps market capitalization due trading values hp stock time impairment test resulting adjustments discount rate arrive appropriate control premium caused significant reduction fair value autonomy reporting unit well fair values hps reporting units prior conducting step one goodwill impairment test autonomy reporting unit hp first evaluated recoverability longlived assets including intangible assets indicators impairment present hp tests longlived assets goodwill recoverability comparing carrying amount asset group undiscounted cash flows hp considered lowerthanexpected revenue profitability levels sustained period time trading values hp stock downward revisions managements short longterm forecasts autonomy business indicators impairment autonomy longlived assets based results recoverability test hp determined carrying amount autonomy asset group exceeded undiscounted cash flows therefore recoverable hp compared fair value asset group carrying amount determined impairment loss impairment loss allocated carrying values longlived assets individual fair values based analysis hp recorded impairment charge 31 billion intangible assets resulted remaining carrying amount approximately 08 billion october 31 2012 decline fair value autonomy intangible assets attributable factors discussed fair value autonomy reporting unit decline fair value autonomy reporting unit autonomy intangibles well fair value changes assets liabilities step two goodwill impairment test resulted implied fair value goodwill substantially carrying amount goodwill autonomy reporting unit result hp recorded goodwill impairment charge 57 billion resulted 12 billion remaining carrying amount autonomy goodwill october 31 2012 goodwill impairment charge intangible assets impairment charge totaling 88 billion included impairment goodwill intangible assets line item consolidated statements earnings subsequent autonomy purchase price allocation period concluded first quarter fiscal 2012 conjunction hps annual goodwill impairment testing hp identified certain indicators impairment indicators impairment included lowerthanexpected revenue profitability levels sustained period time trading values hp stock downward revisions managements short longterm forecasts autonomy business hp revised multiyear forecast autonomy business timing forecast revision coincided timing hps overall forecasting process reporting units completed year fourth fiscal quarter conjunction annual goodwill impairment analysis change assumptions used revised forecast fair value estimates utilized impairment testing autonomy goodwill longlived assets incorporated insights gained owned autonomy business preceding year revised forecast reflected changes related organic revenue growth rates current market trends business mix cost structure expected deal synergies expectations anticipated short longterm operating results autonomy business driven hps analysis regarding certain accounting improprieties incomplete disclosures misrepresentations autonomy occurred prior autonomy acquisition respect autonomys preacquisition business related operating results accordingly change fair values represented change accounting estimate occurred outside purchase price allocation period resulting recorded impairment charge based results annual impairment test reporting units hp concluded goodwill impairment existed august 1 2012 apart impairment charges discussed hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 acquisitions goodwill intangible assets continued intangible assets hps intangible assets composed fiscal 2014 855 million intangible assets became fully amortized eliminated gross intangible assets accumulated amortization hp also eliminated gross intangible assets accumulated amortization related sale portfolio intellectual property ip first quarter fiscal 2014 fiscal 2013 majority decrease gross intangible assets related 17 billion fully amortized intangible assets eliminated gross accumulated amounts fiscal 2012 hp recorded total intangible asset impairment charges 43 billion 31 billion related autonomy reporting unit described remaining 12 billion related change compaq branding strategy may 2012 hp approved change branding strategy pcs resulted limited focused use compaq trade name acquired fiscal 2002 conjunction change branding strategy hp revised assumption useful life intangible asset resulted reclassification asset indefinitelived intangible finite lived intangible changes triggered impairment review compaq trade name intangible asset conducting impairment review intangible asset hp compares fair value asset carrying amount fair value asset less carrying amount difference recorded impairment loss hp estimated fair value compaq trade name calculating present value royalties saved would paid third party hp owned trade name following completion analysis hp determined fair value trade name asset less carrying amount due primarily change useful life assumption decrease expected future revenues related compaqbranded products resulting focused branding strategy result hp recorded impairment charge 12 billion third quarter fiscal 2012 included impairment goodwill intangible assets line item consolidated statements earnings hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 acquisitions goodwill intangible assets continued weightedaverage useful lives intangible assets follows october 31 2014 estimated future amortization expense related finitelived intangible assets follows note 10 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy hp uses valuation techniques based upon observable unobservable inputs observable inputs developed using market data publicly available information reflect assumptions market participants would use unobservable inputs developed using best information available assumptions market participants would use assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability marketcorroborated inputs level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 fair value continued following table presents hps assets liabilities measured fair value recurring basis year ended october 31 2014 transfers levels within fair value hierarchy valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including nav models utilizing market observable inputs fair value debt investments based quoted market prices modeldriven valuations using inputs primarily derived corroborated observable market data certain instances valuation models utilize assumptions cannot corroborated observable market data derivative instruments hp uses forward contracts interest rate total return swaps option contracts hedge certain foreign currency interest rate exposures hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices currencies interest rates see note 11 discussion hps use derivative instruments hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 fair value continued fair value disclosures short longterm debt hp estimates fair value debt primarily using expected present value technique based observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considering credit risk portion hps debt hedged reflected consolidated balance sheets amount equal debts carrying amount fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates estimated fair value hps short longterm debt 199 billion october 31 2014 compared carrying amount 195 billion date estimated fair value hps short longterm debt 227 billion october 31 2013 compared carrying amount 226 billion date measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hps financial instruments primarily accounts receivable accounts payable financial liabilities included accrued liabilities carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 2 level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets hps nonmarketable equity investments nonfinancial assets intangible assets goodwill property plant equipment recorded fair value period impairment charge recognized measured fair value consolidated balance sheets would generally classified level 3 fair value hierarchy fiscal 2012 hp recognized goodwill intangible asset impairment charge 88 billion associated autonomy reporting unit goodwill impairment charge 80 billion associated es reporting unit intangible asset impairment charge 12 billion associated compaq trade name fair value reporting units classified level 3 fair value hierarchy due significance unobservable inputs developed using companyspecific information hp used income approach measure fair value es autonomy reporting units income approach hp calculated fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows discount rate also reflected adjustments required comparing sum fair values hps reporting units hps market capitalization discussed note 9 unobservable inputs used estimate fair value reporting units included projected revenue growth rates profitability risk factor added discount rate inputs used estimate fair value intangible assets autonomy compaq trade name largely unobservable accordingly measurements classified level 3 fair value hierarchy fair value intangible assets autonomy estimated using income approach based managements cash flow projections revenue growth rates operating margins taking consideration industry market conditions hp estimated fair value compaq trade name calculating present value royalties saved would hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 fair value continued paid third party hp owned trade name discount rates used fair value calculations autonomy intangibles compaq trade name based weighted average cost capital adjusted relevant risk associated assets unobservable inputs used valuations include projected revenue growth rates operating margins royalty rates risk factor added discount rate discount rates ranged 11 16 projected revenue growth rates ranged 61 13 61 rate reflected significant decline expected future revenues compaqbranded products fiscal 2013 fiscal 2014 due change branding strategy discussed note 9 note 11 financial instruments cash equivalents availableforsale investments cash equivalents availableforsale investments follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financial instruments continued highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2014 october 31 2013 carrying amount cash equivalents approximated fair value due short period time maturity interest income related cash equivalents debt securities approximately 136 million fiscal 2014 148 million fiscal 2013 155 million fiscal 2012 time deposits primarily issued institutions outside us october 31 2014 october 31 2013 estimated fair value availableforsale investments may representative values realized future gross unrealized loss october 31 2014 october 31 2013 due primarily decline fair value debt security 14 million 15 million respectively continuous loss position twelve months hp intend sell debt security likely hp required sell debt security prior recovery amortized cost contractual maturities investments availableforsale debt securities follows equity securities privately held companies include cost basis equity method investments included longterm financing receivables assets consolidated balance sheets amounted 97 million 50 million october 31 2014 october 31 2013 respectively derivative instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts option contracts interest rate swaps total return swaps hedge certain foreign currency interest rate lesser extent equity exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair value assets liabilities hp leveraged derivatives use derivative contracts speculative purposes hp may designate derivative contracts fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivative instruments fair value consolidated balance sheets hp classifies cash flows derivative programs operating activities consolidated statements cash flows result use derivative instruments hp exposed risk counterparties fail meet contractual obligations mitigate counterparty credit risk hp policy entering derivative contracts carefully selected major financial institutions based hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financial instruments continued credit ratings factors hp maintains dollar risk limits correspond financial institutions credit rating factors hps established policies procedures mitigating credit risk include reviewing establishing limits credit exposure periodically reassessing creditworthiness counterparties master netting agreements mitigate credit exposure counterparties permitting hp net amounts due hp counterparty amounts due hp counterparty certain conditions mitigate credit exposure counterparties hp collateral security agreements allow hp hold collateral require hp post collateral counterparties aggregate derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hps counterpartys credit rating falls specified credit rating either party right request full collateralization derivatives net liability position collateral generally posted within two business days fair value derivatives credit contingent features net liability position 38 million 207 million october 31 2014 october 31 2013 respectively fully collateralized within two business days hps derivative contracts counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hps financial position cash flows october 31 2014 october 31 2013 fair value hedges hp issues longterm debt us dollars based market conditions time financing hp may enter fair value hedges interest rate swaps reduce exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar liborbased floating interest expense swap transactions generally involve principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial investing fixedrate instruments hp may enter interest rate swaps convert fixed interest payments variable interest payments may designate swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes change fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change cash flow hedges hp uses combination forward contracts option contracts designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales operating expenses intercompany loans denominated currencies us dollar hps foreign currency cash flow hedges mature generally within twelve months however hedges related longer term procurement arrangements extend several years forward contracts associated salestype directfinancing leases intercompany loans extend duration lease loan term typically range two five years hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financial instruments continued derivative instruments designated qualify cash flow hedges hp initially records changes fair value effective portion derivative instrument accumulated comprehensive loss separate component stockholders equity consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes fair value hedged item net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency hp records effective portion derivative instruments together changes fair value hedged items cumulative translation adjustment separate component stockholders equity consolidated balance sheets derivatives designated hedging instruments consist primarily forward contracts used hedge foreign currencydenominated balance sheet exposures hp also uses total return swaps lesser extent interest rate swaps based equity fixed income indices hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change hedge effectiveness interest rate swaps designated fair value hedges hp measures hedge effectiveness offsetting change fair value hedged instrument change fair value derivative foreign currency options forward contracts designated cash flow net investment hedges hp measures hedge effectiveness comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates hp recognizes ineffective portion hedge consolidated statements earnings period ineffectiveness occurs amounts excluded assessment effectiveness recognized consolidated statements earnings period arise hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financial instruments continued fair value derivative instruments consolidated balance sheets gross notional fair value derivative instruments consolidated balance sheets follows offsetting derivative instruments hp recognizes derivative instruments gross basis consolidated balance sheets hp offset fair value derivative instruments fair value cash collateral posted collateral security agreements october 31 2014 october 31 2013 hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financial instruments continued information related potential effect hps master netting agreements collateral security agreements follows 1collateral posted reuse counterparty cash collateral 1of 283 million collateral posted 30 million reuse counterparty cash collateral 253 million cash effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2014 2013 2012 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financial instruments continued pretax effect derivative instruments cash flow net investment hedging relationships fiscal years ended october 31 2014 2013 2012 follows october 31 2014 october 31 2013 portion hedging instruments gain loss excluded assessment effectiveness fair value cash flow net investment hedges october 31 2012 portion hedging instruments gain loss excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal 2014 2013 2012 october 31 2014 hp expects reclassify estimated net accumulated comprehensive gain approximately 185 million net taxes earnings next twelve months along earnings effects related forecasted transactions associated cash flow hedges pretax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal years ended october 31 2014 2013 2012 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows 1commercial paper includes 298 million 327 million notes payable banks lines credit includes 404 million 368 million october 31 2014 october 31 2013 respectively borrowing fundingrelated activity associated hpfs subsidiaries hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued longterm debt 1hp may redeem fixedrate us dollar global notes eds senior notes time accordance terms thereof us dollar global notes eds senior notes senior unsecured debt 2other including capital lease obligations includes 123 million 244 million october 31 2014 2013 respectively borrowing fundingrelated activity associated hpfs subsidiaries collateralized receivables underlying assets associated related capital operating leases periods presented carrying amount assets approximated carrying amount borrowings hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued disclosed note 11 hp uses interest rate swaps mitigate exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar liborbased floating interest expense interest rates shown table longterm debt adjusted reflect impact interest rate swaps may 2012 hp filed shelf registration statement 2012 shelf registration statement securities exchange commission sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants hps board directors authorized issuance 160 billion aggregate principal amount commercial paper hp hps subsidiaries authorized issue additional 10 billion aggregate principal amount commercial paper hp maintains two commercial paper programs whollyowned subsidiary maintains third program hps us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 160 billion hps euro commercial paper program provides issuance commercial paper outside us denominated us dollars euros british pounds maximum aggregate principal amount 30 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 160 billion authorized hps board directors hp subsidiarys euro commercial papercertificate deposit programme provides issuance commercial paper various currencies maximum aggregate principal amount 500 million hp maintains senior unsecured committed credit facilities primarily support issuance commercial paper hp 30 billion fiveyear credit facility expires march 2017 45 billion fiveyear credit facility expires april 2019 45 billion credit facility expiring april 2019 executed second quarter fiscal 2014 replaced previous 45 billion credit facility expire february 2015 facilities support us commercial paper program euro commercial paper program commitment fees interest rates terms borrowing credit facilities vary based hps external credit ratings hps ability outstanding us commercial paper balance exceeds 75 billion supported credit facilities subject number factors including liquidity conditions business performance addition 30 billion fiveyear credit facility amended september 2012 permit borrowings euros british pounds amounts available euros british pounds limited us dollar equivalent 22 billion 300 million respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 borrowings continued hps hp subsidiarys resources available obtain short longterm financing follows 1hp capacity issue unspecified amount additional debt securities common stock preferred stock depositary shares warrants 2012 shelf registration statement extent hp able utilize 2012 shelf registration statement commercial paper programs sources liquidity given time subject number factors including market demand hp securities commercial paper hps financial performance hps credit ratings market conditions generally october 31 2014 aggregate future maturities longterm debt face value excluding fair value adjustment related hedged debt 120 million premium debt issuance 13 million discount debt issuance 13 million follows interest expense borrowings recognized consolidated statements earnings fiscal years follows note 13 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends declared 061 per common share fiscal 2014 055 per common share fiscal 2013 050 per common share fiscal 2012 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 stockholders equity continued share repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2014 hp executed share repurchases 92 million shares settled 27 billion included 7 million shares expected settle first quarter fiscal 2015 fiscal 2013 hp executed share repurchases 77 million shares settled 15 billion fiscal 2012 hp executed share repurchases 67 million shares settled 16 billion shares repurchased settled fiscal 2014 fiscal 2013 fiscal 2012 open market repurchase transactions october 31 2014 hp remaining authorization 49 billion future share repurchases 100 billion repurchase authorization approved hps board directors july 21 2011 taxes related comprehensive loss income hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 stockholders equity continued changes reclassifications related comprehensive loss income net taxes 1reclassification pretax losses gains cash flow hedges consolidated statements earnings follows 2these components included computation net pension postretirement benefit credit cost note 4 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 stockholders equity continued components accumulated comprehensive loss net taxes october 31 2014 changes fiscal year 2014 follows note 14 net earnings per share hp calculates basic net eps using net earnings loss weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock awards stock options performancebased awards shares purchased 2011 espp reconciliations numerators denominators basic diluted net eps calculations follows 1net earnings allocated participating securities significant fiscal 2014 2013 2012 hp considers restricted stock awards provide holder nonforfeitable right receive dividends participating securities 2for fiscal 2012 hp excluded calculation diluted net loss per share 10 million shares potentially issuable stockbased incentive compensation plans 2011 espp effect included would antidilutive hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 net earnings per share continued 3hp excludes options assumed proceeds exceed average market price calculation diluted net eps effect would antidilutive assumed proceeds option include sum exercise price average unrecognized compensation cost excess tax benefits note 15 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2014 reasonably possible material loss incurred excess amounts recognized hps financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies litigation proceedings investigations copyright levies described proceedings ongoing concluded involving hp certain european union eu member countries including litigation germany belgium austria seeking impose modify levies upon equipment multifunction devices mfds personal computers pcs printers alleging devices enable producing private copies copyrighted materials descriptions ongoing proceedings included levies generally based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted legal proceedings hp stuttgart civil court seeking impose levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 stuttgart court appeals may 11 2005 stuttgart court appeals issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law vg wort appealed decision filing claim german federal constitutional court challenging ruling printers subject levies september 21 2010 constitutional court published decision holding german federal supreme court erred referring questions interpretation german copyright law court justice european union cjeu therefore revoked hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued german federal supreme court decision remitted matter july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive june 27 2013 cjeu issued decision responding questions german federal supreme court subsequently scheduled joint hearing matter cases relating reprographic levies printers pcs held october 31 2013 german federal supreme court issued decision july 3 2014 partially granting claim vg wort german federal supreme court decision provides levies due printer used pc make permitted reprographic copies single process control person levies due printer reprographic copies made scannerpcprinter product chain case remitted lower courts assess amount paid per printer unit september 2003 vg wort filed lawsuit fujitsu technology solutions gmbh fujitsu munich civil court munich germany seeking impose levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fujitsu december 23 2004 munich civil court held pcs subject levy fujitsu must pay €12 plus compound interest pc sold germany since march 2001 fujitsu appealed decision january 2005 munich court appeals december 15 2005 munich court appeals affirmed munich civil court decision fujitsu filed appeal german federal supreme court february 2006 october 2 2008 german federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law vg wort subsequently filed claim german federal constitutional court challenging ruling january 2011 constitutional court published decision holding german federal supreme court decision inconsistent german constitution revoking german federal supreme court decision constitutional court also remitted matter german federal supreme court action july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive june 27 2013 cjeu issued decision responding questions german federal supreme court subsequently scheduled joint hearing matter cases relating reprographic levies printers held october 31 2013 german federal supreme court issued decision july 3 2014 partially granting claim vg wort german federal supreme court decision provides levies due audiovisual copying standing text pictures using pc last device single reproduction process control person levies due pc reprographic copies made using pcprinter scannerpcprinter chain case remitted lower courts assess amount paid per pc unit reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued copying speed operated normal print mode set default device november 16 2012 court issued decision holding belgium law conformity eu law number respects ordered november 2013 reprobel substantiate amounts claimed reprobel commensurate harm resulting legitimate copying reprographic exception hp subsequently appealed court decision courts appeal brussels seeking confirm belgian law conformity eu law belgian law interpreted manner consistent eu law payments hp required alternatively payments already made hp sufficient comply obligations belgian law october 23 2013 court appeal brussels stayed proceedings referred several questions cjeu relating whether belgian reprographic copyright levies system conformity eu law based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates number units impacted amounts levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed remains uncertain fair labor standards act litigation hp involved several lawsuits plaintiffs seeking unpaid overtime compensation damages based allegations various employees electronic data systems corporation eds hp misclassified exempt employees fair labor standards act andor violation california labor code state laws matters include following •cunningham et al v electronic data systems corporation purported collective action filed may 10 2006 united states district court southern district new york claiming current former eds employees allegedly involved installing andor maintaining computer software hardware misclassified exempt employees another purported collective action steavens et al v electronic data systems corporation filed october 23 2007 court alleging similar facts steavens case consolidated pretrial purposes cunningham case december 14 2010 court granted conditional certification class consisting employees 20 legacy eds job codes consolidated cunningham steavens matter december 11 2013 hp plaintiffs counsel consolidated cunninghamsteavens matter salva matter described mediated cases reached settlement agreement court preliminarily approved settlement november 4 2014 final approval hearing scheduled june 8 2015 •salva v hewlettpackard company purported collective action filed june 15 2012 united states district court western district new york alleging certain information technology employees allegedly involved installing andor maintaining computer software hardware misclassified exempt employees fair labor standards act december 11 2013 hp plaintiffs counsel consolidated cunninghamsteavens matter salva matter mediated cases reached settlement agreement court consolidated salva matter cunninghamsteavens matter preliminarily approved settlement november 4 2014 final approval hearing scheduled june 8 2015 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued •karlbom et al v electronic data systems corporation class action filed march 16 2009 california superior court alleging facts similar cunningham steavens matters parties currently engaged discovery •blake et al v hewlettpackard company filed purported nationwide collective action february 17 2011 united states district court southern district texas claiming class information technology support personnel misclassified exempt employees fair labor standards act february 10 2012 plaintiffs filed motion requesting court conditionally certify case collective action july 11 2013 court denied plaintiffs motion conditional certification entirety following denial class certification case continued individual action behalf named plaintiff one employee parties reached agreement resolve matter two plaintiffs agreeing settle individual claims release claims may hp court approved settlement august 19 2014 dismissed case prejudice september 9 2014 •benedict v hewlettpackard company purported collective action filed january 10 2013 united states district court northern district california alleging certain technical support employees allegedly involved installing maintaining andor supporting computer software andor hardware hp misclassified exempt employees fair labor standards act plaintiff also alleged hp violated california law among things allegedly improperly classifying employees exempt february 13 2014 court granted plaintiffs motion conditional class certification parties engaged discovery state south carolina department social services contract dispute october 2012 state south carolina department social services related government agencies scdss filed proceeding south carolinas chief procurement officer cpo hewlettpackard state local enterprise services inc subsidiary hp hpsles dispute arises contract scdss hpsles design implementation maintenance child support enforcement family court case management system cfs system scdss seeks aggregate damages approximately 275 million declaration hpsles material breach contract therefore termination contract cause scdss would appropriate declaration hpsles required perform certain additional disputed work expands scope original contract november 2012 hpsles filed responsive pleadings asserting defenses seeking payment pastdue invoices totaling 12 million july 10 2013 scdss terminated contract hpsles cause termination notice scdss asserted hpsles responsible future federal penalties cfs system achieves federal certification sought immediate order requiring hpsles transfer scdss work completed progress indicated intends seek suspension debarment hpsles contracting state south carolina hpsles disputing termination improper defective addition august 9 2013 hpsles filed affirmative claim within proceeding alleging scdss materially breached contract improper termination scdss primary material cause project delays september 4 2013 cpo denied scdsss motion injunctive relief seeking immediate transfer system assets scdss indicated cpo would address request following hearing merits hearing merits cpo concluded february 25 2014 closing briefs submitted july 18 2014 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued august 15 2014 cpo agreed parties joint request cpo issue order unless parties guidance mediator report cpo ongoing mediation reached final impasse september 10 2014 parties reached agreement principle resolve matter december 15 2014 parties submitted settlement agreement time materials agreement cpo approval india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence dri issued show cause notices hewlettpackard india sales private ltd hpi subsidiary hp seven thencurrent hp employees one former hp employee alleging hp underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp deposited approximately 16 million dri agreed post provisional bond exchange dris agreement seize hp products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hpi named individuals approximately 386 million hpi already deposited 9 million december 11 2012 hpi voluntarily deposited additional 10 million connection productsrelated show cause notice april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hpi certain named individuals approximately 17 million hpi already deposited 7 million order hpi deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hpi filed appeals commissioners orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hpi deposit additional 24 million products order hpi deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hpi filed applications customs tribunal seeking early hearing appeals well extension stay deposit hp individuals already granted final disposition appeals february 7 2014 application extension stay deposit granted customs tribunal disposal appeals october 27 2014 customs tribunal commenced hearings crossappeals commissioners orders customs tribunal rejected hps request remand matter commissioner procedural grounds scheduled reconvene hearings merits beginning april 6 2015 russia gpo fcpa investigations german public prosecutors office german ppo conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard ise gmbh germany former subsidiary hp general prosecutors office russian federation approximately €35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued german ppo issued indictment four individuals including one current two former hp employees charges including bribery breach trust tax evasion german ppo also requested hp made associated party case request granted hp would participate portion court proceedings could ultimately bear question whether hp subject potential disgorgement profits based conduct indicted current former employees polish central anticorruption bureau also conducting investigation potential corruption violations employee hewlettpackard polska sp z oo indirect subsidiary hp connection certain publicsector transactions poland hp cooperating investigating agencies doj sec also conducted investigation russia gpo deal potential violations foreign corrupt practices act fcpa addition us enforcement agencies conducted investigations certain publicsector transactions russia poland commonwealth independent states mexico among countries april 9 2014 hp announced resolution doj sec fcpa investigations pursuant terms resolution doj sec fcpa investigation announced april 2014 september 11 2014 hp subsidiary russia zao hewlett packard ao entered guilty plea united states district court northern district california criminal violations fcpa hp paid sec approximately 31 million paid approximately 77 million fines penalties pursuant agreements doj hp also agreed undertake certain compliance reporting cooperation obligations december 2 2014 plaintiffs petroleos mexicanos pemex exploracion filed complaint hp mexico united states district court northern district california alleging violations racketeer influenced corrupt organizations act rico act fraudulent concealment tortious interference violations california unfair competition law connection alleged improper payments provided pemex officials thirdparties retained hp mexico allegations arise subjectmatter previously disclosed 2014 nonprosecution agreement hp mexico doj simultaneous ceaseanddesist order hp issued sec hp investigating claim however hp believe resolution matter material impact financial statements ect proceedings january 2011 postal service brazil empresa brasileira de correios e telégrafos ect notified hp subsidiary brazil hp brazil initiated administrative proceedings consider whether suspend hp brazils right bid contract ect related alleged improprieties bidding contracting processes whereby employees hp brazil employees several companies allegedly coordinated bids fixed results three ect contracts 2007 2008 late july 2011 ect notified hp brazil decided apply penalties hp brazil suspend hp brazils right bid contract ect five years based upon evidence august 2011 hp brazil appealed ects decision april 2013 ect rejected hp brazils appeal administrative proceedings closed penalties hp brazil remaining place parallel september 2011 hp brazil filed civil action ect seeking ects decision revoked hp brazil also requested injunction suspending application penalties final ruling merits case court first instance issued decision merits case denied hp brazils request injunctive relief hp brazil appealed denial request injunctive relief intermediate appellate court issued preliminary ruling denying request injunctive relief hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued reducing length sanctions five two years hp brazil appealed decision december 2011 obtained ruling staying enforcement ects sanctions final ruling merits case hp expects decision issued 2015 subsequent appeal merits last several years stockholder litigation described hp involved various stockholder litigation matters commenced certain current former hp executive officers andor certain current former members hps board directors plaintiffs seeking recover damages related hps allegedly inflated stock price certain compensation paid hp defendants damages andor injunctive relief •saginaw police fire pension fund v marc l andreessen et al lawsuit filed october 19 2010 united states district court northern district california alleging among things defendants breached fiduciary duties unjustly enriched consciously disregarding hps alleged violations fcpa august 15 2011 defendants filed motion dismiss lawsuit march 21 2012 court granted defendants motion dismiss court entered judgment defendants favor closed case may 29 2012 june 28 2012 plaintiff filed appeal united states court appeals ninth circuit september 8 2014 plaintiff voluntarily dismissed appeal concluded case •aj copeland v raymond j lane et al copeland lawsuit filed march 7 2011 united states district court northern district california alleging among things defendants breached fiduciary duties wasted corporate assets connection hps alleged violations fcpa hps severance payments made mark hurd former chairman hps board directors hps chief executive officer hps acquisition 3par inc lawsuit also alleges violations section 14a securities exchange act 1934 exchange act connection hps 2010 2011 proxy statements february 8 2012 defendants filed motion dismiss lawsuit october 10 2012 court granted defendants motion dismiss leave file amended complaint november 1 2012 plaintiff filed amended complaint adding unjust enrichment claim claims defendants violated section 14a exchange act breached fiduciary duties connection hps 2012 proxy statement december 13 14 17 2012 defendants moved dismiss amended complaint december 28 2012 plaintiff moved leave file third amended complaint may 6 2013 court denied motion leave amend granted motions dismiss prejudice entered judgment defendants favor may 31 2013 plaintiff filed appeal united states court appeals ninth circuit appeal fully briefed date yet set oral argument •aj copeland v léo apotheker et al copeland ii lawsuit filed february 10 2014 united states district court northern district california alleging among things defendants used control hp corporate suffrage process effectuating directly participating andor aiding abetting violations section 14a exchange act rule 14a9 promulgated thereunder violations sections 10b 20a exchange act rule 10b5 promulgated thereunder complaint asserts claims breach fiduciary duty waste corporate assets unjust enrichment breach duty candor claims arise circumstances hp relating 2013 2014 proxy hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued statements departure mr hurd chairman hps board directors hps chief executive officer alleged violations fcpa hps acquisition 3par inc autonomy corporation plc autonomy february 25 2014 court issued order granting hps administrative motion relate copeland ii copeland april 8 2014 court granted parties stipulation stay action pending resolution copeland united states court appeals ninth circuit •richard gammel v hewlettpackard company et al putative securities class action filed september 13 2011 united states district court central district california alleging among things november 22 2010 august 18 2011 defendants violated sections 10b 20a exchange act concealing material information making false statements hps business model future webos operating system hps commitment developing integrating webos products including touchpad tablet pc april 11 2012 defendants filed motion dismiss lawsuit september 4 2012 court granted defendants motion dismiss gave plaintiff 30 days file amended complaint october 19 2012 plaintiff filed amended complaint asserting causes action dropping one defendants shortening period alleged violations exchange act occurred february 9 2011 august 18 2011 december 3 2012 defendants moved dismiss amended complaint may 8 2013 court granted defendants motion dismiss part denied part result courts ruling alleged class period action runs june 1 2011 august 18 2011 parties commenced mediation private mediator march 31 2014 parties executed settlement stipulation september 15 2014 court granted final approval settlement hp certain insurers paid approximately 57 million pursuant terms settlement agreement deadline appeal courts grant final approval passed courts judgment final •ernesto espinoza v léo apotheker et al larry salat v léo apotheker et al consolidated lawsuits filed september 21 2011 united states district court central district california alleging among things defendants violated section 10b 20a exchange act concealing material information making false statements hps business model future webos touchpad hps pc business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched authorized hps repurchase stock august 29 2010 july 21 2011 lawsuits previously stayed pending developments gammel matter stays lifted plaintiffs filed amended consolidated complaint august 21 2013 october 28 2013 defendants filed motion stay matters order dated february 13 2014 court granted motion stay august 11 2014 status conference stay lifted plaintiffs informed court move forward complaint hp filed motion dismiss november 21 2014 •luis gonzalez v léo apotheker et al richard tyner v léo apotheker et al consolidated lawsuits filed september 29 2011 october 5 2011 respectively california superior court alleging among things defendants breached fiduciary duties wasted corporate assets unjustly enriched concealing material information making false statements hps business model future webos touchpad hps pc hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued business authorizing hps repurchase stock august 29 2010 july 21 2011 lawsuits currently stayed pending resolution espinozasalat consolidated action federal court held status conference november 17 2014 •cement concrete workers district council pension fund v hewlettpackard company et al putative securities class action filed august 3 2012 united states district court northern district california alleging among things november 13 2007 august 6 2010 defendants violated sections 10b 20a exchange act making statements regarding hps standards business conduct sbc false misleading mr hurd serving hps chairman chief executive officer period violating sbc concealing misbehavior manner jeopardized continued employment hp february 7 2013 defendants moved dismiss amended complaint august 9 2013 court granted defendants motion dismiss leave amend complaint september 9 2013 plaintiff filed amended complaint september 9 2013 defendants moved dismiss complaint october 24 2013 june 25 2014 court issued order granting defendants motions dismiss july 25 2014 plaintiff filed notice appeal united states court appeals ninth circuit november 4 2014 plaintiffappellant filed opening brief court appeals ninth circuit autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office doj sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hps acquisition autonomy november 21 2012 representatives us department justice advised hp opened investigation relating autonomy february 6 2013 representatives uk serious fraud office advised hp also opened investigation relating autonomy hp cooperating three investigating agencies litigation described hp involved various stockholder litigation relating among things november 20 2012 announcement recorded noncash charge impairment goodwill intangible assets within software segment approximately 88 billion fourth quarter 2012 fiscal year hps statements based hps findings ongoing investigation majority impairment charge related accounting improprieties misrepresentations market disclosure failures autonomy occurred prior connection hps acquisition autonomy impact improprieties failures misrepresentations expected future financial performance autonomy business long term stockholder litigation commenced among others certain current former hp executive officers certain current former members hps board directors certain advisors hp plaintiffs litigation matters seeking recover certain compensation paid hp defendants andor damages matters include following •in hp securities litigation consists two consolidated putative class actions filed november 26 30 2012 united states district court northern district california alleging among things august 19 2011 november 20 2012 defendants violated sections 10b 20a exchange act concealing material hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued information making false statements related hps acquisition autonomy financial performance hps enterprise services business may 3 2013 lead plaintiff filed consolidated complaint alleging period defendants violated sections 10b 20a exchange act sec rule 10b5b concealing material information making false statements related hps acquisition autonomy certain defendants violated sec rule 10b5a c engaging scheme defraud investors july 2 2013 hp filed motion dismiss lawsuit november 26 2013 court granted part denied part hps motion dismiss allowing claims proceed hp margaret c whitman based alleged statements andor omissions made may 23 2012 court dismissed plaintiffs claims based alleged statements andor omissions made august 19 2011 may 22 2012 plaintiffs filed motion class certification november 4 2014 december 15 2014 defendants filed opposition motion hearing motion class certification scheduled february 20 2015 •in hewlettpackard shareholder derivative litigation consists seven consolidated lawsuits filed beginning november 26 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 one lawsuit alleges certain individual defendants engaged assisted insider trading thereby breached fiduciary duties unjustly enriched violated sections 25402 25403 california corporations code may 3 2013 lead plaintiff filed consolidated complaint alleging among things defendants concealed material information made false statements related hps acquisition autonomy autonomys intelligent data operating layer technology thereby violated sections 10b 20a exchange act breached fiduciary duties engaged abuse control hp corporate waste unjustly enriched litigation stayed agreement july 31 2013 july 30 2013 hp filed motion stay litigation hps board directors decides whether pursue claims asserted litigation court rules hps motion dismiss consolidated complaint hp securities litigation matter court extended stay litigation june 16 2014 lead plaintiff filed stipulation proposed settlement june 30 2014 court held hearings motion preliminary approval proposed settlement issued decision parties interested parties submitted briefing await ruling court also expected rule motion sever filed additional derivative action captioned steinberg vogel v apotheker et al contains substantially similar allegations seeking substantially similar relief motion intervene filed california state court plaintiff vincent ho limited purpose applying attorneys fees motion intervene filed sushovan hussain purposes objecting proposed settlement obtaining discovery motion intervene filed purported hp shareholder rodney cook purposes removing lead plaintiff appointed lead plaintiff hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued •in hp erisa litigation consists three consolidated putative class actions filed beginning december 6 2012 united states district court northern district california alleging among things august 18 2011 november 22 2012 defendants breached fiduciary obligations hps 401k plan participants thereby violated sections 404a1 405a employee retirement income security act 1974 amended concealing negative information regarding financial performance autonomy hps enterprise services business failing restrict participants investing hp stock august 16 2013 hp filed motion dismiss lawsuit march 31 2014 court granted hps motion dismiss action leave amend july 16 2014 plaintiffs filed second amended complaint containing substantially similar allegations seeking substantially similar relief first amended complaint hp moved dismiss second amended complaint hearing motion scheduled january 23 2015 •vincent ho v margaret c whitman et alis lawsuit filed january 22 2013 california superior court alleging among things defendants breached fiduciary duties wasted corporate assets connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 april 22 2013 court stayed lawsuit pending resolution hewlettpackard shareholder derivative litigation matter federal court two additional derivative actions james gould v margaret c whitman et al leroy noel v margaret c whitman et al filed california superior court july 26 2013 august 16 2013 respectively containing substantially similar allegations seeking substantially similar relief actions also stayed pending resolution hewlettpackard shareholder derivative litigation matter settlement federal derivative case approved result release claims asserted three actions claims asserted michael lynch former chief executive officer autonomy •cook v whitman et al lawsuit filed march 18 2014 delaware chancery court alleging among things defendants breached fiduciary duties wasted corporate assets connection hps acquisition autonomy may 15 2014 hp moved dismiss stay cook matter july 22 2014 delaware chancery court stayed motion pending united states district courts hearing preliminary approval proposed settlement hewlettpackard shareholder derivative litigation matter district court approves settlement result release claims asserted cook matter asserted michael lynch sushovan hussain former chief financial officer autonomy deloitte llp hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued environmental hps operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hps products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred product takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies note 16 guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote hp entered service contracts certain clients supported financing arrangements service contract terminated result hps nonperformance contract failure comply terms financing arrangement hp could certain circumstances required acquire certain assets related service contract hp believes likelihood acquire material amount assets arrangements remote indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 guarantees continued perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors customers claims ip infringement made third parties arising vendors customers use hps software products services certain matters indemnifications may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hps baseline experience affect estimated warranty obligation hps aggregate product warranty liabilities changes fiscal years follows note 17 commitments lease commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense approximately 10 billion fiscal 2014 2013 2012 property capital leases comprised primarily equipment furniture capital lease assets included property plant equipment consolidated balance sheets 229 million 437 million october 31 2014 october 31 2013 respectively accumulated depreciation property capital lease 207 million 404 million october 31 2014 october 31 2013 respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 commitments continued october 31 2014 future minimum lease commitments follows unconditional purchase obligations october 31 2014 hp unconditional purchase obligations approximately 21 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations related principally inventory items unconditional purchase obligations exclude agreements cancelable without penalty october 31 2014 future unconditional purchase obligations follows hewlettpackard company subsidiaries quarterly summary unaudited millions except per share amounts 1cost products cost services financing interest 2net eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hp inc audited accompanying consolidated balance sheets hp inc subsidiaries october 31 2015 2014 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2015 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hp inc subsidiaries october 31 2015 2014 consolidated results operations cash flows three years period ended october 31 2015 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states hp incs internal control financial reporting october 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated december 16 2015 expressed unqualified opinion thereon ernst young llp san jose california december 16 2015 report independent registered public accounting firm board directors stockholders hp inc audited hp incs internal control financial reporting october 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria hp incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hp inc maintained material respects effective internal control financial reporting october 31 2015 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hp inc subsidiaries october 31 2015 2014 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2015 report dated december 16 2015 expressed unqualified opinion thereon ernst young llp san jose california december 16 2015 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2015 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 2013 framework based assessment hps management determined hps internal control financial reporting effective october 31 2015 effectiveness hps internal control financial reporting october 31 2015 audited ernst young llp hps independent registered public accounting firm stated report appears page 86 annual report form 10k dion j weisler dion j weisler president chief executive officer december 16 2015 catherine lesjak catherine lesjak chief financial officer december 16 2015 hp inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hp inc subsidiaries notes consolidated financial statements note 1 overview summary significant accounting policies overview november 1 2015 distribution date hewlettpackard company completed separation hewlett packard enterprise company hewlett packard enterprise hewlettpackard companys former enterprise technology infrastructure software services financing businesses separation connection separation hewlettpackard company changed name hp inc hp november 1 2015 hp stockholders record close business october 21 2015 record date received one share hewlett packard enterprise common stock every one share hps common stock held record date hewlett packard enterprise independent public company trading new york stock exchange nyse symbol hpe separation hp beneficially shares hewlett packard enterprise common stock beginning november 1 2015 hp longer consolidates hewlett packard enterprise within financial results reflect financial results hewlett packard enterprise within continuing results operations connection separation hp hewlett packard enterprise entered separation distribution agreement well various agreements provide framework relationships parties going forward including among others tax matters agreement employee matters agreement transition service agreement real estate matters agreement master commercial agreement information technology service agreement agreements provide allocation hp hewlett packard enterprise assets employees liabilities obligations including investments property employee benefits taxrelated assets liabilities attributable periods prior separation govern certain relationship hp hewlett packard enterprise separation information impacts agreements see note 3 restructuring note 4 retirement postretirement benefit plans note 5 stockbased compensation note 6 taxes earnings note 13 borrowings note 16 litigation contingencies note 17 guarantees indemnifications warranties basis presentation accompanying consolidated financial statements hp whollyowned subsidiaries prepared conformity united states us generally accepted accounting principles gaap hp eliminated intercompany accounts transactions historical results operations financial position cash flows hewlett packard enterprise included consolidated financial statements hp fiscal years included report reported discontinued operations beginning first quarter fiscal 2016 principles consolidation consolidated financial statements include accounts hp subsidiaries affiliates hp controlling financial interest primary beneficiary hp accounts investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp presents noncontrolling interests separate component within total stockholders equity consolidated hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued balance sheets net earnings attributable noncontrolling interests eliminated within interest net consolidated statements earnings presented separately material period presented reclassifications hp made certain segment business unit realignments order optimize operating structure reclassifications certain prioryear segment business unit financial information made conform currentyear presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share eps see note 2 discussion hps segment reorganization use estimates preparation financial statements accordance us gaap requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates foreign currency translation hp predominately uses us dollar functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses denominated nonus dollars recorded us dollars monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statements earnings certain nonus subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet date translation adjustments includes component accumulated comprehensive loss consolidated balance sheets accounting pronouncements november 2015 financial accounting standards board fasb issued accounting standards update income taxes requires deferred tax assets liabilities classified noncurrent classified statement financial position new accounting guidance effective annual reporting periods beginning december 15 2016 interim periods therein early adoption permitted entities beginning interim annual reporting periods hp currently assessing impact adoption consolidated financial statements plans adopt interim annual reporting period beginning november 1 2015 april 2015 fasb amended existing accounting standards intangible assets amendments provide explicit guidance customers determining accounting fees paid cloud computing arrangement wherein arrangements convey software license customer accounted service contracts hp required adopt guidance first quarter fiscal 2017 however early adoption permitted retrospective application hp currently evaluating impact amendments consolidated financial statements hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued april 2015 fasb amended existing accounting standards imputation interest amendments require debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts recognition measurement guidance debt issuance costs affected amendments hp required adopt guidance first quarter fiscal 2017 early adoption permitted amendments applied retrospectively adjusted balance sheet individual period presented order reflect periodspecific effects applying new guidance hp currently evaluating timing impact amendments consolidated financial statements may 2014 fasb amended existing accounting standards revenue recognition amendments based principle revenue recognized depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services august 2015 fasb issued accounting standard update oneyear deferral effective date option applying standard original effective date hp first quarter fiscal 2018 accordance deferral hp required adopt amendments first quarter fiscal 2019 amendments may applied retrospectively prior period presented retrospectively cumulative effect recognized date initial application hp continuing evaluate impact amendments transition alternatives consolidated financial statements april 2014 fasb issued guidance changes criteria identifying discontinued operation guidance limits definition discontinued operation disposal component group components disposed classified held sale represents strategic shift major effect entitys operations financial results hp required adopt guidance first quarter fiscal 2016 revenue recognition general hp recognizes revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time delivery channel partners economic substance apart hp completed obligations related sale hp generally recognizes revenue standalone software sales channel partners receipt evidence software sold specific end user hp limits amount revenue recognized delivered elements amount contingent future delivery products services future performance obligations subject customerspecified refund return rights hp reduces revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns later date revenue recognition date sales incentive offered future market conditions product transitions may require hp take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued incentive programs hp estimates number customers expected redeem incentive based historical experience specific terms conditions incentive instances revenue derived sales thirdparty vendor products services hp records revenue gross basis hp principal transaction net basis hp acting agent customer vendor hp considers several factors determine whether acting principal agent notably whether hp primary obligor customer established pricing inventory credit risks hp reports revenue net taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority multiple element arrangements sales arrangement contains multiple elements deliverables hardware software products andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence vsoe selling price available thirdparty evidence tpe vsoe selling price available estimated selling price esp neither vsoe selling price tpe available hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority hp establishes tpe selling price evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers hp establishes esp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies technology industry life cycles arrangements multiple elements hp allocates transaction price individual units accounting inception arrangement based relative selling price multiple element arrangements include software morethanincidental hp allocates transaction price individual units accounting nonsoftware deliverables software deliverables group using relative selling price deliverables arrangement based selling price hierarchy arrangement contains one software deliverable transaction price allocated group software deliverables allocated component software deliverable hp evaluates deliverable arrangement determine whether represents separate unit accounting deliverable constitutes separate unit accounting standalone value customer elements standalone value hp recognizes revenue consistent pattern undelivered elements arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within hps control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued product revenue hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations customer remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including standard product warranties based historical experience time hp recognizes revenue software hp recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria satisfied termbased software license revenue generally recognized ratably term license hp uses residual method allocate revenue software licenses inception arrangement vsoe fair value undelivered elements postcontract customer support exists revenue recognition criteria satisfied hp recognizes revenue maintenance unspecified upgrades updates provided whenand ifavailable basis ratably period items delivered hp recognizes revenue hosting softwareasaservice saas arrangements service delivered generally straightline basis contractual period performance hosting arrangements hp considers rights provided customer eg whether customer contractual right take possession software time hosting period without significant penalty feasibility customer operate contract another vendor operate software determining whether arrangement includes sale software license hosting arrangements software licenses sold license revenue generally recognized according whether perpetual term licenses sold revenue recognition criteria satisfied services revenue hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue services rendered recognizes costs incurred hp recognizes revenue certain fixedprice contracts consulting arrangements work progresses contract period proportional performance basis determined percentage labor costs incurred date compared total estimated labor costs contract hp recognizes revenue fixedprice contracts design build projects design develop construct software systems using percentageofcompletion method hp uses costtocost method measure progress toward completion determined percentage cost incurred date compared total estimated costs project estimates total project costs fixedprice hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued contracts regularly revised life contract provisions estimated losses fixedpriced contracts recognized period losses become known reasonable reliable cost estimates project cannot made hp uses completed contract method recognizes revenue costs upon service completion hp generally recognizes outsourcing services revenue period service provided amount earned contingent occurrence future event hp recognizes revenue using objective measure output unitpriced contracts revenue fixedprice outsourcing contracts periodic billings recognized straightline basis service provided evenly contract term provisions estimated losses outsourcing arrangements recognized period losses become probable estimable hp recognizes revenue operating leases straightline basis service revenue rental period financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term deferred revenue deferred costs hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria satisfied hp records revenue earned recognized excess amounts invoiced services contracts trade receivables deferred revenue represents amounts invoiced advance product support contracts software customer support contracts outsourcing startup services work consulting integration projects product sales leasing income hp recognizes costs associated outsourcing contracts incurred unless costs considered direct incremental startup phase contract case hp defers costs startup phase subsequently amortizes costs period outsourcing services provided services commence hp amortizes deferred contract costs straightline basis remaining term contract unless facts circumstances contract indicate shorter period appropriate based actual projected contract financial performance indicators hp analyzes recoverability deferred contract costs using undiscounted estimated cash flows contract remaining term undiscounted cash flows insufficient recover carrying amount deferred contract costs longlived assets directly associated contract deferred contract costs first impaired cash flow deficiency remains reducing carrying amount deferred contract costs zero hp evaluates remaining longlived assets related contract impairment shipping handling hp includes costs related shipping handling cost products hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued stockbased compensation hp determines stockbased compensation expense based measurement date fair value award hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants cases hp amortizes actuarial gains losses using corridor approach see note 4 full description plans accounting funding policies advertising costs produce advertising expensed incurred production costs communicate advertising expensed advertising first run costs totaled approximately 859 million fiscal 2015 834 million fiscal 2014 867 million fiscal 2013 restructuring hp records charges associated managementapproved restructuring plans reorganize one hps business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related interest penalties hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued accounts receivable hp establishes allowance doubtful accounts receivable hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filing deterioration customers operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable hp thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers financing arrangements certain cases provide partial recourse result transfer hps trade receivables third party hp reflects amounts transferred yet collected third party accounts receivable consolidated balance sheets arrangements involving element recourse fair value recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets concentrations risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments receivables trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographic regions hps policy designed limit exposure particular institution part risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate exposures contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers aggregated business deteriorates substantially hps operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented 18 20 gross accounts receivable october 31 2015 2014 respectively single customer accounts 10 gross accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographic regions hp performs ongoing credit evaluations financial condition thirdparty distributors hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued resellers customers may require collateral letters credit bank guarantees certain circumstances hp utilizes outsourced contract manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components contract manufacturers thereby creating receivable balances contract manufacturers three largest contract manufacturer receivable balances collectively represented 60 65 hps receivables contract manufacturers 10 billion october 31 2015 2014 respectively hp includes receivables contract manufacturers current assets consolidated balance sheets gross basis hps credit risk associated receivables mitigated wholly part amount hp owes outsourced contract manufacturers hp generally legal right offset payables contract manufacturers receivables hp reflect sale components revenue recognize profit component sales related products sold hp time profit recognized reduction cost sales hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hps relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolescence property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation expense recognized straightline basis estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value estimated useful lives assets used solely support customer services contract generally exceed term customer contract retirement disposition asset cost related accumulated depreciation removed consolidated balance sheets gain loss recognized consolidated statements earnings hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized internal use software costs using straightline method estimated useful lives software generally three five years hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued business combinations hp includes results operations acquired businesses hps consolidated results prospectively date acquisition hp allocates fair value purchase consideration assets acquired including inprocess research development iprd liabilities assumed noncontrolling interests acquired entity generally based fair values acquisition date iprd initially capitalized fair value intangible asset indefinite life assessed impairment thereafter iprd project complete reclassified amortizable purchased intangible asset amortized estimated useful life iprd project abandoned hp record charge value related intangible asset hps consolidated statement earnings period abandoned excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquired entity recorded goodwill primary items generate goodwill include value synergies acquired company hp value acquired assembled workforce neither qualifies recognition intangible asset acquisitionrelated expenses postacquisition restructuring costs recognized separately business combination expensed incurred goodwill hp reviews goodwill impairment annually whenever events changes circumstances indicate carrying amount goodwill may recoverable hp permitted conduct qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2015 hp performed quantitative test reporting units goodwill tested impairment reporting unit level october 31 2015 hps reporting units consistent reportable segments identified note 2 except enterprise services es consists two reporting units mphasis limited remainder es first step impairment test hp compares fair value reporting unit carrying amount hp estimates fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections managements estimates revenue growth rates operating margins taking consideration industry market conditions hp bases discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting units ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach mphasis limited reporting unit hp utilized quoted market price active market estimate fair value order assess reasonableness estimated fair value hps reporting units hp compares aggregate reporting unit fair value hps market capitalization calculates hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued implied control premium excess sum reporting units fair value hps market capitalization hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium believed reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount hp performs second step goodwill impairment test measure amount impairment loss second step hp measures reporting units assets including unrecognized intangible assets liabilities noncontrolling interests fair value hypothetical analysis calculate implied fair value goodwill reporting unit manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying amount difference recorded impairment loss intangible assets longlived assets hp reviews intangible assets finite lives longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable hp assesses recoverability assets based estimated undiscounted future cash flows expected result use eventual disposition asset undiscounted future cash flows less carrying amount asset impaired hp measures amount impairment loss difference carrying amount asset fair value using income approach available appropriate using market approach hp amortizes intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years debt marketable equity securities investments debt marketable equity securities generally considered availableforsale reported fair value unrealized gains losses net applicable taxes accumulated comprehensive loss consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included interest net consolidated statements earnings hp monitors investment portfolio potential impairment quarterly basis carrying amount investment debt securities exceeds fair value decline value determined otherthantemporary ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss balance recorded accumulated comprehensive loss consolidated balance sheets derivatives hp uses derivative instruments primarily forwards swaps times options hedge certain foreign currency interest rate exposures hp also may use derivative instruments hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 12 full description hps derivative financial instrument activities related accounting policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability contingencies believes probable liability incurred amount loss reasonably estimated see note 16 full description hps loss contingencies related accounting policies note 2 segment information hp leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers government health education sectors hps offerings span following • personal computing access devices • imaging printingrelated products services • enterprise information technology infrastructure including enterprise server storage technology networking products solutions technology support maintenance • multivendor customer services including technology consulting outsourcing support services across infrastructure applications business process domains • software products solutions including application testing delivery big data analytics enterprise security information governance operations management hps operations organized seven segments financial reporting purposes personal systems printing enterprise group eg enterprise services es software hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology segments based organizational structure information reviewed hps management evaluate segment results personal systems segment printing segment structured beneath broader printing personal systems group pps reportable segment hp may provide financial data aggregating personal systems printing segments order provide supplementary view business result separation beginning november 1 2015 hp report three segments part continuing operations personal systems printing corporate investments summary description segment follows printing personal systems groups mission leverage respective strengths personal systems business printing business creating unified organization hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued customerfocused poised capitalize rapidly shifting industry trends segments within pps described personal systems provides commercial personal computers pcs consumer pcs workstations thin clients tablets retail pointofsale systems calculators related accessories software support services commercial consumer markets hp groups commercial notebooks commercial desktops commercial services commercial tablets workstations thin clients commercial clients consumer notebooks consumer desktops consumer services consumer tablets consumer clients describing performance markets described hps global business capabilities within personal systems •commercial pcs optimized enterprise smb customers focus robust designs serviceability connectivity reliability manageability networked environments •consumer pcs notebooks desktops hybrids optimized consumer usage focusing multimedia consumption online browsing light productivity printing provides consumer commercial printer hardware supplies media software services well scanning devices printing also focused imaging solutions commercial markets hp groups laserjet large format printers commercial inkjet printers commercial hardware consumer inkjet printers consumer hardware describing performance markets described hps global business capabilities within printing •laserjet enterprise solutions deliver hps laserjet enterprise products services solutions smbs large enterprises managed print services provides printing equipment supplies support workflow optimization security services smbs enterprise customers around world utilizing proprietary hp tools fleet management solutions well thirdparty software •inkjet printing solutions deliver hps consumer smb inkjet solutions hardware supplies media webconnected hardware services ongoing initiatives programs ink office ink advantage newer initiatives instant ink provide innovative printing solutions consumers smbs •graphics solutions deliver large format printers designjet large format production scitex industrial specialty printing digital press solutions indigo inkjet webpress supplies services print service providers design rendering customers •software web services delivers suite solutions services including photo storage webconnected printing services •marketing optimization focuses delivering solutions help businesses engage audiences reach new customer segments markets deliver compelling content across channels group provides solutions augmented reality contact center analytics customer communications management digital experience management enterprise group provides servers storage networking technology services combined hps cloud solutions enable customers manage applications across public cloud virtual private cloud private cloud traditional environments described hps business units capabilities within eg hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued •industry standard servers offers range products entrylevel servers premium proliant servers run primarily windows linux virtualization platforms software providers microsoft corporation microsoft vmware inc vmware open sourced software major vendors leveraging x86 processors intel corporation intel advanced micro devices inc amd •business critical systems offers hp integrity servers based intel® itanium® x86 processors hp integrity nonstop solutions missioncritical x86 proliant servers •storage offers traditional storage converged storage solutions traditional storage includes tape storage networking legacy external disk products eva xp converged storage solutions include 3par storeserv storeonce storevirtual products •networking offers wireless local area network mobility security software switches routers network management products span data centers campus branch environments deliver softwaredefined networking unified communications capabilities •technology services provides support services technology consulting integrate optimize egs hardware platforms new style services available form service contracts prepackaged offerings customized basis enterprise services provides technology consulting outsourcing support services across infrastructure applications business process domains es comprised infrastructure technology outsourcing ito application business services abs business units •infrastructure technology outsourcing delivers comprehensive services encompass management data centers security cloud computing workplace technology networks unified communications enterprise service management •application business services helps clients develop revitalize manage applications information assets software provides big data analytics applications enterprise security application testing delivery management operations management solutions businesses enterprises sizes software offerings include licenses support professional services softwareasaservice hp financial services provides flexible investment solutions leasing financing consumption utility programs asset management services customers enable creation unique technology deployment models acquire complete solutions including hardware software services hp others providing flexible services capabilities support entire lifecycle hpfs partners customers globally help build investment strategies enhance business agility support business transformation hpfs offers wide selection investment solution capabilities large enterprise customers channel partners along array financial options smbs educational governmental entities corporate investments includes hp labs certain enterpriserelated business incubation projects venture focused minority investments among others hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued segment policy hp derives results business segments directly internal management reporting system accounting policies hp uses derive segment results substantially consolidated company uses management measures performance segment based several metrics including earnings operations management uses results part evaluate performance allocate resources segments segment revenue includes revenues sales external customers intersegment revenues reflect transactions segments armslength basis intersegment revenues primarily consist sales hardware software sourced internally majority cases financed operating leases hpfs hps consolidated net revenue derived reported elimination intersegment revenues arrangements hp periodically engages intercompany advanced royalty payment licensing arrangements may result advance payments subsidiaries revenues intercompany arrangements deferred recognized earned term arrangement hp legal entities involved transactions however advanced payments eliminated revenues reported hp business segments disclosed note 6 fiscal 2015 hp executed intercompany advanced royalty payment arrangement resulting advanced payments 88 billion fiscal 2014 hp executed multiyear intercompany licensing arrangement intercompany advanced royalty payment arrangement resulted combined advanced payments 115 billion transactions payments received us foreign consolidated affiliate deferral intercompany revenues term arrangements approximately 5 years 15 years respectively impact intercompany arrangements eliminated hp consolidated segment revenues financing interest consolidated statements earnings reflects interest expense debt attributable hpfs debt attributable hpfs consists intercompany equity treated debt segment reporting purposes intercompany debt borrowing fundingrelated activity associated hpfs subsidiaries hp allocate segments certain operating expenses manages corporate level unallocated costs include certain corporate governance costs stockbased compensation expense amortization intangible assets restructuring charges acquisition related charges separation costs defined benefit plan settlement charges impairment data center assets segment realignment effective beginning first quarter fiscal 2015 hp implemented organizational change align segment financial reporting closely current business structure organizational change resulted transfer thirdparty multivendor support arrangements technology services ts business unit within eg segment ito business unit within es segment hp reflected change segment information retrospectively earliest period presented resulted removal intersegment revenue ts business unit within eg segment related corporate intersegment revenue eliminations transfer operating profit ts business unit within eg segment ito business unit within es segment hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued connection separation effective beginning fourth quarter fiscal 2015 hp implemented organizational change resulted transfer marketing optimization solutions business software segment commercial hardware business unit within printing segment hp reflected change segment information prior reporting periods asif basis resulted transfer net revenue software segment commercial hardware business unit within printing segment change also resulted transfer operating profit software segment commercial hardware business unit within printing segment addition change resulted reclassification 512 million goodwill software segment printing segment changes impact hps previously reported consolidated net revenue earnings operations net earnings net eps segment operating results hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued reconciliation segment operating results hp consolidated results follows segment assets hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets follows 1in connection acquisition aruba networks inc aruba fiscal 2015 hp recorded approximately 18 billion goodwill 643 million intangible assets 153 million iprd hp reports financial results arubas business networking business unit within eg segment hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue country based upon sales location predominately represents customer location fiscal years 2015 2014 2013 us country represented 10 hps net revenue net revenue country hp operates follows october 31 2015 us netherlands represented 10 net assets october 31 2014 us netherlands ireland represented 10 net assets net property plant equipment country hp operates follows hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued net revenue segment business unit follows hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring summary restructuring plans hps restructuring activities fiscal 2015 summarized plan follows fiscal 2015 restructuring plan connection separation september 14 2015 hps board directors approved cost saving investment proposal includes restructuring plan 2015 plan implemented fiscal 2018 part 2015 plan hp expects approximately 33300 employees exit company end 2018 workforce reductions primarily associated es segment changes workforce vary country based local legal requirements consultations employee works councils employee representatives appropriate hp estimates incur aggregate pretax charges fiscal 2018 approximately 29 billion connection 2015 plan estimated cost hp inc approximately 280 million total estimated charges result workforce reductions approximately 24 billion total estimated charges real estate consolidation approximately 506 million hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring continued fiscal 2012 restructuring plan may 23 2012 hp adopted multiyear restructuring plan 2012 plan designed simplify business processes accelerate innovation deliver better results customers employees stockholders october 31 2015 hp eliminated 55800 positions connection 2012 plan portion employees exiting company part voluntary enhanced early retirement eer programs us certain countries hp recognized 55 billion total aggregate charges connection 2012 plan 49 billion related workforce reductions including eer programs 589 million related infrastructure including data center real estate consolidation items severance infrastructure related cash payments associated 2012 plan expected paid fiscal 2021 october 31 2015 2012 plan considered completed hp expect additional charges plan plans restructuring plans initiated hp fiscal 2008 2010 substantially completed october 31 2015 severance infrastructure related cash payments associated plans expected paid fiscal 2019 note 4 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant defined benefit plans us hp pension plan pension plan includes former hp retirement plan former hp company cash account pension plan cash account pension plan hp retirement plan benefits based pay years service cash account pension plan benefits accrued pursuant formula based percentage pay plus interest pension plan frozen effective january 1 2008 cash account pension plan merged pension plan 2005 certain funding investment purposes effective october 30 2009 electronic data systems corporation eds us qualified pension plan merged pension plan eds plan frozen effective january 1 2009 hp reduces benefit payable certain us employees pension plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp obligations equal plan assets recognized offset pension plan hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp follows postretirement benefit plans hp sponsors retiree health welfare benefit plans significant us hp retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partiallysubsidized medical coverage based years service retirement former grandfathered employees digital equipment corporation also receive partiallysubsidized medical benefits servicebased hps share premium cost capped subsidized medical coverage provided hp retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered programs well employees hired 2002 august 2008 eligible credits hp retirement medical savings account plan rmsa upon attaining age 45 credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association upon retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 542 million fiscal 2015 573 million fiscal 2014 603 million fiscal 2013 us employees automatically enrolled hp 401k plan meet eligibility requirements unless decline participation quarterly employer matching contributions hp 401k plan 100 employees contributions maximum 4 eligible compensation hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued pension postretirement benefit expense hps net pension postretirement benefit credit cost recognized consolidated statements earnings follows lump sum program january 2015 hp offered certain terminated vested participants us hp pension plan option receiving pension benefit onetime voluntary lump sum within specified window approximately 50 eligible participants elected receive benefits result pension plan trust paid 826 million lump sum payments participants fiscal 2015 result lump sum program hp recognized settlement expense approximately 96 million remeasurement us hp pension plan required remeasurement also resulted additional net periodic benefit cost 45 million fiscal 2015 recognized consolidated statements earnings along settlement expense fiscal 2015 certain events primarily separation settlement result lump sum program required multiple pension plans remeasured year thus assumptions used calculate net benefit credit cost remaining portion fiscal year remeasurement redetermined based current market conditions weightedaverage assumptions used calculate net benefit credit cost follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued funded status funded status defined benefit postretirement benefit plans follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued weightedaverage assumptions used calculate projected benefit obligations follows us defined benefit plans hp adopted new mortality table fiscal 2014 better reflect expected lifetimes us plan participants table used based historical demographic study plans increased projected benefit obligation approximately 870 million year ended october 31 2014 increase projected benefit obligation fiscal 2014 recognized part net actuarial loss included comprehensive loss amortized remaining estimated life plan participants net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets follows following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued following table summarizes net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss income recognized components hp incs net periodic benefit credit cost next fiscal year defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued fair value plan assets table sets forth fair value plan assets asset category within fair value hierarchy october 31 2015 1includes debt issued national state local governments agencies 2includes limited partnerships equity buyout venture capital real estate similar funds invest us internationally foreign currencies hedged 3includes fund invests private public equities primarily us united kingdom well emerging markets across sectors fund also holds fixed income derivative instruments hedge interest rate inflation risk addition fund includes units transferable securities collective investment schemes money market funds cash deposits 4includes limited partnerships invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 5department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships 6includes publicly privately traded registered investment entities 7includes cash equivalents shortterm marketable securities 8includes primarily unsettled transactions international insured contracts derivative instruments unsettled transactions relate primarily fixed income securities settled first quarter fiscal 2016 hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued changes fair value measurements level 3 investments fiscal year ended october 31 2015 follows table sets forth fair value plan assets asset category within fair value hierarchy october 31 2014 1includes debt issued national state local governments agencies 2includes limited partnerships equity buyout venture capital real estate similar funds invest us internationally foreign currencies hedged hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued 3includes fund invests private public equities primarily us united kingdom well emerging markets across sectors fund also holds fixed income derivative instruments hedge interest rate inflation risk addition fund includes units transferable securities collective investment schemes money market funds cash deposits 4includes limited partnerships invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 5department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships 6includes publicly privately traded registered investment entities 7includes cash equivalents shortterm marketable securities 8includes international insured contracts derivative instruments unsettled transactions changes fair value measurements level 3 investments fiscal year ended october 31 2014 follows following description valuation methodologies used measure plan assets fair value changes methodologies used reporting period investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded corporate government assetbacked debt securities fair value based observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based observable quoted prices valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based net asset value nav reported asset manager adjusted cash flows necessary making assessment variety factors hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager depending amount management judgment lack nearterm liquidity absence quoted market prices assets classified level 2 level 3 fair value hierarchy depending quickly hp redeem hedge fund investments extent adjustments nav hedge funds classified either level 2 level 3 fair value hierarchy common collective trusts interests 10312 entities registered investment companies valued nav valuation assets requires judgment due absence quoted market prices assets generally classified level 2 fair value hierarchy cash equivalents includes money market funds valued based nav assets including insurance group annuity contracts classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety plan asset allocations weightedaverage target actual asset allocations across benefit plans respective measurement dates follows investment policy hps investment strategy seek competitive rate return relative appropriate level risk depending funded status plan timing expected benefit payments majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp believes appropriate relative plans liability structure return goals hp conducts periodic assetliability studies us plans order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside us asset allocation decisions typically made independent board trustees specific plan us investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixed income securities would otherwise deployed hp reviews investment strategy provides recommended list investment managers country plan final decisions asset allocation investment managers made board trustees specific plan basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected real returns considers countrys specific inflation outlook hps investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees future contributions funding policy october 31 2015 hp including hewlett packard enterprise expects contribute approximately 384 million nonus pension plans approximately 37 million cover benefit payments us nonqualified plan participants approximately 46 million cover benefit claims hps postretirement benefit plans fiscal 2016 subsequent separation hp inc expects contribute approximately 18 million nonus pension plans approximately 36 million cover benefit payments us nonqualified plan participants approximately 43 million cover benefit claims hps postretirement benefit plans fiscal 2016 hps policy fund pension plans makes least minimum contribution required local government funding taxing authorities estimated future benefits payments october 31 2015 hp inc estimates future benefits payments retirement postretirement plans follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued separation related activities advance separation hp underwent planbyplan analysis determined plan would assigned hp inc hewlett packard enterprise pension plans transitioned entirety hewlett packard enterprise remain entirety hp inc plans split two identical plans resulting companies splitting plans assets liabilities result plan separations hp inc retain defined benefit plan assets approximately 11930 million approximately 11077 million pertain us defined benefit plans projected benefit obligation defined benefit plans october 31 2015 13792 million 12709 million pertains us defined benefit plans net funded status plans represents net obligation recognized hp incs consolidated balance sheets approximately 1862 million 1632 million pertains us defined benefit plans addition hp inc retain postretirement benefit plan assets approximately 434 million projected benefit obligation postretirement benefit plans october 31 2015 approximately 598 million net funded status plans represents net obligation recognized hp incs consolidated balance sheets approximately 164 million current hewlettpackard company 401k plan hp 401k plan remain hp inc new 401k plan created employees hewlett packard enterprise respective balances transferred separation note 5 stockbased compensation hps stockbased compensation plans include incentive compensation plans employee stock purchase plan espp stockbased compensation expense related income tax benefits stockbased compensation expense resulting tax benefits follows connection separation board directors approved amendments certain outstanding longterm incentive awards july 29 2015 amendments provided accelerated vesting september 17 2015 certain stockbased awards otherwise scheduled vest september 18 2015 december 31 2015 pretax stockbased compensation expense due acceleration approximately 76 million fiscal year 2015 cash received option exercises purchases hewlettpackard company 2011 employee stock purchase plan 2011 espp 04 billion fiscal 2015 03 billion fiscal 2014 03 billion fiscal 2013 benefit realized tax deduction option exercises fiscal 2015 2014 2013 75 million 51 million 13 million respectively hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued stockbased incentive compensation plans hps stockbased incentive compensation plans include equity plans adopted 2004 2000 amended principal equity plans well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased awards employees meeting certain employment qualifications eligible receive stockbased awards restricted stock awards nonvested stock awards may include grants restricted stock restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior lapse restrictions awards generally vest one three years date grant vesting period ownership restricted stock cannot transferred restricted stock dividend voting rights common stock considered issued outstanding upon grant dividends paid restricted stock nonforfeitable restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding upon grant however shares underlying restricted stock units included calculation diluted net eps restricted stock units forfeitable dividend equivalent rights equal dividend paid common stock hp expenses fair value restricted stock awards ratably period restrictions lapse stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal closing price hps stock option grant date majority stock options issued hp contain service vesting conditions however starting fiscal 2011 hp began granting performancecontingent stock options vest satisfaction service market conditions prior expiration awards connection separation accordance employee matters agreement hp make certain adjustments exercise price number sharebased compensation awards intention preserving intrinsic value awards prior separation exercisable nonexercisable stock options converted similar awards entity employee working postseparation restricted stock unit awards performancecontingent awards adjusted provide holders restricted stock units performancecontingent awards company employs employee following separation hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued restricted stock awards summary restricted stock awards activity follows fiscal 2015 hp assumed approximately 8 million shares restricted stock units acquisition weightedaverage grant date fair value 33 per share total grant date fair value restricted stock awards vested fiscal 2015 2014 2013 593 million 234 million 247 million respectively net taxes october 31 2015 total unrecognized pretax stockbased compensation expense related nonvested restricted stock awards 652 million expected recognized remaining weightedaverage vesting period 15 years stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value assumptions used measure fair value follows 1the weightedaverage fair value based stock options granted period hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued 2for awards granted fiscal 2015 fiscal 2013 expected volatility estimated using implied volatility derived options traded hps common stock awards granted fiscal 2014 expected volatility awards subject servicebased vesting estimated using implied volatility derived options traded hps common stock whereas performance contingent awards expected volatility estimated using historical volatility hps common stock 3the riskfree interest rate estimated based yield us treasury zerocoupon issues 4the expected dividend yield represents constant dividend yield applied duration expected term award 5for awards subject servicebased vesting expected term estimated using historical exercise postvesting termination patterns performancecontingent awards expected term represents output lattice model summary stock option activity follows aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options last trading day fiscal 2015 2014 2013 aggregate intrinsic value difference hps closing stock price last trading day fiscal year exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal 2015 2014 2013 214 million 151 million 36 million respectively total grant date fair value options vested fiscal 2015 2014 2013 59 million 53 million 64 million respectively net taxes hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued following table summarizes significant ranges outstanding exercisable stock options october 31 2015 total unrecognized pretax stockbased compensation expense related stock options 46 million expected recognized weightedaverage vesting period 19 years employee stock purchase plan hp sponsors 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock pursuant terms 2011 espp employees purchase stock 2011 espp price equal 95 hps closing stock price purchase date stockbased compensation expense recorded connection purchases criteria noncompensatory plan met shares reserved shares available future grant shares reserved future issuance stockbased incentive compensation plans 2011 espp follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings provision taxes domestic foreign components earnings loss taxes follows provision benefit taxes earnings follows differences us federal statutory income tax rate hps effective tax rate follows jurisdictions favorable tax rates significant effective tax rate impact periods presented include puerto rico singapore china malaysia ireland netherlands hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued extent hp plans reinvest earnings jurisdictions indefinitely outside united states us taxes provided indefinitely reinvested earnings fiscal 2015 hp recorded 16 billion net income tax benefits related items unique year amounts included 18 billion tax benefit due release valuation allowances pertaining certain us deferred tax assets 486 million tax charge record valuation allowances certain foreign deferred tax assets related legal entities within es business 394 million tax charges adjustments uncertain tax positions settlement tax audit matters inclusive 449 million tax charges related pension transfers 3 million tax charges various provision return adjustments addition hp recorded 639 million net tax benefits restructuring separationrelated charges tax benefit 47 million arising retroactive research development credit resulting tax increase prevention act 2014 signed law december 2014 fiscal 2014 hp recorded 53 million net income tax charges related items unique year fiscal 2013 hp recorded 471 million net income tax charges related items unique year amounts included 214 million net increases valuation allowances 406 million tax charges adjustments uncertain tax positions settlement tax audit matters 47 million tax charges various prior period adjustments addition hp recorded 146 million tax benefits adjustments prior year foreign income tax accruals tax benefit 50 million arising retroactive research development credit resulting american taxpayer relief act 2012 signed law january 2013 result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2026 gross income tax benefits attributable actions investments estimated 581 million 032 diluted net eps fiscal year 2015 12 billion 061 diluted net eps fiscal 2014 827 million 042 diluted net eps fiscal year 2013 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued uncertain tax positions reconciliation unrecognized tax benefits follows 30 billion 22 billion 19 billion hps unrecognized tax benefits october 31 2015 2014 2013 respectively would affect hps effective tax rate realized 58 billion increase amount unrecognized tax benefits year ended october 31 2015 primarily relates timing intercompany royalty income recognition affect hps effective tax rate hp recognizes interest income favorable settlements interest expense penalties accrued unrecognized tax benefits provision taxes consolidated statements earnings hp accrued 357 million 254 million interest penalties october 31 2015 2014 respectively hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution us internal revenue service irs audit cycle within next 12 months however reasonably possible certain federal foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 144 million within next 12 months hp subject income tax us approximately 105 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits federal state foreign tax authorities irs conducting audit hps 2009 2010 2011 2012 2013 2014 income tax returns hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agent reports rar fiscal 2001 2002 2006 2007 2008 tax years proposed irs adjustments tax years would sustained reduce benefits tax refund claims hp filed net operating loss carrybacks earlier fiscal years tax credit carryforwards subsequent years approximately 445 million addition hp expects irs issue rar 2009 2011 relating certain tax positions taken filed tax returns including matters related us taxation certain intercompany loans rar may material amount hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued believes valid positions supporting tax returns necessary vigorously defend matters hp filed petitions us tax court regarding certain proposed irs adjustments regarding tax years 1999 2003 continuing contest additional adjustments proposed irs tax years us tax court ruled may 2012 hp regarding one irs adjustments hp filed formal notice appeal court proceedings expected begin fiscal 2016 preacquisition tax years hps us group subsidiaries providing enterprise services 2004 audited irs proposed adjustments resolved rars received tax years 2005 2006 2007 short period ended august 26 2008 proposing total tax deficiencies 274 million hp contesting certain issues irs began audit fiscal 2013 2010 income tax return hps us group subsidiaries providing enterprise services issued rar short period ended october 31 2008 period ending october 31 2009 proposing total tax deficiency 62 million hp contesting certain issues respect major state foreign tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp subject foreign tax audit concerning intercompany transaction fiscal 2009 relevant taxing authority proposed assessment approximately 733 million hp contesting proposed assessment hp believes provided adequate reserves tax deficiencies reductions tax benefits could result federal state foreign tax audits hp regularly assesses likely outcomes audits order determine appropriateness hps tax provision hp adjusts uncertain tax positions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular audit however income tax audits inherently unpredictable assurance hp accurately predict outcome audits amounts ultimately paid resolution audit could materially different amounts previously included provision taxes therefore resolution one uncertainties particular period could material impact net income cash flows hp provided us federal income foreign withholding taxes 472 billion undistributed earnings nonus operations october 31 2015 hp intends reinvest earnings indefinitely outside us hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated hp determines advantageous business operations tax cash management reasons hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued deferred income taxes significant components deferred tax assets deferred tax liabilities follows current longterm deferred tax assets liabilities included consolidated balance sheets follows excess tax benefits 64 million recorded resulting exercise employee stock options employee stock programs fiscal 2015 tax deficits approximately 43 million 149 million recorded result employee stock program activity exercise employee stock options decrease stockholders equity fiscal 2014 2013 respectively hp periodically engages intercompany advanced royalty payment licensing arrangements may result advance payments subsidiaries different tax jurisdictions local hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued tax treatment intercompany licensing arrangements differs us gaap treatment deferred taxes recognized fiscal 2015 hp executed intercompany advanced royalty payment arrangement resulting advanced payments 88 billion fiscal 2014 hp executed multiyear intercompany licensing arrangement intercompany advanced royalty payment arrangement resulted combined advanced payments 115 billion result recognition zero net us deferred tax assets fiscal 2015 17 billion fiscal 2014 transactions payments received us foreign consolidated affiliate deferral intercompany revenues term arrangements approximately 5 years 15 years respectively intercompany royalty revenue amortization expense related licensing rights eliminated consolidation separation costs expenses associated hps plan separate two independent publiclytraded companies hp recorded deferred tax asset costs expenses incurred fiscal 2015 hp expects portion deferred tax assets associated separation costs expenses nondeductible expenses time separation executed furthermore hp also concluded legal form separation may 2015 announced hewlett packard enterprise spinnee us accordingly second half fiscal 2015 hp implemented certain internal reorganizations transactions among wholly owned subsidiaries operating activities preparation legal form separation result hp recorded adjustments certain deferred prepaid tax assets well income tax liabilities reflecting impact separation related activities october 31 2015 hp 971 million 61 billion 268 billion federal state foreign net operating loss carryforwards respectively amounts included respective totals begin expire fiscal 2023 2016 respectively hp also capital loss carryforwards approximately 26 million expire fiscal 2020 hp provided valuation allowance 106 million 82 billion related state foreign net operating loss carryforwards respectively october 31 2015 hp recorded deferred tax assets various tax credit carryforwards follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued deferred tax asset valuation allowance deferred tax asset valuation allowance changes follows gross deferred tax assets october 31 2015 2014 2013 reduced valuation allowances 99 billion 119 billion 114 billion respectively total valuation allowance decreased 2 billion fiscal 2015 associated reversal valuation allowance deferred tax assets us increased 525 million fiscal 2014 associated primarily foreign net operating losses tax matters agreement income tax matters connection separation hp entered tax matters agreement tax matters agreement hewlett packard enterprise effective november 1 2015 governs rights obligations hp hewlett packard enterprise certain preseparation tax liabilities tax matters agreement provides hp hewlett packard enterprise share certain preseparation income tax liabilities arise adjustments made tax authorities hp hewlett packard enterprises us certain nonus income tax returns certain jurisdictions hp hewlett packard enterprise joint several liability past income tax liabilities accordingly hp could legally liable applicable tax law liabilities required make additional tax payments addition distribution hewlett packard enterprises common shares hp stockholders determined taxable hewlett packard enterprise hp would share tax liability equally unless taxability distribution direct result action taken either hewlett packard enterprise hp subsequent distribution case party causing distribution taxable would responsible taxes imposed distribution upon completion separation november 1 2015 hp recorded net payable hewlett packard enterprise 390 million certain tax liabilities hewlett packard enterprise joint severally liable indemnified hp tax matters agreement actual amount hp may obligated pay could vary depending upon outcome certain unresolved tax matters may resolved several years hp inc subsidiaries notes consolidated financial statements continued note 7 balance sheet details balance sheet details follows accounts receivable net allowance doubtful accounts related accounts receivable changes follows hp thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers maximum utilized available program capacity shortterm financing arrangements follows 1utilized capacity represents receivables sold third parties collected customer third parties hp inc subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued 2hp reflects amounts transferred yet collected third parties accounts receivable consolidated balance sheets amounts included utilized capacity follows activity related hps revolving shortterm financing arrangements follows 1beginning ending balance represents amounts trade receivables sold yet collected 2in fiscal 2014 hp revised presentation trade receivables sold cash received shortterm financing arrangements fiscal year ended october 31 2013 order present comparable information period inventory hp inc subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued current assets property plant equipment depreciation expense 31 billion 33 billion 32 billion fiscal 2015 2014 2013 respectively change gross property plant equipment due primarily purchases 37 billion partially offset sales retirements totaling 29 billion unfavorable currency impacts 05 billion accumulated depreciation associated assets sold retired fiscal 2015 25 billion longterm financing receivables assets hp inc subsidiaries notes consolidated financial statements continued note 7 balance sheet details continued accrued liabilities note 8 financing receivables operating leases financing receivables represent salestype directfinancing leases hp thirdparty products receivables typically terms ranging two five years usually hp inc subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued collateralized security interest underlying assets financing receivables also include billed receivables operating leases components financing receivables follows 1hp includes current portion financing receivables amounts due one year net longterm financing receivables assets accompanying consolidated balance sheets october 31 2015 scheduled maturities hps minimum lease payments receivable follows credit quality indicators due homogenous nature leasing transactions hp manages financing receivables aggregate basis assessing monitoring credit risk credit risk generally diversified due large number entities comprising hps customer base dispersion across many different industries geographic regions hp evaluates credit quality obligor lease inception monitors credit quality term transaction hp assigns risk ratings lease based creditworthiness obligor variables augment mitigate inherent credit risk particular transaction variables include underlying value liquidity collateral essential use equipment term lease inclusion credit enhancements guarantees letters credit security deposits hp classifies accounts high risk considers financing receivable impaired management believes significant nearterm risk impairment hp inc subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued credit risk profile gross financing receivables based internally assigned ratings follows allowance doubtful accounts allowance doubtful accounts financing receivables comprised general reserve specific reserve hp maintains general reserve percentages regional basis bases percentages several factors including consideration historical credit losses portfolio delinquencies trends overall weightedaverage risk rating portfolio current economic conditions information derived competitive benchmarking hp excludes accounts evaluated part specific reserve general reserve analysis hp establishes specific reserve financing receivables identified exposures customer defaults bankruptcy events make unlikely hp recover investment individually evaluated receivables hp determines expected cash flow receivable includes consideration estimated proceeds disposition collateral calculates estimate potential loss probability loss accounts loss considered probable hp records specific reserve hp generally writes receivable records specific reserve receivable becomes 180 days past due sooner hp determines receivable collectible allowance doubtful accounts related financing receivables changes follows hp inc subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued gross financing receivables related allowance evaluated loss follows nonaccrual pastdue financing receivables hp considers financing receivable past due minimum payment received contractually specified due date hp generally places financing receivables nonaccrual status suspension interest accrual considers receivables nonperforming earlier time full payment principal interest becomes doubtful receivable becomes 90 days past due subsequently hp may recognize revenue nonaccrual financing receivables payments received cash basis hp deems recorded financing receivable fully collectible however doubt regarding ultimate collectability recorded financing receivable cash receipts applied carrying amount financing receivable cost recovery method certain circumstances hp deems delinquency administrative nature financing receivables may accrue interest becoming 90 days past due nonaccrual status financing receivable may impact customers risk rating customers delinquent principal interest balances settled hp may return related financing receivable accrual status hp inc subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued following table summarizes aging nonaccrual status gross financing receivables 1includes billed operating lease receivables billed salestype directfinancing lease receivables 2includes billed operating lease receivables billed unbilled salestype directfinancing lease receivables operating leases operating lease assets included machinery equipment consolidated balance sheets follows hp inc subsidiaries notes consolidated financial statements continued note 8 financing receivables operating leases continued october 31 2015 minimum future rentals noncancelable operating leases related leased equipment follows note 9 acquisitions divestitures acquisitions fiscal 2015 hp completed five acquisitions purchase price allocation acquisitions set forth table reflects various preliminary fair value estimates analyses including preliminary work performed thirdparty valuation specialists subject change within measurement period valuations finalized primary areas preliminary purchase price allocation yet finalized relate fair values certain tangible assets liabilities acquired valuation intangible assets acquired certain legal matters income nonincome based taxes residual goodwill hp expects continue obtain information assist determining fair value net assets acquired acquisition date measurement period measurement period adjustments hp determines material applied retrospectively period acquisition hps consolidated financial statements depending nature adjustments periods subsequent period acquisition could also affected pro forma results operations acquisitions presented material hps consolidated results operations either individually aggregate goodwill represents excess purchase price net tangible intangible assets acquired deductible tax purposes following table presents aggregate purchase price allocation including items still preliminary allocations hps acquisitions fiscal 2015 hp inc subsidiaries notes consolidated financial statements continued note 9 acquisitions divestitures continued acquisition aruba hps largest acquisition fiscal 2015 acquisition aruba completed may 2015 aruba leading provider nextgeneration network access solutions mobile enterprise hp reported financial results arubas business networking business unit within eg segment acquisition date fair value consideration 28 billion consisted cash paid outstanding common stock vested inthemoney stock awards estimated fair value earned unvested stock awards assumed hp connection acquisition hp recorded approximately 18 billion goodwill 643 million intangible assets 153 million iprd hp amortizing intangible assets straightline basis estimated weightedaverage life six years acquisitions prior year fiscal 2014 hp completed two acquisitions combined purchase price 55 million 12 million recorded goodwill 25 million recorded intangible assets related acquisitions divestitures fiscal 2015 hp completed five divestitures resulted 246 million proceeds divestitures included hps sale webbased photo sharing photo printing service snapfish previously reported within consumer hardware business unit within printing segment additionally hp completed sales livevault imanage businesses previously reported within software segment gains associated divestitures included selling general administrative expenses consolidated statements earnings may 2015 hp tsinghua holdings jointly announced partnership bring together chinese enterprise technology assets hewlett packard enterprise tsinghua university create chinese provider technology infrastructure definitive agreement tsinghua holdings subsidiary unisplendour corporation purchase 51 new business called h3c comprising hewlett packard enterprises current h3c technologies chinabased server storage technology services businesses approximately 23 billion hewlett packard enterprise china maintain 100 ownership existing chinabased es aruba software hewlett packard enterprise helion cloud businesses transaction closes new h3c exclusive provider hewlett packard enterprises server storage networking portfolio well hewlett packard enterprises exclusive hardware support services provider china customized market transaction part hewlett packard enterprise result separation expected close first quarter fiscal 2016 subject regulatory approvals closing conditions october 2015 hp signed definitive agreement sell tippingpoint business trend micro international approximately 300 million tippingpoint provider nextgeneration intrusion prevention systems related network security solutions results tippingpoint recorded within software segment transaction part hewlett packard enterprise result separation expected close first quarter fiscal 2016 subject regulatory approvals closing conditions hp inc subsidiaries notes consolidated financial statements continued note 10 goodwill intangible assets goodwill allocated hps reportable segments changes carrying amount goodwill follows 1goodwill net accumulated impairment losses 145 billion amount 80 billion relates es segment 57 billion relates software remaining 08 billion relates corporate investments 2in connection separation effective beginning fourth quarter fiscal 2015 hp implemented organizational change resulted transfer marketing optimization solutions business software segment commercial hardware business unit within printing segment result hp reclassified 512 million goodwill related marketing optimization solutions business software segment printing segment reclassification reflected retrospectively periods presented 3goodwill relates mphasis limited reporting unit fiscal 2015 hp recorded approximately 20 billion goodwill related acquisitions based preliminary fair value estimates assets acquired goodwill adjustments primarily relate allocation goodwill livevault snapfish imanage businesses sold period goodwill impairments goodwill tested impairment reporting unit level october 31 2015 reporting units consistent reportable segments identified note 2 except es includes two reporting units mphasis limited remainder es based results annual impairment tests hp determined impairment goodwill existed august 1 2015 goodwill impairments fiscal 2014 2013 hp inc subsidiaries notes consolidated financial statements continued note 10 goodwill intangible assets continued however future goodwill impairment tests could result charge net earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment intangible assets hps intangible assets composed fiscal 2015 decrease gross intangible assets due primarily 936 million intangible assets became fully amortized partially offset intangible assets iprd resulting hps acquisitions primarily acquisition aruba fully amortized intangible assets eliminated gross intangible assets accumulated amortization period fiscal 2014 855 million intangible assets became fully amortized eliminated gross intangible assets accumulated amortization hp also eliminated gross intangible assets accumulated amortization related sale portfolio intellectual property ip first quarter fiscal 2014 weightedaverage useful lives intangible assets october 31 2015 follows hp inc subsidiaries notes consolidated financial statements continued note 10 goodwill intangible assets continued october 31 2015 estimated future amortization expense related finitelived intangible assets follows note 11 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy hp uses valuation techniques based upon observable unobservable inputs observable inputs developed using market data publicly available information reflect assumptions market participants would use unobservable inputs developed using best information available assumptions market participants would use assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability marketcorroborated inputs level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs hp inc subsidiaries notes consolidated financial statements continued note 11 fair value continued following table presents hps assets liabilities measured fair value recurring basis transfers fair value hierarchy fiscal 2015 2014 valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including nav models utilizing market observable inputs fair value debt investments based quoted market prices modeldriven valuations using inputs primarily derived corroborated observable market data certain instances valuation models utilize assumptions cannot corroborated observable market data derivative instruments hp uses forward contracts interest rate total return swaps option contracts hedge certain foreign currency interest rate exposures hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign currency rates forward spot prices currencies interest rates see note 12 discussion hps use derivative instruments hp inc subsidiaries notes consolidated financial statements continued note 11 fair value continued fair value disclosures short longterm debt hp estimates fair value debt primarily using expected present value technique based observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considering credit risk portion hps debt hedged reflected consolidated balance sheets amount equal debts carrying amount fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates estimated fair value hps short longterm debt approximated carrying amount 247 billion october 31 2015 estimated fair value hps short longterm debt 199 billion october 31 2014 compared carrying amount 195 billion date measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hps financial instruments primarily accounts receivable accounts payable financial liabilities included accrued liabilities carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 2 level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets elements within hps nonmarketable equity investments nonfinancial assets goodwill intangible assets property plant equipment recorded fair value period impairment charge recognized measured fair value consolidated balance sheets would generally classified level 3 fair value hierarchy fiscal 2015 hp determined would exit certain data centers hp conducted analysis respective asset group determine carrying value greater fair value result assessment hp recorded 136 million impairment charge impairment data center assets consolidated statements earnings hp inc subsidiaries notes consolidated financial statements continued note 12 financial instruments cash equivalents availableforsale investments cash equivalents availableforsale investments follows highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2015 2014 carrying amount cash equivalents approximated fair value due short period time maturity interest income related cash equivalents debt securities approximately 129 million fiscal 2015 136 million fiscal 2014 148 million fiscal 2013 time deposits primarily issued institutions outside us october 31 2015 2014 estimated fair value availableforsale investments may representative values realized future gross unrealized loss october 31 2015 2014 due primarily decline fair value debt security 13 million 14 million respectively continuous loss position twelve months hp intend sell debt security likely hp required sell debt security prior recovery amortized cost hp inc subsidiaries notes consolidated financial statements continued note 12 financial instruments continued contractual maturities investments availableforsale debt securities follows equity securities privately held companies include cost basis equity method investments included longterm financing receivables assets consolidated balance sheets amounted 58 million 97 million october 31 2015 2014 respectively derivative instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts interest rate swaps total return swaps times option contracts hedge certain foreign currency interest rate lesser extent equity exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair value assets liabilities hp leveraged derivatives use derivative contracts speculative purposes hp may designate derivative contracts fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivative instruments fair value consolidated balance sheets hp classifies cash flows derivative programs activities correspond underlying hedged items consolidated statements cash flows result use derivative instruments hp exposed risk counterparties fail meet contractual obligations mitigate counterparty credit risk hp policy entering derivative contracts carefully selected major financial institutions based credit ratings factors hp maintains dollar risk limits correspond financial institutions credit rating factors hps established policies procedures mitigating credit risk include reviewing establishing limits credit exposure periodically reassessing creditworthiness counterparties master netting agreements mitigate credit exposure counterparties permitting hp net amounts due hp counterparty amounts due hp counterparty certain conditions mitigate credit exposure counterparties hp collateral security agreements allow hp hold collateral require hp post collateral counterparties aggregate derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hps counterpartys credit rating falls specified credit rating either party right request full collateralization derivatives net liability hp inc subsidiaries notes consolidated financial statements continued note 12 financial instruments continued position collateral generally posted within two business days fair value derivatives credit contingent features net liability position 173 million 38 million october 31 2015 2014 respectively fully collateralized within two business days hps derivative contracts counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hps financial position cash flows october 31 2015 2014 fair value hedges hp issues longterm debt primarily us dollars based market conditions time financing hp may enter fair value hedges interest rate swaps reduce exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar london interbank offered rate liborbased floating interest expense swap transactions generally involve principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial investing fixedrate instruments hp may enter interest rate swaps convert fixed interest payments variable interest payments may designate swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes change fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change cash flow hedges hp uses forward contracts times option contracts designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales operating expenses intercompany loans denominated currencies us dollar hps foreign currency cash flow hedges mature generally within twelve months however hedges related longer term procurement arrangements extend several years forward contracts associated salestype directfinancing leases intercompany loans extend duration lease loan term typically range two five years derivative instruments designated qualify cash flow hedges hp initially records changes fair value effective portion derivative instrument accumulated comprehensive loss separate component stockholders equity consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes fair value hedged item hp inc subsidiaries notes consolidated financial statements continued note 12 financial instruments continued net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency hp records effective portion derivative instruments together changes fair value hedged items cumulative translation adjustment separate component stockholders equity consolidated balance sheets derivatives designated hedging instruments consist primarily forward contracts used hedge foreign currencydenominated balance sheet exposures hp also uses total return swaps lesser extent interest rate swaps based equity fixed income indices hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change hedge effectiveness interest rate swaps designated fair value hedges hp measures hedge effectiveness offsetting change fair value hedged item change fair value derivative foreign currency options forward contracts designated cash flow net investment hedges hp measures hedge effectiveness comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates hp recognizes ineffective portion hedge consolidated statements earnings period ineffectiveness occurs amounts excluded assessment effectiveness recognized consolidated statements earnings period arise hp inc subsidiaries notes consolidated financial statements continued note 12 financial instruments continued fair value derivative instruments consolidated balance sheets gross notional fair value derivative instruments consolidated balance sheets follows offsetting derivative instruments hp recognizes derivative instruments gross basis consolidated balance sheets hp offset fair value derivative instruments fair value cash collateral posted collateral security agreements october 31 2015 2014 information related potential effect hps master netting agreements collateral security agreements follows hp inc subsidiaries notes consolidated financial statements continued note 12 financial instruments continued 1represents cash collateral posted counterparties respective reporting date hps asset position net derivative amounts could offset generally two business days prior respective reporting date 2represents collateral posted hp reuse counterparty cash collateral respective reporting date hps liability position net derivative amounts could offset generally two business days prior respective reporting date effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2015 2014 2013 follows pretax effect derivative instruments cash flow net investment hedging relationships fiscal years ended october 31 2015 2014 2013 follows hp inc subsidiaries notes consolidated financial statements continued note 12 financial instruments continued october 31 2015 2014 2013 portion hedging instruments gain loss excluded assessment effectiveness fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal 2015 2014 2013 october 31 2015 hp expects reclassify estimated net accumulated comprehensive gain approximately 26 million net taxes earnings next twelve months along earnings effects related forecasted transactions associated cash flow hedges pretax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal 2015 2014 2013 follows note 13 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows 1out current portion longterm debt 21 billion us dollar global notes redeemed repaid november 4 2015 2commercial paper balance 39 million 298 million notes payable banks lines credit includes 374 million 404 million october 31 2015 2014 respectively borrowing fundingrelated activity associated hpfs subsidiaries hp inc subsidiaries notes consolidated financial statements continued note 13 borrowings continued longterm debt hp inc subsidiaries notes consolidated financial statements continued note 13 borrowings continued 1hp may redeem fixedrate us dollar global notes eds senior notes time accordance terms thereof us dollar global notes eds senior notes senior unsecured debt 2other including capital lease obligations includes 196 million 123 million october 31 2015 2014 respectively borrowing fundingrelated activity associated hpfs subsidiaries collateralized receivables underlying assets associated related capital operating leases periods presented carrying amount assets approximated carrying amount borrowing disclosed note 12 hp uses interest rate swaps mitigate exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar liborbased floating interest expense interest rates shown table longterm debt adjusted reflect impact interest rate swaps october 31 2015 aggregate future maturities debt face value excluding fair value adjustment related hedged debt 48 million premium debt issuance 13 million discount debt issuance 25 million follows hp inc subsidiaries notes consolidated financial statements continued note 13 borrowings continued interest expense borrowings recognized consolidated statements earnings fiscal years follows hewlett packard enterprise senior notes october 9 2015 hewlett packard enterprise completed offering pricing nine series senior unsecured notes aggregate principal amount 146 billion includes 140 billion fixed rate notes 600 million floating rate notes interest fixed rate notes payable semiannually interest floatingrate notes payable quarterly issuance costs 54 million included assets consolidated balance sheets amortized interest expense term notes initially guaranteed hp guarantee automatically unconditionally released upon completion separation november 1 2015 concurrent issuance notes hewlett packard enterprise entered interest rate swaps reduce exposure 95 billion aggregate principal amount fixed rate senior notes changes fair value resulting changes interest rates achieving liborbased floating interest expense extinguishment debt september 30 2015 hp commenced cash tender offers tender offers purchase 885 billion outstanding debt securities two separate offers outstanding 220 notes due december 2015 265 notes due june 2016 300 notes due september 2016 330 notes due december 2016 540 notes due march 2017 260 notes due september 2017 550 notes due march 2018 ii 23 billion aggregate principal amount outstanding 275 notes due january 2019 floating rate notes due january 2019 375 notes due december 2020 430 notes due june 2021 4375 notes due september 2021 4650 notes due december 2021 4050 notes due september 2022 600 notes due september 2041 fourth quarter fiscal 2015 hp redeemed repaid 66 billion early extinguishment debt resulted loss 167 million net realized gains fair value hedges recorded interest net consolidated statements earnings november 4 2015 hp incrementally redeemed repaid total 21 billion fixedrate us dollar global notes resulted loss 66 million net realized gains fair value hedges commercial paper hps board directors authorized issuance 160 billion aggregate principal amount commercial paper hp hps subsidiaries authorized issue additional 10 billion aggregate principal amount commercial paper hp maintains two commercial paper hp inc subsidiaries notes consolidated financial statements continued note 13 borrowings continued programs whollyowned subsidiary maintains third program hps us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 160 billion hps euro commercial paper program provides issuance commercial paper outside us denominated us dollars euros british pounds maximum aggregate principal amount 30 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 160 billion authorized hps board directors hp subsidiarys euro commercial papercertificate deposit programme provides issuance commercial paper various currencies maximum aggregate principal amount 500 million november 1 2015 hps board directors authorized borrow use benefit hp hps subsidiaries issuance commercial paper execution promissory notes loan agreements letters credit agreements lines credit overdraft facilities total outstanding principal balance commercial paper issued shall exceed 40 billion equivalent foreign currencies hewlett packard enterprise commercial paper credit agreements hewlett packard enterprises board directors authorized issuance 40 billion aggregate principal amount commercial paper hewlett packard enterprise maintains two commercial paper programs us dollardenominated commercial paper program hewlett packard enterprise permitted issued outstanding 40 billion unsecured commercial paper notes us commercial paper program ii eurocommercial paper program hewlett packard enterprise permitted issued outstanding 3 billion unsecured commercial paper notes issued outside us euro commercial paper program combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 40 billion hewlett packard enterprises subsidiaries authorized issue additional 500 million aggregate principal amount commercial paper hewlett packard enterprise subsidiarys euro commercial paper certificate deposit program provides issuance commercial paper various currencies maximum aggregate principal amount 500 million credit agreements october 31 2015 hp maintained senior unsecured committed credit facilities primarily support issuance commercial paper hp 30 billion fiveyear credit facility would expired march 2017 45 billion fiveyear credit facility would expired april 2019 facilities supported us commercial paper program euro commercial paper program commitment fees interest rates terms borrowing credit facilities varied based hps external credit ratings hps ability outstanding us commercial paper balance exceeded 75 billion supported credit facilities subject number factors including liquidity conditions business performance addition 30 billion fiveyear credit facility amended september 2012 permit borrowings euros british pounds amounts available euros british pounds limited us dollar equivalent 22 billion 300 million respectively hp inc subsidiaries notes consolidated financial statements continued note 13 borrowings continued november 1 2015 30 billion fiveyear credit facility cancelled hp amended 45 billion fiveyear credit facility revolving credit facility providing senior unsecured revolving credit facility aggregate lending commitments 40 billion commitments revolving credit facility available period ending april 2 2019 funds borrowed revolving credit facility may used general corporate purposes term loan agreement april 30 2015 hp entered credit agreement provides senior unsecured delayed multiple draw term loan facility aggregate principal amount 50 billion funds borrowed agreement used general corporate purposes including pay expenses associated hps proposed plan separate two independent publicly traded companies matters related acquisition aruba fiscal 2015 hp borrowed repaid 35 billion credit agreement along repayment fourth quarter fiscal 2015 term loan agreement terminated upon separation available borrowing resources hps subsidiaries resources available obtain shortor longterm financing follows 1the extent hp able utilize commercial paper programs sources liquidity given time subject number factors including market demand hp securities commercial paper hps financial performance hps credit ratings market conditions generally note 14 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends declared 067 per common share fiscal 2015 061 per common share fiscal 2014 055 per common share fiscal 2013 share repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2015 hp executed share repurchases 75 million shares included 05 million shares settled november 2015 fiscal 2015 hp settled total shares 29 billion fiscal 2014 hp executed share repurchases 92 million shares settled total shares 27 billion fiscal 2013 hp executed share repurchases 77 million shares settled total shares 15 billion hp inc subsidiaries notes consolidated financial statements continued note 14 stockholders equity continued shares repurchased fiscal 2015 2014 2013 open market repurchase transactions october 31 2015 hp remaining authorization 20 billion future share repurchases 100 billion repurchase authorization approved hps board directors july 21 2011 taxes related comprehensive loss income hp inc subsidiaries notes consolidated financial statements continued note 14 stockholders equity continued changes reclassifications related comprehensive loss income net taxes 1reclassification pretax gains losses cash flow hedges consolidated statements earnings follows 2these components included computation net pension postretirement benefit credit cost note 4 hp inc subsidiaries notes consolidated financial statements continued note 14 stockholders equity continued components accumulated comprehensive loss net taxes october 31 2015 changes fiscal year 2015 follows note 15 net earnings per share hp calculates basic net eps using net earnings weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock awards stock options performancebased awards shares purchased 2011 espp reconciliations numerators denominators basic diluted net eps calculations follows 1hp considers restricted stock awards provide holder nonforfeitable right receive dividends participating securities october 31 2015 restricted stock hp inc subsidiaries notes consolidated financial statements continued note 15 net earnings per share continued awards outstanding fiscal 2014 2013 net earnings allocated participating securities significant 2hp excludes options restricted stock units assumed proceeds exceed average market price calculation diluted net eps effect would antidilutive assumed proceeds option include sum exercise price average unrecognized compensation cost excess tax benefits assumed proceeds restricted stock unit include sum average unrecognized compensation cost excess tax benefits note 16 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2015 reasonably possible material loss incurred excess amounts recognized hps financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies separation distribution agreement hp hewlett packard enterprise agreed cooperate managing litigation environmental matters related companies businesses separation distribution agreement also included provisions assign company responsibility managing pending future litigation environmental matters related general corporate matters hp arising prior separation litigation proceedings investigations copyright levies described proceedings ongoing concluded involving hp certain european union eu member countries including litigation germany belgium austria seeking impose modify levies upon equipment multifunction devices mfds pcs printers alleging devices enable producing private copies copyrighted materials descriptions ongoing proceedings included levies generally based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted legal proceedings hp stuttgart civil court seeking impose levies hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 stuttgart court appeals may 11 2005 stuttgart court appeals issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law vg wort appealed decision filing claim german federal constitutional court challenging ruling printers subject levies september 21 2010 constitutional court published decision holding german federal supreme court erred referring questions interpretation german copyright law court justice european union cjeu therefore revoked german federal supreme court decision remitted matter july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive june 27 2013 cjeu issued decision responding questions german federal supreme court subsequently scheduled joint hearing matter cases relating reprographic levies printers pcs held october 31 2013 german federal supreme court issued decision july 3 2014 partially granting claim vg wort german federal supreme court decision provides levies due printer used pc make permitted reprographic copies single process control person levies due printer reprographic copies made scannerpcprinter product chain case remitted stuttgart civil court assess amount paid per printer unit industry association bitkom vg wort signed settlement agreement defining levies due printers sold germany 20012007 hp opted join settlement agreement august 10 2015 paid €682 million approximately 720 million levies excluding value added taxes due result settlement november 30 2015 september 2003 vg wort filed lawsuit fujitsu technology solutions gmbh fujitsu munich civil court munich germany seeking impose levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fujitsu december 23 2004 munich civil court held pcs subject levy fujitsu must pay €12 plus compound interest pc sold germany since march 2001 fujitsu appealed decision january 2005 munich court appeals december 15 2005 munich court appeals affirmed munich civil court decision fujitsu filed appeal german federal supreme court february 2006 october 2 2008 german federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law vg wort subsequently filed claim german federal constitutional court challenging ruling january 2011 constitutional court published decision holding german federal supreme court decision inconsistent german constitution revoking german federal supreme court decision constitutional court also remitted matter german federal supreme court action july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive june 27 2013 cjeu issued decision responding questions german federal supreme court subsequently scheduled joint hearing matter cases relating reprographic levies printers held october 31 2013 hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued german federal supreme court issued decision july 3 2014 partially granting claim vg wort german federal supreme court decision provides levies due audiovisual copying standing text pictures using pc last device single reproduction process control person levies due pc reprographic copies made using pcprinter scannerpcprinter chain case remitted munich court appeals assess amount paid per pc unit reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based copying speed operated normal print mode set default device november 16 2012 court issued decision holding belgium law conformity eu law number respects ordered november 2013 reprobel substantiate amounts claimed reprobel commensurate harm resulting legitimate copying reprographic exception hp subsequently appealed court decision courts appeal brussels seeking confirm belgian law conformity eu law belgian law interpreted manner consistent eu law payments hp required alternatively payments already made hp sufficient comply obligations belgian law october 23 2013 court appeal brussels stayed proceedings referred several questions cjeu relating whether belgian reprographic copyright levies system conformity eu law case heard cjeu january 29 2015 november 12 2015 cjeu published judgment providing national legislation belgian one issue main proceedings incompatible eu law multiple legal points argued hp court appeal brussels rule litigation hp reprobel following answers provided cjeu based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates number units impacted amounts levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed remains uncertain memjet technology ltd v hp august 11 2015 memjet technology ltd memjet filed lawsuit hp us district court southern district california complaint alleges hp infringes eight memjet patents products accused infringement use hp pagewide technology including officejet pro x series officejet enterprise x series hp pagewide xl wide scan printers using 425inch thermal inkjet printheads hp web presses photo kiosks october 2 2015 hp answered memjets complaint asserted counterclaim memjet infringement four hp patents products accused infringement include various memjet oem printers incorporate memjets printheads print engines november 20 2015 hp asserted three additional patents memjet patents hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued asserted parties generally relate inkjet printhead print system technology memjets hps respective complaints seek injunctive relief monetary damages party alleged patent infringement november 16 2015 memjet granted ex parte preliminary injunction germany state court munich hp deutschland gmbhs sale offers sale hp pagewide xl printers memjets injunction request alleges hp infringes memjet european patent december 4 2015 hp filed opposition application suspend enforcement preliminary injunction pending court hearing decision december 9 2015 court denied hps application suspend enforcement prior hearing scheduled january 7 2016 fair labor standards act litigation hp involved several lawsuits plaintiffs seeking unpaid overtime compensation damages based allegations various employees electronic data systems corporation eds hp misclassified exempt employees fair labor standards act flsa andor violation california labor code state laws matters include following •karlbom et al v electronic data systems corporation purported wage hour class action filed march 16 2009 california superior court plaintiffs claim eds hp information technology employees infrastructure job codes working california misclassified exempt overtime wrongfully paid law october 30 2015 plaintiffs filed motion certify rule 23 state class californiabased eds employees infrastructure associate infrastructure analyst infrastructure specialist infrastructure specialist senior job codes march 16 2005 october 31 2009 claim improperly classified exempt overtime state law pursuant separation distribution agreement hewlett packard enterprise assigned responsibility litigation •benedict v hewlettpackard company purported class action filed january 10 2013 united states district court northern district california alleging certain technical support employees allegedly involved installing maintaining andor supporting computer software andor hardware hp misclassified exempt employees fair labor standards act plaintiff also alleged hp violated california law among things allegedly improperly classifying employees exempt february 13 2014 court granted plaintiffs motion conditional class certification may 7 2015 plaintiffs filed motion certify rule 23 state class certain technical solutions consultants california massachusetts colorado claim improperly classified exempt overtime state law july 30 2015 court dismissed technology consultant certain field technical support consultant optins conditionally certified flsa collective action pursuant separation distribution agreement hewlett packard enterprise assigned responsibility litigation india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence dri issued show cause notices hewlettpackard india sales private ltd hp india subsidiary hp seven hp india employees one former hp india employee alleging hp india underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp india deposited approximately 16 million dri hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued agreed post provisional bond exchange dris agreement seize hp india products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hp india named individuals approximately 386 million hp india already deposited 9 million december 11 2012 hp india voluntarily deposited additional 10 million connection productsrelated show cause notice differential duty demand subject interest april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hp india certain named individuals approximately 17 million hp india already deposited 7 million order hp india deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hp india filed appeals commissioners orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hp india deposit additional 24 million products order hp india deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hp india filed applications customs tribunal seeking early hearing appeals well extension stay deposit hp india individuals already granted final disposition appeals february 7 2014 application extension stay deposit granted customs tribunal disposal appeals october 27 2014 customs tribunal commenced hearings crossappeals commissioners orders customs tribunal rejected hp indias request remand matter commissioner procedural grounds hearings scheduled reconvene april 6 2015 november 3 2015 cancelled request customs tribunal new hearing date set russia gpo anticorruption investigations german public prosecutors office german ppo conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard ise gmbh germany former subsidiary hp general prosecutors office russian federation approximately €35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network german ppo issued indictment four individuals including one current two former hp employees charges including bribery breach trust tax evasion german ppo also requested hp made associated party case request granted hp would participate portion court proceedings could ultimately bear question whether hp subject potential disgorgement profits based conduct indicted current former employees regional court leipzig determine whether matter admitted trial polish central anticorruption bureau also investigating potential corrupt actions former employee hewlettpackard polska sp z oo former indirect subsidiary hp connection certain publicsector transactions poland hp cooperating investigating agencies december 2 2014 plaintiffs petroleos mexicanos pemex exploracion filed complaint hp mexico united states district court northern district california hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued alleging violations racketeer influenced corrupt organizations act rico act fraudulent concealment tortious interference violations california unfair competition law connection alleged improper payments provided pemex officials thirdparties retained hp mexico allegations arise subjectmatter previously disclosed 2014 nonprosecution agreement hp mexico doj simultaneous ceaseanddesist order hp issued securities exchange commission sec february 9 2015 hp mexico filed motion dismiss complaint entirety july 13 2015 court granted motion dismiss gave plaintiffs leave amend complaint plaintiffs filed first amended complaint july 31 2015 august 21 2015 hp mexico filed motion dismiss first amended complaint november 3 2015 parties settled matter payment court dismissed case prejudice november 4 2015 ect proceedings january 2011 postal service brazil empresa brasileira de correios e telégrafos ect notified hp subsidiary brazil hp brazil initiated administrative proceedings consider whether suspend hp brazils right bid contract ect related alleged improprieties bidding contracting processes whereby employees hp brazil employees several companies allegedly coordinated bids fixed results three ect contracts 2007 2008 late july 2011 ect notified hp brazil decided apply penalties hp brazil suspend hp brazils right bid contract ect five years based upon evidence august 2011 hp brazil appealed ects decision april 2013 ect rejected hp brazils appeal administrative proceedings closed penalties hp brazil remaining place parallel september 2011 hp brazil filed civil action ect seeking ects decision revoked hp brazil also requested injunction suspending application penalties final ruling merits case court first instance issued decision merits case denied hp brazils request injunctive relief hp brazil appealed denial request injunctive relief intermediate appellate court issued preliminary ruling denying request injunctive relief reducing length sanctions five two years hp brazil appealed decision december 2011 obtained ruling staying enforcement ects sanctions final ruling merits case hp expects decision issued 2016 subsequent appeal merits last several years pursuant separation distribution agreement hewlett packard enterprise assigned responsibility litigation cisco systems august 21 2015 cisco systems inc cisco systems cisco systems capital corporation cisco capital filed action santa clara county superior court declaratory judgment breach contract hp connection dispute arising thirdpartys termination services contract hp part thirdparty services contract hp separately contracted cisco agreement utilize cisco products services hp prepaid entire amount due cisco financing arrangement cisco capital following termination hp services contract thirdparty hp longer required ciscos products services accordingly exercised contractual termination rights agreement cisco requested cisco apply appropriate credit toward remaining balance owed cisco capital lawsuit relates calculation credit agreement cisco hp cisco contends credit applied hp still owes cisco capital approximately 58 million hp contends proper reading agreement hp owes nothing cisco hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued capital cisco owes significant amounts hp pursuant separation distribution agreement hewlett packard enterprise assigned responsibility litigation stockholder litigation described hp involved various stockholder litigation matters commenced certain current former hp executive officers andor certain current former members hps board directors plaintiffs seeking recover damages related hps allegedly inflated stock price certain compensation paid hp defendants damages andor injunctive relief •aj copeland v raymond j lane et al copeland lawsuit filed march 7 2011 united states district court northern district california alleging among things defendants breached fiduciary duties wasted corporate assets connection hps alleged violations foreign corrupt practices act 1977 fcpa hps severance payments made mark hurd former chairman hps board directors hps chief executive officer hps acquisition 3par inc lawsuit also alleges violations section 14a securities exchange act 1934 exchange act connection hps 2010 2011 proxy statements february 8 2012 defendants filed motion dismiss lawsuit october 10 2012 court granted defendants motion dismiss leave file amended complaint november 1 2012 plaintiff filed amended complaint adding unjust enrichment claim claims defendants violated section 14a exchange act breached fiduciary duties connection hps 2012 proxy statement december 13 14 17 2012 defendants moved dismiss amended complaint december 28 2012 plaintiff moved leave file third amended complaint may 6 2013 court denied motion leave amend granted motions dismiss prejudice entered judgment defendants favor may 31 2013 plaintiff filed appeal united states court appeals ninth circuit october 26 2015 united states court appeals ninth circuit affirmed dismissal action •aj copeland v léo apotheker et al copeland ii lawsuit filed february 10 2014 united states district court northern district california alleging among things defendants used control hp corporate suffrage process effectuating directly participating andor aiding abetting violations section 14a exchange act rule 14a9 promulgated thereunder violations sections 10b 20a exchange act rule 10b5 promulgated thereunder complaint asserts claims breach fiduciary duty waste corporate assets unjust enrichment breach duty candor claims arise circumstances hp relating 2013 2014 proxy statements departure mr hurd chairman hps board directors hps chief executive officer alleged violations fcpa hps acquisition 3par inc autonomy corporation plc autonomy february 25 2014 court issued order granting hps administrative motion relate copeland ii copeland april 8 2014 court granted parties stipulation stay action pending resolution copeland united states court appeals ninth circuit hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued •cement concrete workers district council pension fund v hewlettpackard company et al putative securities class action filed august 3 2012 united states district court northern district california alleging among things november 13 2007 august 6 2010 defendants violated sections 10b 20a exchange act making statements regarding hps standards business conduct sbc false misleading mr hurd serving hps chairman chief executive officer period violating sbc concealing misbehavior manner jeopardized continued employment hp february 7 2013 defendants moved dismiss amended complaint august 9 2013 court granted defendants motion dismiss leave amend complaint september 9 2013 plaintiff filed amended complaint september 9 2013 defendants moved dismiss complaint october 24 2013 june 25 2014 court issued order granting defendants motions dismiss july 25 2014 plaintiff filed notice appeal united states court appeals ninth circuit november 4 2014 plaintiffappellant filed opening brief court appeals ninth circuit hp filed answering brief january 16 2015 plaintiffappellants reply brief filed march 2 2015 oral argument yet scheduled autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice doj sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hps acquisition autonomy november 21 2012 doj representatives advised hp opened investigation relating autonomy february 6 2013 representatives uk serious fraud office advised hp also opened investigation relating autonomy january 19 2015 uk serious fraud office notified hp closing investigation decided cede jurisdiction investigation us authorities hp cooperating doj sec whose investigations ongoing litigation described hp involved various stockholder litigation relating among things october 2011 acquisition autonomy november 20 2012 announcement recorded noncash charge impairment goodwill intangible assets within software segment approximately 88 billion fourth quarter 2012 fiscal year hps statements based hps findings ongoing investigation majority impairment charge related accounting improprieties misrepresentations market disclosure failures autonomy occurred prior connection hps acquisition autonomy impact improprieties failures misrepresentations expected future financial performance autonomy business long term stockholder litigation commenced among others certain current former hp executive officers certain current former members hps board directors certain advisors hp plaintiffs litigation matters seeking recover certain compensation paid hp defendants andor damages matters include following •in hp securities litigation consists two consolidated putative class actions filed november 26 30 2012 united states district court northern district hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued california alleging among things august 19 2011 november 20 2012 defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business may 3 2013 lead plaintiff filed consolidated complaint alleging period defendants violated sections 10b 20a exchange act sec rule 10b5b concealing material information making false statements related hps acquisition autonomy certain defendants violated sec rule 10b5a c engaging scheme defraud investors july 2 2013 hp filed motion dismiss lawsuit november 26 2013 court granted part denied part hps motion dismiss allowing claims proceed hp margaret c whitman based alleged statements andor omissions made may 23 2012 court dismissed plaintiffs claims based alleged statements andor omissions made august 19 2011 may 22 2012 lead plaintiff filed motion class certification november 4 2014 december 15 2014 defendants filed opposition motion june 9 2015 hp entered settlement agreement lead plaintiff consolidated securities class action terms settlement hp insurers contribute 100 million settlement fund used compensate persons purchased hps shares period august 19 2011 november 20 2012 individual contributing settlement hp current former officers directors advisors released autonomyrelated securities claims part settlement july 17 2015 court granted preliminary approval settlement november 13 2015 court granted final approval settlement •in hewlettpackard shareholder derivative litigation federal court derivative action consists seven consolidated lawsuits filed beginning november 26 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 one lawsuit alleges certain individual defendants engaged assisted insider trading thereby breached fiduciary duties unjustly enriched violated sections 25402 25403 california corporations code may 3 2013 lead plaintiff filed consolidated complaint alleging among things defendants concealed material information made false statements related hps acquisition autonomy autonomys intelligent data operating layer technology thereby violated sections 10b 20a exchange act breached fiduciary duties engaged abuse control hp corporate waste unjustly enriched litigation stayed june 2014 lead plaintiff filed stipulation proposed settlement june 30 2014 court declined grant preliminary approval settlement december 19 2014 also declined grant preliminary approval revised version settlement january 22 2015 lead plaintiff moved preliminary approval revised version settlement march 13 2015 court issued order granting preliminary approval settlement july 24 2015 court held hearing hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued entertain remaining objections settlement decide whether grant final approval settlement july 30 2015 court granted final approval settlement denied remaining objections settlement certain objectors settlement appealed courts final approval order •vincent ho v margaret c whitman et al lawsuit filed january 22 2013 california superior court alleging among things defendants breached fiduciary duties wasted corporate assets connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 april 22 2013 court stayed lawsuit pending resolution federal court derivative action two additional derivative actions james gould v margaret c whitman et al leroy noel v margaret c whitman et al filed california superior court july 26 2013 august 16 2013 respectively containing substantially similar allegations seeking substantially similar relief actions also stayed pending resolution federal court derivative action claims asserted matters asserted michael lynch sushovan hussain former chief financial officer autonomy deloitte uk qatalyst released terms settlement federal court derivative action following final approval settlement federal court derivative action ho matter dismissed prejudice august 13 2015 •cook v whitman et al lawsuit filed march 18 2014 delaware chancery court alleging among things defendants breached fiduciary duties wasted corporate assets connection hps acquisition autonomy may 15 2014 hp moved dismiss stay cook matter july 22 2014 delaware chancery court stayed motion pending united states district courts hearing preliminary approval proposed settlement federal court derivative action claims asserted matters asserted michael lynch sushovan hussain former chief financial officer autonomy deloitte uk qatalyst released terms settlement federal court derivative action following final approval federal court derivative settlement cook matter dismissed august 19 2015 •autonomy corporation limited v michael lynch sushovan hussain april 17 2015 four hp subsidiaries autonomy corporation limited hewlett packard vision bv autonomy systems limited autonomy inc initiated civil proceedings uk high court justice two members autonomys former management michael lynch sushovan hussain particulars claim seek damages excess 5 billion messrs lynch hussain breach fiduciary duties causing autonomy group companies engage improper transactions accounting practices october 1 2015 messrs lynch hussain filed defenses mr lynch also filed counterclaim autonomy corporation limited seeking 160 million damages among things alleged misstatements regarding lynch hp subsidiary claimants opportunity file response defenses asserted counterclaim •in hp erisa litigation consists three consolidated putative class actions filed beginning december 6 2012 united states district court northern district california alleging among things august 18 2011 november 22 2012 defendants breached fiduciary obligations hps 401k plan participants thereby violated hp inc subsidiaries notes consolidated financial statements continued note 16 litigation contingencies continued sections 404a1 405a employee retirement income security act 1974 amended concealing negative information regarding financial performance autonomy hps enterprise services business failing restrict participants investing hp stock august 16 2013 hp filed motion dismiss lawsuit march 31 2014 court granted hps motion dismiss action leave amend july 16 2014 plaintiffs filed second amended complaint containing substantially similar allegations seeking substantially similar relief first amended complaint june 15 2015 court granted hps motion dismiss second amended complaint entirety denied plaintiffs leave file another amended complaint july 2 2015 plaintiffs appealed courts order united states court appeals ninth circuit environmental hps operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hps products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred product takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies note 17 guarantees indemnifications warranties guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified hp inc subsidiaries notes consolidated financial statements continued note 17 guarantees indemnifications warranties continued triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote hp entered service contracts certain clients supported financing arrangements service contract terminated result hps nonperformance contract failure comply terms financing arrangement hp could certain circumstances required acquire certain assets related service contract hp believes likelihood acquire material amount assets arrangements remote indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors customers claims ip infringement made third parties arising vendors customers use hps software products services certain matters indemnifications may subject maximum loss clauses historically payments made related indemnifications immaterial separation distribution agreement hp agreed indemnify hewlett packard enterprise subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hp part separation hewlett packard enterprise similarly agreed indemnify hp subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hewlett packard enterprise part separation hp expects hewlett packard enterprise fully perform terms separation distribution agreement information crossindemnifications related tax matter agreements litigations effective upon separation november 1 2015 see note 6 taxes earnings note 16 litigation contingencies respectively warranties hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hps baseline experience affect estimated warranty obligation hp inc subsidiaries notes consolidated financial statements continued note 17 guarantees indemnifications warranties continued hps aggregate product warranty liabilities changes follows note 18 commitments lease commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense approximately 10 billion fiscal 2015 2014 2013 property capital leases comprised primarily equipment furniture capital lease assets included property plant equipment consolidated balance sheets 207 million 229 million october 31 2015 2014 respectively accumulated depreciation property capital leases 187 million 207 million october 31 2015 2014 respectively october 31 2015 future minimum operating lease commitments follows 1subsequent separation hp expects total remaining future minimum operating lease commitments approximately 367 million unconditional purchase obligations october 31 2015 hp unconditional purchase obligations approximately 27 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate hp inc subsidiaries notes consolidated financial statements continued note 18 commitments continued timing transaction unconditional purchase obligations related principally inventory service support items unconditional purchase obligations exclude agreements cancelable without penalty october 31 2015 future unconditional purchase obligations follows 1subsequent separation hp expects total remaining future unconditional purchase obligations approximately 915 million hp inc subsidiaries quarterly summary unaudited millions except per share amounts 1cost products cost services financing interest 2net eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hp inc audited accompanying consolidated balance sheets hp inc subsidiaries october 31 2016 2015 related consolidated statements earnings comprehensive income stockholders’ deficit equity cash flows three years period ended october 31 2016 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hp inc subsidiaries october 31 2016 2015 consolidated results operations cash flows three years period ended october 31 2016 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states hp inc subsidiaries’ internal control financial reporting october 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated december 15 2016 expressed unqualified opinion thereon ernst young llp san jose california december 15 2016 report independent registered public accounting firm board directors stockholders hp inc audited hp inc subsidiaries’ internal control financial reporting october 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria hp inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hp inc subsidiaries maintained material respects effective internal control financial reporting october 31 2016 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets hp inc subsidiaries october 31 2016 2015 related consolidated statements earnings comprehensive income stockholders’ deficit equity cash flows three years period ended october 31 2016 report dated december 15 2016 expressed unqualified opinion thereon ernst young llp san jose california december 15 2016 management’s report internal control financial reporting hp’s management responsible establishing maintaining adequate internal control financial reporting hp’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hp’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hp’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hp’s management assessed effectiveness hp’s internal control financial reporting october 31 2016 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 2013 framework based assessment hp’s management determined hp’s internal control financial reporting effective october 31 2016 effectiveness hp’s internal control financial reporting october 31 2016 audited ernst young llp hp’s independent registered public accounting firm stated report appears page 54 annual report form 10k hp inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements stockholders’ deficit equity accompanying notes integral part consolidated financial statements hp inc subsidiaries notes consolidated financial statements note 1 overview summary significant accounting policies overview november 1 2015 “distribution date” hewlettpackard company completed separation hewlett packard enterprise company “hewlett packard enterprise” hewlettpackard company’s former enterprise technology infrastructure software services financing businesses “separation” connection separation hewlettpackard company changed name hp inc “hp” distribution date hp’s stockholders record close business october 21 2015 “record date” received one share hewlett packard enterprise common stock every one share hp common stock held record date hewlett packard enterprise independent public company trading new york stock exchange “nyse” symbol “hpe” hp distributed total approximately 18 billion shares hewlett packard enterprise common stock hp’s stockholders separation hp beneficially shares hewlett packard enterprise common stock connection separation hp hewlett packard enterprise entered separation distribution agreement well various agreements provide framework relationships parties including among others tax matters agreement employee matters agreement transition service agreement real estate matters agreement master commercial agreement information technology service agreement information impacts agreements see note 5 “retirement postretirement benefit plans” note 6 “stockbased compensation” note 7 “taxes earnings” note 15 “litigation contingencies” note 16 “guarantees indemnifications warranties” basis presentation accompanying consolidated financial statements hp whollyowned subsidiaries prepared conformity united states “us” generally accepted accounting principles “gaap” periods prior separation financial results hewlett packard enterprise presented net earnings discontinued operations consolidated statements earnings assets liabilities discontinued operations consolidated balance sheets historical statements comprehensive income cash flows balances related stockholders’ deficit equity revised reflect effect separation information discontinued operations see note 2 “discontinued operations” principles consolidation consolidated financial statements include accounts hp subsidiaries affiliates hp controlling financial interest primary beneficiary intercompany balances transactions eliminated use estimates preparation financial statements accordance us gaap requires management make estimates assumptions affect amounts reported hp’s consolidated financial statements accompanying notes actual results could differ materially estimates foreign currency translation hp uses us dollar functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses denominated nonus dollars recorded us dollars monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statements earnings recent accounting pronouncements hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued august 2016 financial accounting standards board “fasb” issued guidance amends existing accounting standards classification certain cash receipts cash payments statement cash flows hp required adopt guidance first quarter fiscal year 2019 earlier adoption permitted hp currently evaluating impact guidance consolidated financial statements june 2016 fasb issued guidance requires credit losses financial assets measured amortized cost basis presented net amount expected collected based incurred losses credit losses availableforsale debt securities recorded allowance credit losses limited amount fair value amortized cost hp required adopt guidance first quarter fiscal year 2021 earlier adoption permitted hp currently evaluating impact guidance consolidated financial statements march 2016 fasb issued guidance amends existing accounting standards sharebased payments amendment changes accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities classification statements cash flows hp required adopt guidance first quarter fiscal year 2018 earlier adoption permitted hp elected early adopt amendment first quarter fiscal year 2017 hp expects implementation guidance material effect consolidated financial statements february 2016 fasb issued guidance amends existing accounting standards leases consistent current guidance recognition measurement presentation expenses cash flows arising lease lessee primarily depend classification new guidance lessee required recognize assets liabilities leases lease terms twelve months hp required adopt guidance first quarter fiscal year 2020 using modified retrospective approach earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements january 2016 fasb issued guidance amends existing accounting standards recognition measurement financial assets financial liabilities updated guidance primarily addresses certain aspects recognition measurement presentation disclosure financial instruments hp required adopt guidance first quarter fiscal year 2019 amendments applied means cumulativeeffect adjustment balance sheet beginning fiscal year adoption amendments related specifically equity securities without readily determinable fair values applied prospectively hp currently evaluating timing impact guidance consolidated financial statements may 2015 fasb issued guidance amends existing disclosures investments certain entities calculate net asset value per share equivalent amendment removes requirement categorize within fair value hierarchy investments fair value measured using net asset value per share practical expedient amendment also removes requirement make certain disclosures investments eligible measured fair value using net asset value per share practical expedient hp required adopt guidance first quarter fiscal year 2017 earlier adoption permitted hp adopt amendment first quarter fiscal year 2017 hp expects implementation guidance impact disclosures notes consolidated financial statements effect consolidated balance sheets consolidated statements earnings april 2015 fasb amended existing accounting standards intangible assets amendments provide explicit guidance customers determining accounting fees paid cloud computing arrangement wherein arrangements convey software license customer accounted service contracts hp required adopt guidance first quarter fiscal year 2017 however earlier adoption permitted amendment may adopted either prospectively arrangements entered materially modified effective date retrospectively hp adopt amendments prospectively first quarter fiscal year 2017 hp expects implementation guidance material effect consolidated financial statements april 2015 fasb amended existing accounting standards presentation debt issuance costs amendments require debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts recognition measurement guidance debt issuance costs affected amendments hp required adopt guidance first quarter fiscal year 2017 earlier adoption permitted amendments applied retrospectively adjusted balance hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued sheet individual period presented order reflect periodspecific effects applying new guidance hp adopt amendments first quarter fiscal year 2017 hp expects implementation guidance material effect consolidated financial statements may 2014 fasb amended existing accounting standards revenue recognition amendments based principle revenue recognized depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services august 2015 fasb issued accounting standard update oneyear deferral effective date option applying standard original effective date hp first quarter fiscal year 2018 accordance deferral hp required adopt amendments first quarter fiscal year 2019 amendments may applied retrospectively prior period presented retrospectively cumulative effect recognized date initial application hp continuing evaluate impact guidance transition alternatives consolidated financial statements revenue recognition general hp recognizes revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time delivery channel partners economic substance apart hp completed obligations related sale hp reduces revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns later date revenue recognition date sales incentive offered future market conditions product transitions may require hp take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs hp estimates number customers expected redeem incentive based historical experience specific terms conditions incentive instances revenue derived sales thirdparty vendor products services hp records revenue gross basis hp principal transaction net basis hp acting agent customer vendor hp considers several factors determine whether acting principal agent notably whether hp primary obligor customer established pricing inventory credit risks hp reports revenue net taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority multiple element arrangements sales arrangement contains multiple elements deliverables hardware andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence “vsoe” selling price available thirdparty evidence “tpe” vsoe selling price available estimated selling price “esp” neither vsoe selling price tpe available hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority hp evaluates tpe selling price reviewing largely similar interchangeable competitor products services standalone sales similarly situated customers hp establishes esp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies technology industry life cycles arrangements multiple elements hp allocates transaction price individual units accounting inception arrangement based relative selling price hp limits amount revenue recognized delivered elements amount contingent future delivery products services future performance obligations subject customerspecified refund return rights hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued hp evaluates deliverable arrangement determine whether represents separate unit accounting deliverable constitutes separate unit accounting standalone value customer deliverables standalone value hp recognizes revenue consistent pattern delivery final deliverable arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within hp’s control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract net revenue hardware hp’s standard terms conditions sale hp transfers title risk loss customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations customer remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases revenue inception lease hp accrues estimated cost postsale obligations including standard product warranties based historical experience time hp recognizes revenue services hp recognizes revenue fixedprice support maintenance contracts ratably contract period recognizes costs associated contracts incurred deferred revenue hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria satisfied hp records revenue earned recognized excess amounts invoiced services contracts trade receivables deferred revenue represents amounts invoiced advance product support contracts product sales shipping handling hp includes costs related shipping handling cost revenue stockbased compensation hp determines stockbased compensation expense based measurement date fair value award hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants limited cases hp amortizes actuarial gains losses using corridor approach see note 5 “retirement postretirement benefit plans” full description plans accounting funding policies advertising hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued costs produce advertising expensed incurred production costs communicate advertising expensed advertising first run costs totaled approximately 586 million fiscal year 2016 635 million fiscal year 2015 614 million fiscal year 2014 restructuring charges hp records charges associated managementapproved restructuring plans reorganize one hp’s business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs distinct ongoing operational costs information technology costs incurred connection separation taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related interest penalties accounts receivable hp establishes allowance doubtful accounts receivable hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filing deterioration customer’s operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable hp thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers financing arrangements certain cases provide partial recourse result transfer hp’s trade receivables third party hp reflects amounts transferred yet collected third party accounts receivable consolidated balance sheets arrangements involving element recourse fair value recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets concentrations risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments receivables trade customers contract manufacturers derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographic regions hp’s policy designed hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued limit exposure particular institution part risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate exposures contracts involve risk nonperformance counterparty could result material loss likelihood hp deems remote hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors’ resellers’ aggregated business deteriorates substantially hp’s operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 34 42 gross accounts receivable october 31 2016 2015 respectively single customer accounts 10 gross accounts receivable october 31 2016 2015 credit risk respect accounts receivable generally diversified due large number entities comprising hp’s customer base dispersion across many different industries geographic regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers may require collateral letters credit bank guarantees certain circumstances hp utilizes outsourced manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components outsourced manufacturers thereby creating receivable balances outsourced manufacturers three largest outsourced manufacturer receivable balances collectively represented 78 81 hp’s supplier receivables 774 million 634 million october 31 2016 2015 respectively hp includes supplier receivables current assets consolidated balance sheets gross basis hp’s credit risk associated receivables mitigated wholly part amount hp owes outsourced manufacturers hp generally legal right offset payables outsourced manufacturers receivables hp reflect sale components net revenue recognize profit component sales related products sold hp time profit recognized reduction cost revenue hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hp’s relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hp’s net revenue gross margins upon completion separation november 1 2015 hp recorded net income tax indemnification receivables hewlett packard enterprise certain income tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement “tma” actual amount hewlett packard enterprise may obligated pay hp could vary depending upon outcome certain unresolved tax matters may resolved several years net receivable october 31 2016 16 billion inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolete impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation expense recognized straightline basis estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipment’s estimated residual value retirement disposition asset cost related accumulated depreciation removed consolidated balance sheets gain loss recognized consolidated statements earnings goodwill hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued hp reviews goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable hp opt perform qualitative assessment test reporting unit’s goodwill impairment hp directly perform twostep impairment test based qualitative assessment hp determines fair value reporting unit likely ie likelihood 50 percent less carrying amount twostep impairment test performed first step impairment test hp compares fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions hp bases discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach order assess reasonableness estimated fair value hp’s reporting units hp compares aggregate reporting unit fair value hp’s market capitalization overall basis calculates implied control premium excess sum reporting units’ fair value hp’s market capitalization overall basis hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium determined reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired testing required fair value reporting unit less carrying amount hp performs second step goodwill impairment test measure amount impairment loss second step hp measures reporting unit’s assets including unrecognized intangible assets liabilities noncontrolling interests fair value hypothetical analysis calculate implied fair value goodwill reporting unit manner reporting unit acquired business combination implied fair value reporting unit’s goodwill less carrying amount difference recorded impairment loss debt marketable equity securities investments debt marketable equity securities generally considered availableforsale reported fair value unrealized gains losses net applicable taxes accumulated comprehensive loss consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included interest net consolidated statements earnings hp monitors investment portfolio potential impairment quarterly basis carrying amount investment debt securities exceeds fair value decline value determined otherthantemporary ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss remaining amount recorded accumulated comprehensive loss consolidated balance sheets derivatives hp uses derivative instruments primarily forwards swaps times options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative instruments speculative purposes see note 11 “financial instruments” full description hp’s derivative financial instrument activities related accounting policies loss contingencies hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability contingencies believes probable liability incurred amount loss reasonably estimated see note 15 “litigation contingencies” full description hp’s loss contingencies related accounting policies note 2 discontinued operations november 1 2015 hp completed separation hewlett packard enterprise separation hp beneficially shares hewlett packard enterprise common stock connection separation hp hewlett packard enterprise entered separation distribution agreement well various agreements provide framework relationships parties including among others tax matters agreement employee matters agreement transition service agreement real estate matters agreement master commercial agreement information technology service agreement agreements provide allocation hp hewlett packard enterprise assets employees liabilities obligations including investments property employee benefits taxrelated assets liabilities attributable periods prior separation govern certain relationships hp hewlett packard enterprise separation hp longer consolidates financial results hewlett packard enterprise within financial results continuing operations periods prior separation financial results hewlett packard enterprise presented net earnings discontinued operations consolidated statements earnings assets liabilities discontinued operations consolidated balance sheets following table presents financial results hp’s discontinued operations 1 cost products cost services financing interest 2 expenses fiscal year 2016 primarily related separation costs 3 fiscal years 2015 2014 allocation interest hewlett packard enterprise based using average effective interest rate debt assumed hewlett packard enterprise debt repaid part separation fiscal year 2015 interest net also includes loss early extinguishment debt connection review hp’s capital structure separation 4 connection tma interest net fiscal year 2016 includes 208 million changes tax indemnifications amounts provision taxes fiscal year 2016 includes 201 million tax impact relating changes described information tax indemnifications tma see note 7 “taxes earnings” following table presents significant noncash items capital expenditures hp’s discontinued operations hp inc subsidiaries notes consolidated financial statements continued note 2 discontinued operations continued following table presents assets liabilities transferred hewlett packard enterprise november 1 2015 presented discontinued operations consolidated balance sheets october 31 2015 subsequent separation conformity separation agreement hp made final cash transfer 526 million hewlett packard enterprise note 3 segment information hp leading global provider personal computing access devices imaging printing products related technologies solutions services hp sells individual consumers small mediumsized businesses “smbs” large enterprises including customers government health education sectors hp’s operations organized three segments financial reporting purposes personal systems printing corporate investments hp’s organizational structure based number factors chief operating decision maker uses evaluate view run business operations include limited customer base homogeneity products technology segments based organizational structure information reviewed hp’s chief operating decision maker evaluate segment results chief operating decision maker uses several metrics evaluate performance overall business including earnings operations uses results allocate resources segments hp inc subsidiaries notes consolidated financial statements continued note 3 segment information continued summary description segment follows personal systems provides commercial personal computers “pcs” consumer pcs workstations thin clients commercial tablets mobility devices retail pointofsale systems displays related accessories software support services commercial consumer markets hp groups commercial notebooks commercial desktops commercial services commercial tablets mobility devices commercial detachables workstations retail pointofsale systems thin clients commercial clients consumer notebooks consumer desktops consumer services consumer detachables consumer clients describing performance markets described hp’s global business capabilities within personal systems • commercial pcs optimized enterprise smb customers focus robust designs serviceability connectivity reliability manageability networked environments additionally hp offers range services solutions enterprise smb customers help manage lifecycle pc mobility installed base • consumer pcs notebooks desktops hybrids optimized consumer usage focusing multimedia consumption online browsing light productivity printing provides consumer commercial printer hardware supplies media solutions services well scanning devices printing also focused imaging solutions commercial markets hp groups laserjet graphics pagewide printers commercial hardware inkjet printers consumer hardware describing performance markets described hp’s global business capabilities within printing • laserjet enterprise solutions delivers hp’s laserjet printers supplies solutions smbs large enterprises hp goes market extensive channel network directly hp sales ongoing key initiatives include design deployment a3 products solutions copier multifunction printer market printer security solutions pagewide enterprise solutions awardwinning jetintelligence products • inkjet printing solutions delivers hp’s consumer smb pagewide inkjet solutions hardware supplies media webconnected hardware services ongoing initiatives programs instant ink newer initiatives continuous ink supply system provide innovative printing solutions consumers smbs • graphics solutions delivers large format printers designjet large format production scitex industrial specialty printing digital press solutions indigo pagewide presses supplies services print service providers design rendering customers • print solutions provides endtoend services well core platforms develop deploy services across printing systems hp’s focus includes driving customer value managed print services providing support solutions new existing customers corporate investments includes hp labs certain business incubation projects accounting policies hp uses derive segment results substantially used company preparing financial statements hp derives results business segments directly internal management reporting system segment net revenue includes revenues sales external customers intersegment revenues reflect transactions segments arm’slength basis hp’s consolidated net revenue derived reported elimination intersegment revenues arrangements effective beginning first quarter fiscal year 2016 hp implemented reporting change segment operating results reporting change resulted exclusion retirement related credits representing market related components pension postretirement benefits interest expense expected return plan assets actuarial gain loss amortization “market related retirement credits” reporting change immaterial impact previously reported segment net revenue earnings operations impact previously reported consolidated net revenue earnings continuing operations net earnings net earnings per share hp inc subsidiaries notes consolidated financial statements continued note 3 segment information continued hp allocate certain operating expenses credits manages corporate level segments unallocated amounts include certain corporate governance costs market related retirement credits stockbased compensation expense amortization intangible assets restructuring charges acquisition related charges defined benefit plan settlement charges credits intersegment eliminations segment operating results continuing operations reconciliation segment operating results hp consolidated results follows segment assets continuing operations hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets continuing operations follows hp inc subsidiaries notes consolidated financial statements continued note 3 segment information continued major customers single customer represented 10 hp’s net revenue fiscal year presented geographic information net revenue country based upon sales location predominately represents customer location fiscal years 2016 2015 2014 united states country represented 10 hp net revenue net revenue country hp operates follows net property plant equipment country hp operates follows single country represented exceed 10 hp’s total net property plant equipment fiscal year presented hp inc subsidiaries notes consolidated financial statements continued note 3 segment information continued net revenue segment business unit follows hp inc subsidiaries notes consolidated financial statements continued note 4 restructuring charges summary restructuring plans hp’s restructuring activities fiscal years 2016 2015 summarized plan follows 1 prp represents phased retirement program 2 eer represents enhanced early retirement fiscal 2017 plan october 10 2016 hp’s board directors approved restructuring plan “fiscal 2017 plan” expects implemented fiscal year 2019 hp estimates incur aggregate pretax charges 350 million 500 million relating workforce reductions real estate consolidation nonlabor charges hp estimates approximately half expected cumulative pretax costs relate severance remaining relate infrastructure hp expects 3000 4000 employees exit end fiscal year 2019 fiscal 2015 plan connection separation september 14 2015 hp’s board directors approved cost savings plan “fiscal 2015 plan” includes labor nonlabor actions fiscal 2015 plan considered complete october 31 2016 expect costs associated plan approximately 3000 employees exited end fiscal year 2016 fiscal year 2016 hp announced voluntary prp certain qualified employees qualified employees retire gradually defined period time end receive severance certain benefits hp recognized charges aggregating 29 million fiscal year 2016 related prp fiscal 2012 plan hp inc subsidiaries notes consolidated financial statements continued note 4 restructuring charges continued severance infrastructure cash payments associated restructuring plan initiated hp fiscal year 2012 “fiscal 2012 plan” expected paid fiscal year 2021 fiscal 2012 plan considered complete october 31 2016 expect costs associated plan charges include nonrecurring costs distinct ongoing operational costs information technology costs incurred connection separation hp incurred 30 million charges fiscal year 2016 note 5 retirement postretirement benefit plan separation related activities advance separation hp underwent planbyplan analysis determined plans would assigned either hp hewlett packard enterprise pension plans transitioned entirety hewlett packard enterprise remain entirety hp plans split two identical plans resulting companies splitting plan’s assets liabilities fourth quarter fiscal year 2015 plans legally separated amounts attributable hewlett packard enterprise transferred reported discontinued operations fiscal year 2015 hewlettpackard company 401k plan known hp inc 401k plan remained hp new 401k plan created employees hewlett packard enterprise balances hewlett packard enterprise employees transferred new plan postseparation defined benefit plans hp sponsors number defined benefit pension plans worldwide significant defined benefit plan hp inc pension plan “pension plan” united states hp reduces benefit payable certain us employees pension plan service 1993 amounts due employee hp’s frozen defined contribution deferred profitsharing plan “dpsp” october 31 2016 2015 fair value plan assets dpsp 606 million 742 million respectively dpsp obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations pension plan dpsp remain entirely hp postseparation postretirement benefit plans hp sponsors retiree health welfare benefit plans significant united states hp inc retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partiallysubsidized medical coverage based years service retirement hp’s share premium cost capped subsidized medical coverage provided hp inc retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp inc retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered programs employees hired 2002 august 2008 eligible credits hp inc retirement medical savings account plan “rmsa” upon attaining age 45 credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued hp offers various defined contribution plans us nonus employees total defined contribution expense 100 million fiscal year 2016 92 million fiscal year 2015 93 million fiscal year 2014 us employees automatically enrolled hp inc 401k plan meet eligibility requirements unless decline participation quarterly employer matching contributions hp inc 401k plan 100 employee’s contributions maximum 4 eligible compensation effective january 2017 funding employer matching contributions change made annually sometime end calendar year pension postretirement benefit expense components hp’s pension postretirement benefit cost credit recognized consolidated statements earnings follows 1 plan expense credit allocation relates employees hp covered hewlett packard enterprise plans employees hewlett packard enterprise covered hp plans lump sum program fiscal year 2016 hp offered certain terminated vested participants pension plan option receiving pension benefit onetime voluntary lump sum specific window approximately 16000 plan participants elected receive benefits result pension plan trust paid 977 million lump sum payments participants fiscal year 2016 result lump sum program hp recognized settlement expense approximately 177 million october 2016 resulting remeasurement coincided annual year end plan remeasurement additional net periodic pension cost incurred fiscal year 2016 january 2015 hp offered certain terminated vested participants pension plan option receiving pension benefit onetime voluntary lump sum specified window approximately 50 eligible participants elected receive benefits result pension plan trust paid 826 million lump sum payments participants fiscal year 2015 result lump sum program hp recognized settlement credit approximately 79 million fiscal year 2015 result settlement additional net periodic benefit cost 20 million recorded hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued fiscal year 2015 offset actuarial gain settlement recognized consolidated statements earnings defined benefit plan settlement credits weightedaverage assumptions used calculate total periodic benefit credit cost follows funded status funded status defined benefit postretirement benefit plans follows hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued 1 fiscal year 2015 connection separation hp transferred plan assets liabilities hp’s plans establish hewlett packard enterprise plans 2 october 2015 connection separation hewlett packard enterprise transferred hp three unfunded nonqualified us defined benefit plans weightedaverage assumptions used calculate projected benefit obligations fiscal years ended october 31 2016 2015 follows hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued net amounts noncurrent assets current noncurrent liabilities hp’s defined benefit postretirement benefit plans recognized hp’s consolidated balance sheet follows following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans following table summarizes hp’s pretax net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss income recognized components net periodic benefit cost credit next fiscal year defined benefit plans projected benefit obligations exceeding fair value plan assets follows hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows fair value plan assets table sets forth fair value plan assets asset category within fair value hierarchy october 31 2016 refer note 10 “fair value” details fair value hierarchy 1 investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded 2 fair value corporate government assetbacked debt securities based observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based observable quoted prices also included category debt issued national state local governments agencies 3 alternative investments primarily include private equities hedge funds valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based net asset value “nav” reported asset manager adjusted cash flows necessary making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued conditions subsequent last nav reported asset manager depending amount management judgment lack nearterm liquidity absence quoted market prices assets classified level 2 level 3 fair value hierarchy depending quickly hp redeem hedge fund investments extent adjustments nav hedge funds classified either level 2 level 3 fair value hierarchy • private equities include limited partnerships equity buyout venture capital real estate similar funds invest united states internationally foreign currencies hedged • hedge funds include limited partnerships invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 4 common contractual fund investment arrangement institutional investors pool assets units may acquired six different subfunds focused equities fixed income alternative investments emerging markets subfund invested accordance fund’s investment objective units issued relation subfund subfunds publicly traded custodian strikes net asset value either twice month depending subfund assets valued nav classified level 2 fair value hierarchy 5 department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships common collective trusts interests 10312 entities registered investment companies valued nav valuation assets requires judgment due absence quoted market prices assets generally classified level 2 fair value hierarchy 6 includes publicly privately traded registered investment entities 7 includes cash equivalents shortterm marketable securities cash equivalents include money market funds valued based nav assets classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety 8 includes primarily unsettled transactions international insured contracts derivative instruments unsettled transactions relate primarily fixed income securities settled first quarter fiscal year 2017 changes fair value measurements level 3 investments follows table sets forth fair value plan assets asset category within fair value hierarchy october 31 2015 hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued 1 investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded 2 fair value corporate government assetbacked debt securities based observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based observable quoted prices also included category debt issued national state local governments agencies 3 alternative investments primarily include private equities hedge funds valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based nav reported asset manager adjusted cash flows necessary making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager depending amount management judgment lack nearterm liquidity absence quoted market prices assets classified level 2 level 3 fair value hierarchy depending quickly hp redeem hedge fund investments extent adjustments nav hedge funds classified either level 2 level 3 fair value hierarchy • private equities include limited partnerships equity buyout venture capital real estate similar funds invest united states internationally foreign currencies hedged • hedge funds include limited partnerships invest long short primarily common stocks credit relative value event driven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued 4 common contractual fund investment arrangement institutional investors pool assets units may acquired six different subfunds focused equities fixed income alternative investments emerging markets subfund invested accordance fund’s investment objective units issued relation subfund subfunds publicly traded custodian strikes net asset value either twice month depending subfund assets valued nav classified level 2 fair value hierarchy 5 department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships common collective trusts interests 10312 entities registered investment companies valued nav valuation assets requires judgment due absence quoted market prices assets generally classified level 2 fair value hierarchy 6 includes publicly privately traded registered investment entities 7 includes cash equivalents shortterm marketable securities cash equivalents include money market funds valued based nav assets classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety 8 includes primarily unsettled transactions international insured contracts derivative instruments unsettled transactions relate primarily fixed income securities settled first quarter fiscal year 2016 changes fair value measurements level 3 investments follows plan asset allocations refer fair value hierarchy table actual assets allocations across benefit plans weightedaverage target asset allocations across benefit plans represented fair value tables follows investment policy hp inc subsidiaries notes consolidated financial statements continued note 5 retirement postretirement benefit plan continued hp’s investment strategy seek competitive rate return relative appropriate level risk depending funded status plan timing expected benefit payments majority plans’ investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans’ investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp believes appropriate relative plan’s liability structure return goals hp conducts periodic assetliability studies us plans order model various potential asset allocations comparison plan’s forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside united states asset allocation decisions typically made independent board trustees specific plan united states investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixed income securities would otherwise deployed hp reviews investment strategy provides recommended list investment managers country plan final decisions asset allocation investment managers made board trustees specific plan basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected real returns considers country’s specific inflation outlook hp’s investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees future contributions funding policy fiscal year 2017 hp expects contribute approximately 26 million nonus pension plans 33 million cover benefit payments us nonqualified plan participants 9 million cover benefit claims hp’s postretirement benefit plans hp’s policy fund pension plans makes least minimum contribution required local government funding taxing authorities estimated future benefits payments october 31 2016 hp estimates future benefits payments retirement postretirement plans follows hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation hp’s stockbased compensation plans include incentive compensation plans employee stock purchase plan “espp” stockbased compensation expense related income tax benefits continuing operations stockbased compensation expense resulting tax benefits continuing operations follows connection separation accordance employee matters agreement hp made certain adjustments exercise price number stockbased compensation awards intention preserving intrinsic value awards prior separation exercisable nonexercisable stock options converted similar awards entity employee working postseparation restricted stock unit awards performancecontingent awards adjusted provide holders restricted stock units awards performancecontingent awards c hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued ompany employs employee following separation pretax stockbased compensation expense due adjustments 2 million fiscal year 2016 outstanding restricted stock awards stock options employees transferred hewlett packard enterprise cancelled connection separation restricted stock awards activity stock options activity fiscal years 2015 2014 tables include discontinued operations awards cancelled separation became effective first quarter fiscal year 2016 connection separation board directors approved amendments certain outstanding longterm incentive awards july 29 2015 amendments provided accelerated vesting september 17 2015 certain stockbased awards otherwise scheduled vest september 18 2015 december 31 2015 pretax stockbased compensation expense due acceleration continuing operations approximately 23 million fiscal year 2015 cash received option exercises purchases hewlettpackard company 2011 employee stock purchase plan “2011 espp” 48 million fiscal year 2016 206 million fiscal year 2015 143 million fiscal year 2014 benefit realized tax deduction option exercises fiscal years 2016 2015 2014 9 million 30 million 9 million respectively stockbased incentive compensation plans hp’s stockbased incentive compensation plans include equity plans adopted 2004 2000 amended “principal equity plans” well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased awards employees meeting certain employment qualifications eligible receive stockbased awards restricted stock awards nonvested stock awards may include grants restricted stock restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior lapse restrictions awards generally vest one three years date grant vesting period ownership restricted stock cannot transferred restricted stock dividend voting rights common stock considered issued outstanding upon grant dividends paid restricted stock nonforfeitable restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding upon grant however shares underlying restricted stock units included calculation diluted net eps restricted stock units forfeitable dividend equivalent rights equal dividend paid common stock hp expenses fair value restricted stock awards ratably period restrictions lapse majority restricted stock hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued units issued hp contain service vesting conditions however starting fiscal year 2014 hp began granting performanceadjusted restricted stock units vest satisfaction service market conditions prior expiration awards stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal closing price hp’s stock option grant date majority stock options issued hp contain service vesting conditions however starting fiscal year 2011 hp began granting performancecontingent stock options vest satisfaction service market conditions prior expiration awards restricted stock awards hp uses closing stock price grant date estimate fair value servicebased restricted stock units hp estimates fair value restricted stock units subject performanceadjusted vesting conditions using combination closing stock price grant date monte carlo simulation model weightedaverage fair value assumptions used measure fair value restricted stock units subject performanceadjusted vesting conditions monte carlo simulation model follows hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued 1 weightedaverage fair value based performanceadjusted restricted stock units granted period 2 expected volatility estimated using historical volatility derived hp’s common stock 3 riskfree interest rate estimated based yield us treasury zerocoupon issues 4 expected performance period estimated based length remaining performance period grant date summary restricted stock awards activity follows hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued fiscal year 2015 hp assumed approximately 8 million shares restricted stock units acquisition weightedaverage grant date fair value 33 per share total grant date fair value restricted stock awards vested fiscal years 2016 2015 2014 54 million 889 million 338 million respectively october 31 2016 total unrecognized pretax stockbased compensation expense related nonvested restricted stock awards continuing operations 180 million expected recognized remaining weightedaverage vesting period 14 years stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value assumptions used measure fair value follows hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued 1 weightedaverage fair value based stock options granted period 2 awards granted fiscal year 2016 expected volatility estimated using leverageadjusted average termmatching volatilities peer companies due lack volume forward traded options precluded use implied volatility awards granted fiscal year 2015 expected volatility estimated using implied volatility derived options traded hp’s common stock awards granted fiscal year 2014 expected volatility awards subject servicebased vesting estimated using implied volatility derived options traded hp’s common stock whereas performancecontingent awards expected volatility estimated using historical volatility hp’s common stock 3 riskfree interest rate estimated based yield us treasury zerocoupon issues 4 expected dividend yield represents constant dividend yield applied duration expected term award 5 awards subject servicebased vesting due lack historical exercise postvesting termination patterns postseparation employee base expected term estimated using simplified method awards granted fiscal year 2016 expected term estimated using historical exercise postvesting termination patterns awards granted fiscal years 2015 2014 performancecontingent awards expected term represents output lattice model summary stock options activity follows hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options last trading day fiscal years 2016 2015 2014 aggregate intrinsic value difference hp’s closing stock price last trading day fiscal year exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal years 2016 2015 2014 26 million 214 million 151 million respectively total grant date fair value options vested fiscal years 2016 2015 2014 11 million 131 million 82 million respectively following table summarizes significant ranges outstanding exercisable stock options october 31 2016 total unrecognized pretax stockbased compensation expense related stock options continuing operations 17 million expected recognized weightedaverage vesting period 17 years employee stock purchase plan hp sponsors 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hp’s common stock hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued hp inc subsidiaries notes consolidated financial statements continued note 6 stockbased compensation continued pursuant terms 2011 espp employees purchase stock 2011 espp price equal 95 hp’s closing stock price purchase date stockbased compensation expense recorded connection purchases criteria noncompensatory plan met shares reserved shares available future grant shares reserved future issuance stockbased incentive compensation plans 2011 espp follows hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings provision taxes domestic foreign components earnings continuing operations taxes follows provision benefit taxes earnings continuing operations follows differences us federal statutory income tax rate hp’s effective tax rate follows hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued jurisdictions favorable tax rates significant effective tax rate impact periods presented include puerto rico singapore china malaysia ireland extent hp plans reinvest earnings jurisdictions indefinitely outside united states us taxes provided indefinitely reinvested earnings fiscal year 2016 hp recorded 301 million net income tax charges related items unique year continuing operations amounts primarily include uncertain tax positions charges 525 million related preseparation tax matters addition hp recorded 62 million net tax benefits restructuring charges 52 million net tax benefits related release foreign valuation allowances 41 million net tax benefits arising retroactive research development credit provided consolidated appropriations act 2016 signed law december 2015 70 million tax benefit hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued fiscal year 2015 hp recorded 12 billion net income tax benefits related items unique year amounts included 17 billion tax benefits due release valuation allowances pertaining certain us deferred tax assets 449 million tax charges related uncertain tax positions pension transfers 70 million tax benefits related state tax impacts 6 million income tax charges related various items addition hp recorded 33 million income tax charges restructuring pensionrelated costs fiscal year 2014 hp recorded 69 million net income tax benefits related items unique year amounts included 37 million income tax benefits related provision return adjustments 25 million income tax charges related state rate changes 41 million income tax benefits adjustments related uncertain tax positions 16 million income tax benefits related items result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2027 gross income tax benefits attributable actions investments estimated 341 million 020 diluted net eps fiscal year 2016 322 million 018 diluted net eps fiscal year 2015 596 million 031 diluted net eps fiscal year 2014 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors uncertain tax positions reconciliation unrecognized tax benefits follows hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued october 31 2016 amount unrecognized tax benefits 109 billion 39 billion would affect hp’s effective tax rate realized october 31 2015 amount unrecognized tax benefits 65 billion 32 billion would affect hp’s effective tax rate realized hp continues record tax liabilities related uncertain tax positions certain liabilities joint several liability hewlett packard enterprise twelve months ended october 31 2016 part separation hp distributed 732 million liabilities related solely uncertain tax positions associated hewlett packard enterprise hp recognizes interest income favorable settlements interest expense penalties accrued unrecognized tax benefits provision taxes consolidated statements earnings october 31 2016 hp accrued 193 million interest penalties hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expects complete resolution certain tax years various tax authorities within next 12 months also possible federal foreign state tax issues may concluded within next 12 months hp believes reasonably possible existing unrecognized tax benefits may reduced amount 25 billion within next 12 months hp subject income tax united states approximately 58 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits federal state foreign tax authorities irs conducting audit hp’s 2009 2010 2011 2012 2013 2014 income tax returns hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agent hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued reports “rar” fiscal years 2001 2002 2006 2007 2008 tax years proposed irs adjustments tax years would sustained reduce benefits tax refund claims hp filed net operating loss carrybacks earlier fiscal years tax credit carryforwards subsequent years approximately 377 million hp waiting ninth circuit court appeals rule hp’s appeal adverse us tax court determination related irs adjustments tax years 1999 2003 us tax court ruled may 2012 hp related certain tax attributes claimed hp tax years 1999 2003 hp appealed us tax court determination filing formal notice appeal ninth circuit court appeals case argued ninth circuit november 2016 ninth circuit yet issue determination appeal hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued respect major state foreign tax jurisdictions hp longer subject tax authority examinations years prior 1999 material tax deficiencies assessed major state foreign tax jurisdictions reporting period hp believes provided adequate reserves tax deficiencies reductions tax benefits could result federal state foreign tax audits hp regularly assesses likely outcomes audits order determine appropriateness hp’s tax provision hp adjusts uncertain tax positions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular audit however income tax audits inherently unpredictable assurance hp accurately predict outcome audits amounts ultimately paid resolution audit could materially different amounts previously included provision taxes therefore resolution one uncertainties particular period could material impact net income cash flows hp provided us federal income foreign withholding taxes 203 billion undistributed earnings nonus operations october 31 2016 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated hp determines advantageous business operations tax cash management reasons deferred income taxes significant components deferred tax assets deferred tax liabilities follows hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued 2015 fasb issued accounting standards update “asu” 201517 “balance sheet classification deferred taxes” simplifies presentation deferred income taxes guidance requires deferred tax liabilities hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued ssets classified noncurrent classified statement financial position hp early adopted fasb’s new accounting guidance prospectively interim period beginning november 1 2015 thus prior reporting period retrospectively adjusted current longterm deferred tax assets liabilities included consolidated balance sheets follows excess tax benefits approximately zero 64 million recorded resulting exercise employee stock options employee stock programs fiscal years 2016 2015 tax deficits approximately 43 million recorded fiscal year 2014 historical statements stockholders’ deficit equity revised reflect effect separation information discontinued operations see note 2 “discontinued operations” hp periodically engages intercompany advanced royalty payment arrangements may result advance payments subsidiaries different tax jurisdictions local tax treatment intercompany licensing arrangements differs us gaap treatment deferred taxes recognized fiscal year 2016 hp executed intercompany advanced royalty payment arrangements resulting advanced payments 12 billion fiscal year 2015 hp executed hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued intercompany advanced royalty payment arrangements resulting advanced payments 38 billion fiscal year 2014 hp executed multiyear intercompany licensing arrangement intercompany advanced royalty payment arrangement resulted combined advanced payments 38 billion result recognition zero net us deferred tax assets fiscal years 2016 2015 06 billion fiscal year 2014 transactions payments received united states foreign consolidated affiliate deferral intercompany revenues term arrangements approximately 18 months fiscal year 2016 5 years fiscal year 2015 15 years fiscal year 2014 intercompany royalty revenue eliminated consolidation separation costs expenses associated hp’s plan separate two companies hp recorded deferred tax asset costs expenses incurred fiscal year 2015 hp expected portion deferred tax assets associated separation costs expenses nondeductible expenses time separation executed furthermore hp also concluded legal form separation may 2015 announced hewlett packard enterprise spinnee united states order reflect impact separation activities hp recorded adjustments certain deferred prepaid tax assets well income tax liabilities reflecting impact separation related activities october 31 2016 hp 627 million 20 billion 253 billion federal state foreign net operating loss carryforwards respectively amounts included state foreign net operating loss carryforwards begin expire fiscal year 2018 amounts included federal net operating loss carryforwards begin expire 2030 hp also capital loss carryforwards approximately 197 million expire 2021 hp provided valuation allowance 87 million 82 billion deferred tax assets related state foreign net operating loss carryforwards respectively hp expect realize october 31 2016 hp recorded deferred tax assets various tax credit carryforwards follows hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued deferred tax asset valuation allowance deferred tax asset valuation allowance changes follows gross deferred tax assets october 31 2016 2015 2014 reduced valuation allowances 85 billion 71 billion 82 billion respectively total valuation allowance increased 14 billion fiscal year 2016 associated primarily foreign net operating losses decreased 11 billion fiscal year 2015 associated release valuation allowance deferred tax assets united states increased 35 million fiscal 2014 associated primarily foreign net operating losses tax matters agreement income tax matters hp inc subsidiaries notes consolidated financial statements continued note 7 taxes earnings continued connection separation hp entered tma hewlett packard enterprise effective november 1 2015 governs rights obligations hp hewlett packard enterprise certain pre separation tax liabilities tma provides hp hewlett packard enterprise share certain pre separation income tax liabilities certain jurisdictions hp hewlett packard enterprise joint several liability past income tax liabilities accordingly hp could legally liable applicable tax law liabilities required make additional tax payments addition distribution hewlett packard enterprise’s common shares hp stockholders determined taxable hewlett packard enterprise hp would share tax liability equally unless taxability distribution direct result action taken either hewlett packard enterprise hp subsequent distribution case party causing distribution taxable would responsible taxes imposed distribution upon completion separation november 1 2015 hp recorded net income tax indemnification receivables hewlett packard enterprise certain income tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tma actual amount hewlett packard enterprise may obligated pay hp could vary depending upon outcome certain unresolved tax matters may resolved several years net receivable october 31 2016 16 billion connection tma interest net fiscal year 2016 includes 472 million changes tax indemnifications amounts note 8 balance sheet details balance sheet details follows accounts receivable net hp inc subsidiaries notes consolidated financial statements continued note 8 balance sheet details continued allowance doubtful accounts related accounts receivable changes follows hp thirdparty arrangements consisting revolving shortterm financing provide liquidity certain partners order facilitate working capital requirements financing arrangements certain circumstances may contain partial recourse result transfer hp’s receivables risk thirdparty transfers qualify true sales applicable accounting guidance receivables derecognized consolidated balance sheets upon transfer hp receives payment receivables thirdparty within mutually agreed upon time period arrangements involving element recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets recourse obligations october 31 2016 2015 2014 material october 31 2016 2015 2014 hp 149 million 93 million 271 million respectively outstanding third parties reported accounts receivable consolidated balance sheets costs associated sales trade receivables fiscal year 2016 material following summary activity arrangements hp inc subsidiaries notes consolidated financial statements continued note 8 balance sheet details continued inventory hp inc subsidiaries notes consolidated financial statements continued note 8 balance sheet details continued current assets 1 effective november 1 2015 hp prospectively adopted asu 201517 “balance sheet classification deferred taxes” result classified deferred assets liabilities noncurrent property plant equipment net depreciation expense 316 million 302 million 344 million fiscal years 2016 2015 2014 respectively noncurrent assets hp inc subsidiaries notes consolidated financial statements continued note 8 balance sheet details continued 1 connection tma discussed note 7 “taxes earnings” 2 effective november 1 2015 hp prospectively adopted asu 201517 “balance sheet classification deferred taxes” result classified deferred assets liabilities noncurrent hp inc subsidiaries notes consolidated financial statements continued note 8 balance sheet details continued accrued liabilities noncurrent liabilities note 9 goodwill allocated hp’s reportable segments changes carrying amount goodwill follows hp inc subsidiaries notes consolidated financial statements continued note 9 goodwill continued 1 goodwill net accumulated impairment losses 08 billion related corporate investments 2 divestiture technology assets including licensing distribution rights certain software offerings open text corporation see note 18 “divestitures” goodwill tested impairment reporting unit level october 31 2016 reporting units consistent reportable segments identified note 3 “segment information” goodwill impairments fiscal years 2016 2015 hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment hp inc subsidiaries notes consolidated financial statements continued note 10 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy hp uses valuation techniques based upon observable unobservable inputs observable inputs developed using market data publicly available information reflect assumptions market participants would use unobservable inputs developed using best information available assumptions market participants would use assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability marketcorroborated inputs level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs following table presents hp’s assets liabilities measured fair value recurring basis transfers levels within fair value hierarchy fiscal years 2016 2015 hp inc subsidiaries notes consolidated financial statements continued note 10 fair value continued valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including nav models utilizing market observable inputs fair value debt investments based quoted market prices modeldriven valuations using inputs primarily derived corroborated observable market data certain instances valuation models utilize assumptions cannot corroborated observable market data derivative instruments hp uses forward contracts interest rate total return swaps times option contracts hedge certain foreign currency interest rate exposures hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices currencies interest rates see note 11 “financial instruments” discussion hp’s use derivative instruments fair value disclosures short longterm debt hp estimates fair value debt primarily using expected present value technique based observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considering credit risk portion hp’s debt hedged reflected consolidated balance sheets amount equal debt’s carrying amount fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates estimated fair value hp’s short longterm debt 71 billion october 31 2016 compared carrying amount 68 billion date estimated fair value hp’s short longterm debt approximated carrying value 89 billion october 31 2015 measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hp’s financial instruments primarily accounts receivable accounts payable financial liabilities included accrued liabilities carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 2 level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets hp’s nonmarketable equity investments nonfinancial assets intangible assets goodwill property plant equipment recorded fair value period impairment charge recognized measured fair value consolidated balance sheets would generally classified level 3 fair value hierarchy hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments cash equivalents availableforsale investments hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments continued highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2016 2015 carrying amount cash equivalents approximated fair value due short period time maturity interest income related cash equivalents debt securities approximately 24 million fiscal year 2016 75 million fiscal year 2015 72 million fiscal year 2014 time deposits primarily issued institutions outside united states october 31 2016 2015 estimated fair value availableforsale investments may representative values realized future gross unrealized loss october 31 2016 2015 contractual maturities investments availableforsale debt securities follows equity securities privately held companies include cost basis equity method investments included noncurrent assets consolidated balance sheets amounted 16 million 13 million october 31 2016 2015 respectively derivative instruments hp uses derivatives offset business exposure foreign currency interest rate risk expected future cash flows certain existing assets liabilities part risk management strategy hp uses derivative instruments primarily forward contracts interest rate swaps total return swaps times option contracts hedge certain foreign currency interest rate lesser extent equity exposures hp may designate derivative contracts fair value hedges cash flow hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments continued hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivative instruments fair value consolidated balance sheets hp classifies cash flows hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments continued derivative programs activities correspond underlying hedged items consolidated statements cash flows result use derivative instruments hp exposed risk counterparties fail meet contractual obligations master netting agreements mitigate credit exposure counterparties permitting hp net amounts due hp counterparty amounts due hp counterparty certain conditions limit credit risk hp collateral security agreements allow hp hold collateral require hp post collateral counterparties aggregate derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hp’s counterparty’s credit rating falls specified credit rating either party right request full collateralization derivatives’ net liability position fair value derivatives credit contingent features net liability position 2 million 138 million october 31 2016 2015 respectively fully collateralized within two business days hp’s derivative contracts counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hp’s financial position cash flows october 31 2016 2015 fair value hedges hp enters fair value hedges interest rate swaps reduce exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar london interbank offered rate “libor”based floating interest expense derivative instruments designated qualify fair value hedges hp recognizes change fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change cash flow hedges hp uses forward contracts times option contracts designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost revenue operating expenses intercompany loans denominated currencies us dollar hp’s foreign currency cash flow hedges mature generally within twelve months however hedges related longer term procurement arrangements extend several years forward contracts associated intercompany loans extend duration lease loan term typically range two five years derivative instruments designated qualify cash flow hedges hp initially records changes fair value effective portion derivative instrument accumulated comprehensive loss separate component stockholders’ deficit equity consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes fair value hedged item net investment hedges hp used forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency part separation hp disposed foreign subsidiaries longer utilizes net investment hedges hp recorded effective portion derivative instruments together changes fair value hedged items cumulative translation adjustment separate component stockholders’ deficit equity derivatives hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments continued derivatives designated hedging instruments consist primarily forward contracts used hedge foreign currencydenominated balance sheet exposures hp uses total return swaps hedge executive deferred compensation plan liability hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments continued derivative instruments designated hedging instruments hp recognizes changes fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change hedge effectiveness interest rate swaps designated fair value hedges hp measures hedge effectiveness offsetting change fair value hedged item change fair value derivative foreign currency options forward contracts designated cash flow hedges hp measures hedge effectiveness comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates hp recognizes ineffective portion hedge consolidated statements earnings period ineffectiveness occurs amounts excluded assessment effectiveness recognized consolidated statements earnings period arise fair value derivative instruments consolidated balance sheets gross notional fair value derivative instruments consolidated balance sheets follows offsetting derivative instruments hp recognizes derivative instruments gross basis consolidated balance sheets hp offset fair value derivative instruments fair value cash collateral posted collateral security agreements october 31 2016 2015 information related potential effect hp’s master netting agreements collateral security agreements follows hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments continued 1 represents cash collateral posted counterparties respective reporting date hp’s asset position net derivative amounts could offset generally two business days prior respective reporting date 2 represents collateral posted hp reuse counterparty cash collateral respective reporting date hp’s liability position net derivative amounts could offset generally two business days prior respective reporting date effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2016 2015 2014 follows pretax effect derivative instruments cash flow net investment hedging relationships fiscal years ended october 31 2016 2015 2014 follows hp inc subsidiaries notes consolidated financial statements continued note 11 financial instruments continued october 31 2016 2015 2014 portion hedging instruments’ gain loss excluded assessment effectiveness fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years 2016 2015 2014 october 31 2016 hp expects reclassify estimated net accumulated comprehensive income approximately 139 million net taxes earnings next twelve months along earnings effects related forecasted transactions associated cash flow hedges pretax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal years 2016 2015 2014 follows note 12 borrowings notes payable shortterm borrowings hp inc subsidiaries notes consolidated financial statements continued note 12 borrowings continued 1 month november 2015 hp redeemed repaid 21 billion fixedrate us dollar global notes 2 october 31 2016 hp’s subsidiaries available borrowing resources 822 million uncommitted lines credit shortterm longterm financing longterm debt hp inc subsidiaries notes consolidated financial statements continued note 12 borrowings continued 1 hp may redeem fixedrate us dollar global notes time accordance terms thereof us dollar global notes senior unsecured debt 2 hp redeemed repaid 21 billion aggregate principal amount outstanding us dollar global notes month november 2015 disclosed note 11 “financial instruments” hp uses interest rate swaps mitigate exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar liborbased floating interest expense interest rates shown table longterm debt adjusted reflect impact interest rate swaps interest expense borrowings recognized “interest net” consolidated statements earnings fiscal years 2016 2015 2014 273 million 167 million 167 million respectively october 31 2016 aggregate future maturities debt face value excluding fair value adjustment related hedged debt 72 million discount debt issuance 7 million including capital lease obligations follows hp inc subsidiaries notes consolidated financial statements continued note 12 borrowings continued extinguishment debt month november 2015 hp redeemed repaid total 21 billion fixedrate us dollar global notes commercial paper november 1 2015 hp’s board directors authorized hp borrow total outstanding principal balance 40 billion equivalent foreign currencies use benefit hp’s subsidiaries issuance commercial paper execution promissory notes loan agreements letters credit agreements lines credit overdraft facilities october 31 2016 hp maintained two commercial paper programs hp’s us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 40 billion hp’s euro commercial paper program provides issuance commercial paper outside united states denominated us dollars euros british pounds maximum aggregate principal amount 40 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 40 billion authorized hp’s board directors credit facility october 31 2016 hp maintained 40 billion senior unsecured committed revolving credit facility support issuance commercial paper general corporate purposes commitments revolving credit facility available april 2 2019 commitment fees interest rates terms borrowing credit facilities vary based hp’s external credit ratings october 31 2016 hp compliance financial covenants credit agreement governing revolving credit facility available borrowing resources october 31 2016 hp’s hp’s subsidiaries available borrowing resources 822 million uncommitted lines credit addition senior unsecured committed revolving credit facility discussed note 13 stockholders’ deficit equity dividends stockholders hp common stock entitled receive dividends declared hp’s board directors dividends declared 050 per share common stock fiscal year 2016 067 per share common stock fiscal year 2015 061 per share common stock fiscal year 2014 share repurchase program hp’s share repurchase program authorizes open market private repurchase transactions fiscal year 2016 hp executed share repurchases 100 million shares fiscal year 2016 hp settled total shares 12 billion hp inc subsidiaries notes consolidated financial statements continued note 13 stockholders’ deficit equity continued fiscal year 2015 hp executed share repurchases 75 million shares included 05 million shares settled november 2015 fiscal year 2015 hp settled total shares 29 billion fiscal year 2014 hp executed share repurchases 92 million shares settled total shares 27 billion shares repurchased fiscal years 2016 2015 2014 open market repurchase transactions october 10 2016 board authorized additional 30 billion future repurchases outstanding shares common stock hp intends use additional authorization repurchase shares time offset dilution created shares issued employee stock plans repurchase shares opportunistically october 31 2016 hp approximately 38 billion remaining repurchase authorization taxes related comprehensive loss income hp inc subsidiaries notes consolidated financial statements continued note 13 stockholders’ deficit equity continued changes reclassifications related comprehensive loss net taxes 1 reclassification pretax gains losses cash flow hedges consolidated statements earnings follows hp inc subsidiaries notes consolidated financial statements continued note 13 stockholders’ deficit equity continued components accumulated comprehensive loss net taxes october 31 2016 changes fiscal year 2016 follows 1 represents amounts reclassified retained earnings distributed hewlett packard enterprise connection separation november 1 2015 note 14 earnings per share hp calculates basic net eps using net earnings weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock awards stock options performancebased awards shares purchased 2011 espp reconciliation number shares used basic diluted net eps calculations follows 1 hp considers restricted stock provides holder nonforfeitable right receive dividends participating securities october 31 2016 2015 participating securities outstanding fiscal year 2014 net earnings allocated participating securities significant hp inc subsidiaries notes consolidated financial statements continued note 14 earnings per share continued 2 hp excludes stock options restricted stock units assumed proceeds exceed average market price calculation diluted net eps effect would antidilutive assumed proceeds stock option include sum exercise price average unrecognized compensation cost excess tax benefits assumed proceeds restricted stock unit include sum average unrecognized compensation cost excess tax benefits note 15 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2016 reasonably possible material loss incurred excess amounts recognized hp’s financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case pursuant separation distribution agreement hp shares responsibility hewlett packard enterprise certain matters indicated hewlett packard enterprise agreed indemnify hp whole part respect certain matters based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hp’s potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies litigation proceedings investigations copyright levies proceedings ongoing concluded involving hp certain european countries including litigation belgium countries seeking impose modify levies upon equipment multifunction devices “mfds” pcs alleging devices enable production private copies copyrighted materials levies generally based upon number products sold perproduct amounts levies vary european countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes european countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based copying speed operated normal print mode set default device november 16 2012 court issued decision holding belgium law conformity eu law number respects ordered november 2013 reprobel substantiate amounts claimed reprobel commensurate harm resulting legitimate copying reprographic exception hp subsequently appealed court decision courts appeal brussels seeking confirm belgian law conformity eu law belgian law interpreted manner consistent eu law payments hp required alternatively payments already made hp sufficient comply obligations belgian law october 23 2013 court appeal brussels stayed proceedings referred several questions cjeu relating whether belgian reprographic copyright levies system conformity eu law case heard cjeu january 29 2015 november 12 2015 cjeu published judgment providing national legislation hp inc subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued belgian one issue main proceedings incompatible eu law multiple legal points argued hp court appeal brussels rule litigation hp reprobel following answers provided cjeu hp inc subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued based industry opposition extension levies digital products hp’s assessments merits various proceedings hp’s estimates number units impacted amounts levies hp accrued amounts believes adequate address ongoing disputes hewlettpackard company v oracle corporation june 15 2011 hp filed suit oracle corporation “oracle” california superior court santa clara county connection oracle’s march 2011 announcement discontinuing software support hp’s itaniumbased line mission critical servers hp asserted among things oracle’s actions breached contract signed parties part settlement litigation relating oracle’s hiring mark hurd matter eventually progressed trial bifurcated two phases hp prevailed first phase trial court ruled contract issue required oracle continue offer software products hp’s itaniumbased servers long hp decided sell servers second phase trial postponed oracle’s appeal trial court’s denial oracle’s “antislapp” motion oracle argued hp’s damages claim infringed oracle’s first amendment rights august 27 2015 california court appeals rejected oracle’s appeal matter remanded trial court second phase trial began may 23 2016 submitted jury june 29 2016 june 30 2016 jury returned verdict favor hp awarding hp approximately 30 billion damages included approximately17 billion past lost profits 13 billion future lost profits october 20 2016 court entered judgment hp amount interest accruing judgment paid oracle filed motion new trial publicly stated appeal jury’s verdict hp expects appeals process could take several years complete litigation unpredictable assurance hp recover damages award damages amount awarded jury’s verdict amount ultimately awarded would recorded period received adjustment recorded financial statements relation potential award pursuant terms separation distribution agreement hp hewlett packard enterprise share equally recovery oracle hewlett packard enterprise reimbursed costs incurred prosecution action prior separation forsyth et al vs hp inc hewlett packard enterprise purported class collective action filed august 18 2016 united states district court northern district california hp hewlett packard enterprise alleging defendants violated federal age discrimination employment act “adea” california fair employment housing act california public policy california business professions code terminating older workers replacing younger workers plaintiffs seek certify nationwide collective class action adea comprised us residents employed defendants employment terminated pursuant workforce reduction “wfr” plan may 23 2012 40 years age older plaintiffs also seek represent rule 23 class california law comprised persons 40 years older employed defendants state california terminated pursuant wfr plan may 23 2012 november 14 2016 defendants filed partial motion dismiss motion compel arbitration one plaintiff november 15 2016 defendants filed motion strike class definition shorten class period india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence “dri” issued show cause notices hewlettpackard india sales private limited “hp india” subsidiary hp seven hp india employees one former hp india employee alleging hp india underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp india deposited approximately 16 million dri agreed post provisional bond exchange dri’s agreement seize hp india products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hp india named individuals approximately 386 million hp india already deposited 9 million december 11 2012 hp india voluntarily deposited additional 10 million connection productsrelated show cause notice differential duty demand subject interest april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hp india certain named individuals approximately 17 million hp india already deposited 7 million order hp india deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hp inc subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued hp india filed appeals commissioner’s orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hp india deposit additional 24 million products order hp india deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hp india filed applications customs tribunal seeking early hearing appeals well extension stay deposit hp india individuals already granted final disposition appeals february 7 2014 application extension stay deposit granted customs tribunal disposal appeals october 27 2014 customs tribunal commenced hearings crossappeals commissioner’s orders customs tribunal rejected hp india’s request remand matter commissioner procedural grounds hearings scheduled reconvene april 6 2015 november 3 2015 april 11 2016 cancelled request customs tribunal pursuant separation distribution agreement hewlett packard enterprise agreed indemnify hp part based extent liability arises products spare parts hewlett packard enterprise’s businesses russia gpo anticorruption investigations german public prosecutor’s office “german ppo” conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard ise gmbh germany former subsidiary hp general prosecutor’s office russian federation approximately 35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network german ppo issued indictment four individuals including one current two former hp employees charges including bribery breach trust tax evasion german ppo also requested hp made associated party case request granted hp would participate portion court proceedings could ultimately bear question whether hp subject potential disgorgement profits based conduct indicted current former employees regional court leipzig determine whether matter admitted trial polish central anticorruption bureau also investigating potential corrupt actions former employee hewlettpackard polska sp z oo former indirect subsidiary hp connection certain publicsector transactions poland criminal proceedings pending regional court warsaw number individuals including former employee hewlettpackard polska sp z oo charges bribery bidrigging hp cooperating investigating agencies cement concrete workers district council pension fund v hewlettpackard company et al putative securities class action filed august 3 2012 united states district court northern district california alleging among things november 13 2007 august 6 2010 defendants violated sections 10b 20a exchange act making statements regarding hp’s standards business conduct “sbc” false misleading mr hurd serving hp’s chairman chief executive officer period violating sbc concealing misbehavior manner jeopardized continued employment hp february 7 2013 defendants moved dismiss amended complaint august 9 2013 court granted defendants’ motion dismiss leave amend complaint september 9 2013 plaintiff filed amended complaint september 9 2013 defendants moved dismiss complaint october 24 2013 june 25 2014 court issued order granting defendants’ motions dismiss july 25 2014 plaintiff filed notice appeal united states court appeals ninth circuit november 4 2014 plaintiffappellant filed opening brief united states court appeals ninth circuit hp filed answering brief january 16 2015 plaintiffappellant’s reply brief filed march 2 2015 appellate court heard oral argument july 7 2016 class actions authentication supplies four purported consumer class actions filed hp arising supplies authentication protocol certain officejet printers authentication protocol rejects thirdparty ink cartridges use nonhp security chips september 23 2016 bayse v hp inc filed united states district court northern district alabama alleging claims injunctive relief negligence andor wantonness breach warranty violations sherman act 15 usc § 1 et seq plaintiffs seek certify class persons united states purchased andor otherwise owned printer manufactured andor sold hp officejet pro andor officejet pro x line printers time september 18 2009 september 18 2016 hp inc subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued september 28 2016 doty v hp inc filed united states district court central district california alleging claims violations california’s false advertising law cal bus prof code § 17500 et seq unfair competition law cal bus prof code § 17200 et seq plaintiffs added claim consumer legal remedies act cal civ code § 1750 et seq october 31 2016 plaintiffs seek certify class united states citizens applicable statute limitations present hp printer modified reject third partyink cartridges october 7 2016 san miguel v hp inc filed united states district court northern district california alleging claims violation california’s unfair competition law cal bus prof code § 17200 et seq unjust enrichment plaintiffs seek certify class persons united states one hp printer device following categories officejet 6220 series officejet pro 6230 series officejet 6820 series officejet pro 6830 series officejet 8600 series officejet pro x series november 9 2016 ware v hp inc filed united states district court northern district california alleging claims violation california’s unfair competition law cal bus prof code § 17200 et seq unjust enrichment plaintiffs seek certify class persons united states one hp printer device following categories officejet 6220 series officejet pro 6230 series officejet 6820 series officejet pro 6830 series officejet 8600 series officejet pro x series autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice “doj” sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hp’s acquisition autonomy january 19 2015 uk serious fraud office notified hp closing investigation decided cede jurisdiction investigation us authorities november 14 2016 doj announced federal grand jury indicted sushovan hussain former cfo autonomy charges conspiracy commit wire fraud multiple counts wire fraud indictment alleges hussain engaged scheme defraud purchasers sellers securities autonomy hp true performance autonomy’s business financial condition prospects growth november 15 2016 sec announced stouffer egan former ceo autonomy’s usbased operations settled charges relating participation accounting scheme meet internal sales targets analyst revenue expectations hp continuing cooperate ongoing enforcement actions litigation described hp involved various stockholder litigation relating among things october 2011 acquisition autonomy november 20 2012 announcement recorded noncash charge impairment goodwill intangible assets within hewlett packard enterprise’s software segment approximately 88 billion fourth quarter 2012 fiscal year hp’s statements based hp’s findings ongoing investigation majority impairment charge related accounting improprieties misrepresentations market disclosure failures autonomy occurred prior connection hp’s acquisition autonomy impact improprieties failures misrepresentations expected future financial performance autonomy business long term stockholder litigation commenced among others certain current former hp executive officers certain current former members hp’s board directors certain advisors hp plaintiffs litigation matters seeking recover certain compensation paid hp defendants andor damages pursuant separation distribution agreement hp hewlett packard enterprise share equally cost damages arising litigation matters include following •in hewlettpackard shareholder derivative litigation “federal court derivative action” consists seven consolidated lawsuits filed beginning november 26 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hp’s acquisition autonomy financial performance hp’s enterprise services business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hp’s acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 one lawsuit alleges certain individual defendants engaged assisted insider trading thereby breached fiduciary duties unjustly hp inc subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued enriched violated sections 25402 25403 california corporations code may 3 2013 lead plaintiff filed consolidated complaint alleging among things defendants concealed material information made false statements related hp’s acquisition autonomy’s intelligent data operating layer technology thereby violated sections 10b 20a exchange act breached fiduciary duties engaged “abuse control” hp corporate waste unjustly enriched litigation stayed june 2014 lead plaintiff filed stipulation proposed settlement june 30 2014 court declined grant preliminary approval settlement december 19 2014 also declined grant preliminary approval revised version settlement january 22 2015 lead plaintiff moved preliminary approval revised version settlement march 13 2015 court issued order granting preliminary approval settlement july 24 2015 court held hearing entertain remaining objections settlement decide whether grant final approval settlement july 30 2015 court granted final approval settlement denied remaining objections settlement three objectors settlement appealed court’s final approval order ninth circuit plaintiffsappellants filed opening briefs december 30 2015 hp’s response brief filed february 29 2016 reply briefs filed may 12 2016 •autonomy corporation limited v michael lynch sushovan hussain april 17 2015 four hp subsidiaries autonomy corporation limited hewlett packard vision bv autonomy systems limited autonomy inc initiated civil proceedings uk high court justice two members autonomy’s former management michael lynch sushovan hussain particulars claim seek damages excess 5 billion messrs lynch hussain breach fiduciary duties causing autonomy group companies engage improper transactions accounting practices october 1 2015 messrs lynch hussain filed defenses mr lynch also filed counterclaim autonomy corporation limited seeking 160 million damages among things alleged misstatements regarding lynch hp subsidiary claimants filed replies defenses asserted counterclaim march 11 2016 •in hp erisa litigation consists three consolidated putative class actions filed beginning december 6 2012 united states district court northern district california alleging among things august 18 2011 november 22 2012 defendants breached fiduciary obligations hp’s 401k plan participants thereby violated sections 404a1 405a employee retirement income security act 1974 amended concealing negative information regarding financial performance autonomy hp’s enterprise services business failing restrict participants investing hp stock august 16 2013 hp filed motion dismiss lawsuit march 31 2014 court granted hp’s motion dismiss action leave amend july 16 2014 plaintiffs filed second amended complaint containing substantially similar allegations seeking substantially similar relief first amended complaint june 15 2015 court granted hp’s motion dismiss second amended complaint entirety denied plaintiffs leave file another amended complaint july 2 2015 plaintiffs appealed court’s order united states court appeals ninth circuit environmental hp’s operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hp’s products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred “product takeback legislation” hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hp’s potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act “cercla” known “superfund” state laws hp inc subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued hp inc subsidiaries notes consolidated financial statements continued note 15 litigation contingencies continued similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies separation distribution agreement includes provisions provide allocation environmental liabilities hp hewlett packard enterprise including certain remediation obligations responsibilities arising chemical materials composition respective products safe use energy consumption obligations product take back legislation addresses collection recycling treatment disposal products environmental matters hp generally responsible environmental liabilities related properties assets including products allocated hp separation distribution agreement ancillary agreements hp indemnify hewlett packard enterprise liabilities specified ongoing remediation projects subject certain limitations hewlett packard enterprise payment obligation specified portion cost remediation projects addition hp share hewlett packard enterprise environmental liabilities set forth separation distribution agreement hp indemnified whole part hewlett packard enterprise liabilities arising assets assigned hewlett packard enterprise certain environmental matters detailed separation distribution agreement note 16 guarantees indemnifications warranties guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors customers claims ip infringement made third parties arising vendors’ customers’ use hp’s software products services certain matters indemnifications may subject maximum loss clauses historically payments made related indemnifications immaterial crossindemnifications hewlett packard enterprise separation distribution agreement hp agreed indemnify hewlett packard enterprise subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hp part separation hewlett packard enterprise similarly agreed indemnify hp subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hewlett packard enterprise part separation hp expects hewlett packard enterprise fully perform terms separation distribution agreement information crossindemnifications related tax matter agreements litigations effective upon separation november 1 2015 see note 7 “taxes earnings” note 15 “litigation contingencies” respectively warranties hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however hp inc subsidiaries notes consolidated financial statements continued note 16 guarantees indemnifications warranties continued contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hp’s baseline experience affect estimated warranty obligation hp’s aggregate product warranty liabilities changes follows hp inc subsidiaries notes consolidated financial statements continued note 17 commitments lease commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense continuing operations approximately 02 billion fiscal years 2016 2015 2014 october 31 2016 future minimum operating lease commitments follows unconditional purchase obligations october 31 2016 hp unconditional purchase obligations 249 million unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations primarily related inventory service support unconditional purchase obligations exclude agreements cancelable without penalty october 31 2016 future unconditional purchase obligations follows note 18 divestitures fiscal year 2016 hp entered agreements divest certain technology assets including licensing distribution rights certain software offerings open text corporation enterprise information management company 475 million divestitures substantially completed fourth quarter fiscal year 2016 technology assets sold previously reported within commercial hardware business unit within printing segment total gain recognized divestitures 401 million gains associated divestitures included selling general administrative expenses consolidated statements earnings hp inc subsidiaries quarterly summary unaudited millions except per share amounts 1 net eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year hence sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hp inc audited accompanying consolidated balance sheets hp inc subsidiaries october 31 2017 2016 related consolidated statements earnings comprehensive income stockholders’ equity deficit cash flows three years period ended october 31 2017 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hp inc subsidiaries october 31 2017 2016 consolidated results operations cash flows three years period ended october 31 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states hp inc subsidiaries’ internal control financial reporting october 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated december 14 2017 expressed unqualified opinion thereon ernst young llp san jose california december 14 2017 report independent registered public accounting firm board directors stockholders hp inc audited hp inc subsidiaries’ internal control financial reporting october 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria hp inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hp inc subsidiaries maintained material respects effective internal control financial reporting october 31 2017 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets hp inc subsidiaries october 31 2017 2016 related consolidated statements earnings comprehensive income stockholders’ equity deficit cash flows three years period ended october 31 2017 report dated december 14 2017 expressed unqualified opinion thereon ernst young llp san jose california december 14 2017 management’s report internal control financial reporting hp’s management responsible establishing maintaining adequate internal control financial reporting hp’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hp’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hp’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hp’s management assessed effectiveness hp’s internal control financial reporting october 31 2017 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 2013 framework based assessment hp’s management determined hp’s internal control financial reporting effective october 31 2017 effectiveness hp’s internal control financial reporting october 31 2017 audited ernst young llp hp’s independent registered public accounting firm stated report appears page 54 annual report form 10k hp inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements stockholders’ equity deficit accompanying notes integral part consolidated financial statements hp inc subsidiaries notes consolidated financial statements note 1 overview summary significant accounting policies overview november 1 2015 hewlettpackard company completed separation hewlett packard enterprise company “hewlett packard enterprise” hewlettpackard company’s former enterprise technology infrastructure software services financing businesses “separation” connection separation hewlettpackard company changed name hp inc “hp” connection separation hp hewlett packard enterprise entered separation distribution agreement well various agreements provide framework relationships parties including among others tax matters agreement employee matters agreement transition service agreement real estate matters agreement master commercial agreement information technology service agreement information impacts agreements see note 4 “retirement postretirement benefit plans” note 5 “stockbased compensation” note 6 “taxes earnings” note 7 “supplementary financial information” note 14 “litigation contingencies” note 15 “guarantees indemnifications warranties” basis presentation accompanying consolidated financial statements hp whollyowned subsidiaries prepared conformity united states “us” generally accepted accounting principles “gaap” periods prior separation financial results hewlett packard enterprise presented net earnings discontinued operations consolidated statements earnings historical statements comprehensive income cash flows balances related stockholders’ deficit revised reflect effect separation information discontinued operations see note 17 “discontinued operations” principles consolidation consolidated financial statements include accounts hp subsidiaries affiliates hp controlling financial interest primary beneficiary intercompany balances transactions eliminated reclassifications hp made changes alignment business units order align business unit financial reporting closely current business structure hp made changes business unit information prior reporting periods asis basis reporting changes impact previously reported segment net revenue consolidated net revenue earnings continuing operations net earnings net earnings per share “eps” see note 2 “segment information” discussion hp’s business unit realignments hp reclassified certain prioryear amounts conform currentyear presentation including adoption accounting standards update “asu” 201503 “simplifying presentation debt issuance costs” asu 201609 “improvements employee sharebased payment accounting” use estimates preparation financial statements accordance us gaap requires management make estimates assumptions affect amounts reported hp’s consolidated financial statements accompanying notes actual results could differ materially estimates foreign currency translation hp uses us dollar functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses denominated nonus dollars recorded us dollars monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statements earnings recently adopted accounting pronouncements january 2017 financial accounting standard board “fasb” issued guidance simplifies accounting goodwill impairment updated guidance eliminates step 2 impairment test requires entities calculate implied fair value goodwill measure goodwill impairment charge instead entities record impairment charge based excess reporting unit’s carrying amount fair value hp required adopt guidance first quarter fiscal year 2021 using prospective approach earlier adoption permitted hp early adopted guidance hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued fourth quarter fiscal year 2017 connection annual goodwill impairment test implementation guidance impact consolidated financial statements march 2016 fasb issued guidance amends existing accounting standards sharebased payments including accounting income taxes forfeitures well classifications statements cash flows hp early adopted amendments first quarter fiscal year 2017 beginning november 1 2016 stockbased compensation excess tax benefits tax deficiencies reflected consolidated statements earnings component provision taxes whereas previously recognized additional paidin capital stockholders’ deficit consolidated balance sheets hp elected continue estimate forfeitures expected occur determine stockbased compensation expense additionally consolidated statements cash flows present excess tax benefits operating activity rather financing activity payment withholding taxes settlement stockbased compensation awards presented financing activity rather operating activity prior periods adjusted accordingly adoption resulted change cash flow operating investing activities 22 million 536 million years ended october 31 2016 2015 respectively see note 6 “taxes earnings” additional impact consolidated financial statements may 2015 fasb issued guidance amends existing disclosures investments measured net asset value “nav” per share equivalent practical expedient fair value amendment removes requirement categorize investments within fair value hierarchy amendment also removes requirement make certain disclosures investments eligible measured fair value using nav practical expedient hp adopted guidance first quarter fiscal year 2017 change presentation certain pensionrelated assets use nav practical expedient requires retrospective application adoption new guidance impact consolidated financial statements april 2015 fasb issued guidance amended existing accounting standards intangible assets amendments provide explicit guidance customers determining accounting fees paid cloud computing arrangement hp adopted guidance prospectively first quarter fiscal year 2017 implementation guidance impact consolidated financial statements april 2015 fasb issued guidance amended existing accounting standards presentation debt issuance costs amendments require debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts recognition measurement guidance debt issuance costs affected amendments hp adopted guidance first quarter fiscal year 2017 adoption resulted reclassification unamortized debt issuance costs related hp’s us dollar global notes “other noncurrent assets” “longterm debt” within consolidated balance sheets 23 million october 31 2016 recently issued accounting pronouncements yet adopted august 2017 fasb issued guidance amends existing accounting standards derivatives hedging amendment improves financial reporting hedging relationships better represent economic results entity’s risk management activities financial statements made certain targeted improvements simplify application hedge accounting guidance current us gaap hp required adopt guidance first quarter fiscal year 2020 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements january 2017 fasb issued guidance amended existing accounting standards business combinations amendments clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses hp required adopt guidance first quarter fiscal year 2019 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements november 2016 fasb issued guidance addresses presentation restricted cash statement cash flows guidance requires entities present changes total cash equivalents restricted cash restricted cash equivalents statement cash flows result entities longer present transfers cash equivalents restricted cash restricted cash equivalents statement cash flows hp required adopt guidance retrospectively first quarter fiscal year 2019 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements october 2016 fasb issued guidance amends existing accounting intraentity transfers assets inventory guidance requires entity recognize income tax consequences intraentity transfers hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued inventory transfer occurs also requires modified retrospective transition cumulative catchup adjustment opening retained earnings period adoption hp required adopt guidance first quarter fiscal year 2019 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements august 2016 fasb issued guidance amends existing accounting standards classification certain cash receipts cash payments statement cash flows hp required adopt guidance first quarter fiscal year 2019 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements june 2016 fasb issued guidance requires credit losses financial assets measured amortized cost basis presented net amount expected collected based incurred losses credit losses availableforsale debt securities recorded allowance credit losses limited amount fair value amortized cost hp required adopt guidance first quarter fiscal year 2021 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements february 2016 fasb issued guidance amends existing accounting standards leases consistent current guidance recognition measurement presentation expenses cash flows arising lease lessee primarily depend classification new guidance lessee required recognize assets liabilities leases lease terms twelve months hp required adopt guidance first quarter fiscal year 2020 using modified retrospective approach earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements january 2016 fasb issued guidance amends existing accounting standards recognition measurement financial assets financial liabilities guidance primarily addresses certain aspects recognition measurement presentation disclosure financial instruments hp required adopt guidance first quarter fiscal year 2019 amendments applied means cumulativeeffect adjustment balance sheet beginning fiscal year adoption amendments related specifically equity securities without readily determinable fair values applied prospectively earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements may 2014 fasb issued guidance amended existing accounting standards revenue recognition amendments topic 606 based principle revenue recognized depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services amendments may applied retrospectively prior period presented “full retrospective method” retrospectively cumulative effect recognized date initial application “modified retrospective method” hp adopt new revenue standard first quarter fiscal 2019 intends apply modified retrospective method based initial assessment anticipated adoption material impact amount timing revenue recognized consolidated financial statements continue make progress assessing overall impact adoption standard business processes systems controls revenue recognition general hp recognizes revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time delivery channel partners economic substance apart hp completed obligations related sale hp reduces revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns later date revenue recognition date sales incentive offered future market conditions product transitions may require hp take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs hp estimates number customers expected redeem incentive based historical experience specific terms conditions incentive instances revenue derived sales thirdparty vendor products services hp records revenue gross basis hp principal transaction net basis hp acting agent customer vendor hp considers several factors determine whether acting principal agent notably whether hp primary obligor customer established pricing inventory credit risks hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued hp reports revenue net taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority multiple element arrangements sales arrangement contains multiple elements deliverables hardware andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence “vsoe” selling price available thirdparty evidence “tpe” vsoe selling price available estimated selling price “esp” neither vsoe selling price tpe available hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority hp evaluates tpe selling price reviewing largely similar interchangeable competitor products services standalone sales similarly situated customers hp establishes esp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product lifecycle consideration also given market conditions competitor pricing strategies technology industry life cycles arrangements multiple elements hp allocates transaction price individual units accounting inception arrangement based relative selling price hp limits amount revenue recognized delivered elements amount contingent future delivery products services future performance obligations subject customerspecified refund return rights hp evaluates deliverable arrangement determine whether represents separate unit accounting deliverable constitutes separate unit accounting standalone value customer deliverables standalone value hp recognizes revenue consistent pattern delivery final deliverable arrangement includes customernegotiated refund return right contingency relative delivered items delivery performance undelivered items considered probable substantially within hp’s control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract net revenue hardware hp’s standard terms conditions sale hp transfers title risk loss customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations customer remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases revenue inception lease hp accrues estimated cost postsale obligations including standard product warranties based historical experience time hp recognizes revenue services hp recognizes revenue fixedprice support maintenance contracts ratably contract period recognizes costs associated contracts incurred deferred revenue hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria satisfied deferred revenue represents amounts invoiced advance product support contracts product sales shipping handling hp includes costs related shipping handling cost revenue stockbased compensation hp determines stockbased compensation expense based measurement date fair value award hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants limited cases hp amortizes actuarial gains losses using corridor approach see note 4 “retirement postretirement benefit plans” full description plans accounting funding policies advertising costs produce advertising expensed incurred production costs communicate advertising expensed advertising first run costs totaled approximately 544 million fiscal year 2017 586 million fiscal year 2016 635 million fiscal year 2015 restructuring charges hp records charges associated managementapproved restructuring plans reorganize one hp’s business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs including result separation distinct ongoing operational costs primarily relate information technology costs advisory consulting nonrecurring labor costs taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related interest penalties accounts receivable hp establishes allowance doubtful accounts receivable hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filing deterioration customer’s operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable hp thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers financing arrangements certain cases provide partial recourse result transfer hp’s trade receivables third party hp reflects amounts transferred yet collected third party accounts receivable consolidated balance sheets arrangements involving element recourse fair value recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets concentrations risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments receivables trade customers contract manufacturers derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographic regions hp’s policy designed hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued limit exposure particular institution part risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate exposures contracts involve risk nonperformance counterparty could result material loss likelihood hp deems remote hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors’ resellers’ aggregated business deteriorates substantially hp’s operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 34 gross accounts receivable october 31 2017 2016 single customer accounts 10 gross accounts receivable october 31 2017 2016 credit risk respect accounts receivable generally diversified due large number entities comprising hp’s customer base dispersion across many different industries geographic regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers may require collateral letters credit bank guarantees certain circumstances hp utilizes outsourced manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components outsourced manufacturers thereby creating receivable balances outsourced manufacturers three largest outsourced manufacturer receivable balances collectively represented 70 78 hp’s supplier receivables 951 million 774 million october 31 2017 2016 respectively hp includes supplier receivables current assets consolidated balance sheets gross basis hp’s credit risk associated receivables mitigated wholly part amount hp owes outsourced manufacturers hp generally legal right offset payables outsourced manufacturers receivables hp reflect sale components net revenue recognize profit component sales related products sold hp time profit recognized reduction cost revenue hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hp’s relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hp’s net revenue gross margins upon completion separation november 1 2015 hp recorded net income tax indemnification receivables hewlett packard enterprise certain income tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement “tma” actual amount hewlett packard enterprise may obligated pay hp could vary depending outcome certain unresolved tax matters may resolved several years net receivable october 31 2017 2016 17 billion 16 billion respectively inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments required reduce cost inventory market net realizable value made estimated excess obsolete impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation expense recognized straightline basis estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipment’s estimated residual value retirement disposition asset cost related accumulated depreciation removed consolidated balance sheets gain loss recognized consolidated statements earnings business combinations hp includes results operations acquired businesses hp’s consolidated results prospectively acquisition date hp allocates purchase consideration assets acquired liabilities assumed noncontrolling interests acquired entity generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquired entity recorded goodwill primary items generate goodwill include value synergies hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued acquired company hp value acquired assembled workforce neither qualifies recognition intangible asset acquisitionrelated charges recognized separately business combination expensed incurred charges include direct expenses thirdparty professional legal fees integrationrelated costs goodwill hp reviews goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable hp opt perform qualitative assessment test reporting unit’s goodwill impairment hp directly perform quantitative impairment test based qualitative assessment hp determines fair value reporting unit likely ie likelihood 50 percent less carrying amount quantitative impairment test performed quantitative impairment test hp compares fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions hp bases discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach order assess reasonableness estimated fair value hp’s reporting units hp compares aggregate reporting unit fair value hp’s market capitalization overall basis calculates implied control premium excess sum reporting units’ fair value hp’s market capitalization overall basis hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium determined reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired fair value reporting unit less carrying amount goodwill impaired excess reporting unit’s carrying value fair value recognized impairment loss debt marketable equity securities investments hp determines appropriate classification investments time purchase reevaluates classifications balance sheet date debt marketable equity securities generally considered availableforsale highly liquid investments maturities three months less date purchase classified cash equivalents marketable debt securities maturities twelve months less classified shortterm investments marketable debt securities maturities greater twelve months classified based availability use current operations marketable equity securities including mutual funds classified either shortterm longterm based nature security availability use current operations debt marketable equity securities reported fair value unrealized gains losses net applicable taxes accumulated comprehensive loss consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included interest net consolidated statements earnings hp monitors investment portfolio potential impairment quarterly basis carrying amount investment debt securities exceeds fair value decline value determined otherthantemporary ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss remaining amount recorded accumulated comprehensive loss consolidated balance sheets derivatives hp uses derivative instruments primarily forwards swaps times options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative instruments speculative purposes see note 10 “financial instruments” full description hp’s derivative instrument activities related accounting policies hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability contingencies believes probable liability incurred amount loss reasonably estimated see note 14 “litigation contingencies” full description hp’s loss contingencies related accounting policies hp inc subsidiaries notes consolidated financial statements continued note 2 segment information hp leading global provider personal computing access devices imaging printing products related technologies solutions services hp sells individual consumers small mediumsized businesses “smbs” large enterprises including customers government health education sectors hp’s operations organized three segments financial reporting purposes personal systems printing corporate investments hp’s organizational structure based number factors chief operating decision maker uses evaluate view run business operations include limited customer base homogeneity products technology segments based organizational structure information reviewed hp’s chief operating decision maker evaluate segment results chief operating decision maker uses several metrics evaluate performance overall business including earnings operations uses results allocate resources segments summary description segment follows personal systems provides commercial consumer personal computers “pcs” workstations thin clients commercial tablets mobility devices retail pointofsale systems displays related accessories software support services commercial consumer markets hp groups commercial notebooks commercial desktops commercial services commercial tablets mobility devices commercial detachables workstations retail pointofsale systems thin clients commercial clients consumer notebooks consumer desktops consumer services consumer detachables consumer clients describing performance markets described hp’s global business capabilities within personal systems • commercial pcs optimized use customers including enterprise smbs focus robust designs security serviceability connectivity reliability manageability networked environments additionally hp offers range services solutions enterprise smbs help manage lifecycle pc mobility installed base • consumer pcs notebooks desktops hybrids optimized consumer usage focusing multimedia consumption online browsing gaming light productivity personal systems groups global business capabilities notebooks desktops workstations reporting business performance printing provides consumer commercial printer hardware supplies solutions services well scanning devices printing also focused imaging solutions commercial markets described hp’s global business capabilities within printing • office printing solutions delivers hp’s office printers supplies services solutions smbs large enterprises hp goes market extensive channel network directly hp sales ongoing key initiatives include design deployment a3 products solutions copier multifunction printer market printer security solutions pagewide solutions awardwinning jetintelligence laserjet products • home printing solutions delivers innovative printing products solutions home business small office customers utilizing hp’s ink laser technologies initiatives instant ink continuous ink supply system provide business model innovation benefit expand hp’s existing customer base new innovations like sprocket drive print relevance mobile generation • graphics solutions offers largeformat commercial industrial solutions print service providers packaging converters largest portfolio printers presses hp designjet hp latex hp scitex hp indigo hp pagewide web presses • 3d printing delivers hp’s multijet fusion 3d printing solution designed prototyping production functional parts functioning open platform facilitating development new 3d printing materials hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued printing groups global business capabilities following business units reporting business performance • commercial hardware consists office printing solutions graphics solutions 3d printing excluding supplies • consumer hardware includes home printing solutions excluding supplies • supplies comprises set highly innovative consumable products ranging ink laser print cartridges media graphics supplies 3d printing supplies recurring use consumer commercial hardware corporate investments includes hp labs certain business incubation projects accounting policies hp uses derive segment results substantially used hp preparing financial statements hp derives results business segments directly internal management reporting system segment net revenue includes revenues sales external customers certain revenues related managed print services arrangements eliminated purposes reporting hp’s consolidated net revenue hp allocate certain operating expenses manages corporate level segments unallocated amounts include certain corporate governance costs marketrelated retirement credits stockbased compensation expense restructuring charges acquisitionrelated charges amortization intangible assets defined benefit plan settlement charges net revenue eliminations primarily related managed print services business unit realignment effective beginning first quarter fiscal year 2017 hp implemented organizational change align business unit financial reporting closely current business structure organizational change resulted transfer portion laserjet printers commercial consumer within printing segment hp reflected change business unit information prior reporting periods asis basis resulted reclassification revenues commercial consumer business units printing reporting change impact previously reported segment net revenue consolidated net revenue earnings continuing operations net earnings net earnings per share segment operating results continuing operations 1 fiscal year 2016 amount includes recognition revenue previously deferred relation sales preseparation finance entity reconciliation segment operating results hp consolidated results follows hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued segment assets hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets follows major customers single customer represented 10 hp’s net revenue fiscal year presented geographic information net revenue country based upon sales location predominately represents customer location fiscal years 2017 2016 2015 united states country represented 10 hp net revenue net revenue country hp operates follows hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued net property plant equipment country hp operates follows single country represented exceeds 10 hp’s total net property plant equipment fiscal year presented net revenue segment business unit follows hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring charges summary restructuring plans hp’s restructuring activities fiscal years 2017 2016 2015 summarized plan follows 1 infrastructure includes asset impairment charges 52 million fiscal year 2017 associated consolidation manufacturing global hubs 2 prp represents phased retirement program 3 eer represents enhanced early retirement fiscal 2017 plan october 10 2016 hp’s board directors approved restructuring plan “fiscal 2017 plan” expects implemented fiscal year 2019 hp estimates incur aggregate pretax charges 350 million 500 million relating labor nonlabor actions hp estimates approximately half expected cumulative pretax costs relate severance remaining relate infrastructure nonlabor actions charges described hp expects 3000 4000 employees exit end fiscal year 2019 fiscal 2015 plan connection separation september 14 2015 hp’s board directors approved cost savings plan “fiscal 2015 plan” included labor nonlabor actions fiscal 2015 plan considered substantially complete october 31 2016 hp expect activity associated plan approximately 3000 employees exited end fiscal year 2016 fiscal 2012 plan hp initiated restructuring plan fiscal year 2012 “fiscal 2012 plan” included severance infrastructure costs fiscal 2012 plan considered substantially complete october 31 2016 hp expect activity associated plan hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring charges continued charges include nonrecurring costs including result separation distinct ongoing operational costs primarily relate information technology costs advisory consulting nonrecurring labor costs hp incurred 135 million 30 million charges fiscal year 2017 2016 respectively charges incurred fiscal year 2015 note 4 retirement postretirement benefit plan separation related activities advance separation hp underwent planbyplan analysis determined plans would assigned either hp hewlett packard enterprise pension plans transitioned entirety hewlett packard enterprise remain entirety hp plans split two identical plans resulting companies splitting plan’s assets liabilities fourth quarter fiscal year 2015 plans legally separated amounts attributable hewlett packard enterprise transferred reported discontinued operations fiscal year 2015 hewlettpackard company 401k plan known hp inc 401k plan remained hp new 401k plan created employees hewlett packard enterprise balances hewlett packard enterprise employees transferred new plan postseparation defined benefit plans hp sponsors number defined benefit pension plans worldwide significant defined benefit plan hp inc pension plan “pension plan” united states hp reduces benefit payable certain us employees pension plan service 1993 amounts due employee hp’s frozen defined contribution deferred profitsharing plan “dpsp” october 31 2017 2016 fair value plan assets dpsp 580 million 606 million respectively dpsp obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations pension plan dpsp remain entirely hp postseparation postretirement benefit plans hp sponsors retiree health welfare benefit plans significant united states hp inc retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partiallysubsidized medical coverage based years service retirement hp’s share premium cost capped subsidized medical coverage provided hp inc retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp inc retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered partially subsidized medical coverage programs employees hired 2002 august 2008 eligible credits hp inc retiree welfare benefits plan credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association upon attaining age 45 part early retirement programs retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 103 million fiscal year 2017 100 million fiscal year 2016 92 million fiscal year 2015 hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued us employees automatically enrolled hp inc 401k plan meet eligibility requirements unless decline participation employer matching contributions hp inc 401k plan 100 employee’s contributions maximum 4 eligible compensation starting january 2017 funding employer matching contributions made annually month following end calendar year prior january 2017 funding employer matching contributions made quarterly sometime end calendar quarter pension postretirement benefit expense components hp’s pension postretirement benefit credit cost recognized consolidated statements earnings follows 1 plan expense allocation relates employees hp covered hewlett packard enterprise plans employees hewlett packard enterprise covered hp plans lump sum program fiscal year 2016 hp offered certain terminated vested participants pension plan option receiving pension benefit onetime voluntary lump sum specific window approximately 16000 plan participants elected receive benefits result pension plan trust paid 977 million lump sum payments participants fiscal year 2016 result lump sum program hp recognized settlement expense approximately 177 million october 2016 resulting remeasurement coincided annual year end plan remeasurement additional net periodic pension cost incurred fiscal year 2016 january 2015 hp offered certain terminated vested participants pension plan option receiving pension benefit onetime voluntary lump sum specified window approximately 50 eligible participants elected receive benefits result pension plan trust paid 826 million lump sum payments participants fiscal year 2015 result lump sum program hp recognized settlement credit approximately 79 million fiscal year 2015 result settlement additional net periodic benefit cost 20 million recorded fiscal year 2015 offset actuarial gain settlement recognized consolidated statements earnings defined benefit plan settlement credits hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued weightedaverage assumptions used calculate total periodic benefit credit cost follows funded status funded status defined benefit postretirement benefit plans follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued weightedaverage assumptions used calculate projected benefit obligations fiscal years ended october 31 2017 2016 follows net amounts noncurrent assets current noncurrent liabilities hp’s defined benefit postretirement benefit plans recognized hp’s consolidated balance sheet follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans following table summarizes hp’s pretax net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss recognized components net periodic benefit cost credit next fiscal year defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued fair value plan assets effective november 1 2016 hp retrospectively adopted asu 201507 disclosures investments certain entities calculate net asset value per share equivalent removed requirement categorize within fair value hierarchy investments fair value measured using nav per share practical expedient table sets forth fair value plan assets asset category within fair value hierarchy october 31 2017 refer note 9 “fair value” details fair value hierarchy table sets forth fair value plan assets asset category within fair value hierarchy october 31 2016 hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued 1 investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded 2 fair value corporate government assetbacked debt securities based observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based observable quoted prices also included category debt issued national state local governments agencies 3 includes publicly privately traded registered investment entities 4 includes cash equivalents shortterm marketable securities cash equivalents include money market funds valued based nav assets classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety 5 includes reverse repurchase agreements unsettled transactions international insured contracts derivative instruments unsettled transactions relate primarily fixed income securities settled first quarter next fiscal year 2017 year reverse repurchase agreements 6 alternative investments primarily include private equities hedge funds valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based nav reported asset manager adjusted cash flows necessary making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager • private equities include limited partnerships equity buyout venture capital real estate similar funds hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued invest united states internationally foreign currencies hedged • hedge funds include limited partnerships invest long short primarily common stocks credit relative value eventdriven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position 7 common contractual fund investment arrangement institutional investors pool assets units may acquired different subfunds focused equities fixed income alternative investments emerging markets subfund invested accordance fund’s investment objective units issued relation subfund subfunds publicly traded custodian strikes net asset value either twice month depending subfund assets valued using nav practical expedient 8 department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships common collective trusts interests 10312 entities registered investment companies valued using nav practical expedient plan asset allocations refer fair value hierarchy table actual assets allocations across benefit plans weightedaverage target asset allocations across benefit plans represented fair value tables follows investment policy hp’s investment strategy seek competitive rate return relative appropriate level risk depending funded status plan timing expected benefit payments majority plans’ investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans’ investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives affect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp believes appropriate relative plan’s liability structure return goals hp conducts periodic assetliability studies us plans order model various potential asset allocations comparison plan’s forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside united states asset allocation decisions typically made independent board trustees specific plan united states investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixed income securities would otherwise deployed hp reviews investment strategy hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plan continued provides recommended list investment managers country plan final decisions asset allocation investment managers made board trustees specific plan basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected real returns considers country’s specific inflation outlook hp’s investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees future contributions funding policy fiscal year 2018 hp expects contribute approximately 24 million nonus pension plans 33 million cover benefit payments us nonqualified plan participants 7 million cover benefit claims hp’s postretirement benefit plans hp’s policy fund pension plans makes least minimum contribution required local government funding taxing authorities estimated future benefits payments october 31 2017 hp estimates future benefits payments retirement postretirement plans follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation hp’s stockbased compensation plans include incentive compensation plans employee stock purchase plan “espp” stockbased compensation expense related income tax benefits continuing operations stockbased compensation expense resulting tax benefits continuing operations follows connection separation accordance employee matters agreement hp made certain adjustments exercise price number stockbased compensation awards intention preserving intrinsic value awards prior separation exercisable nonexercisable stock options converted similar awards entity employee working postseparation restricted stock unit awards performancecontingent awards adjusted provide holders restricted stock units awards performancecontingent awards company employs employee following separation pretax stockbased compensation expense due adjustments 2 million fiscal year 2016 outstanding restricted stock units stock options employees transferred hewlett packard enterprise canceled connection separation restricted stock units activity stock options activity fiscal year 2015 table include discontinued operations awards cancelled separation became effective first quarter fiscal year 2016 connection separation board directors approved amendments certain outstanding longterm incentive awards july 29 2015 amendments provided accelerated vesting september 17 2015 certain stockbased awards otherwise scheduled vest september 18 2015 december 31 2015 pretax stockbased compensation expense due acceleration continuing operations approximately 23 million fiscal year 2015 cash received option exercises purchases hewlettpackard company 2011 employee stock purchase plan “2011 espp” 118 million fiscal year 2017 48 million fiscal year 2016 206 million fiscal year 2015 benefit realized tax deduction option exercises fiscal years 2017 2016 2015 15 million 9 million 30 million respectively stockbased incentive compensation plans hp’s stockbased incentive compensation plans include equity plans adopted 2004 2000 amended “principal equity plans” well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased awards employees meeting certain employment qualifications eligible receive stockbased awards restricted stock awards nonvested stock awards may include grants restricted stock restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior lapse restrictions awards generally vest one three years date grant vesting period ownership restricted stock cannot transferred restricted stock dividend voting rights common stock considered issued outstanding upon grant dividends paid restricted stock nonforfeitable restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding upon grant however shares underlying restricted stock units included calculation diluted net eps hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued restricted stock units forfeitable dividend equivalent rights equal dividend paid common stock hp expenses fair value restricted stock awards ratably period restrictions lapse majority restricted stock units issued hp contain service vesting conditions however starting fiscal year 2014 hp began granting performanceadjusted restricted stock units vest satisfaction service market conditions prior expiration awards stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal closing price hp’s stock option grant date majority stock options issued hp contain service vesting conditions however starting fiscal year 2011 hp began granting performancecontingent stock options vest satisfaction service market conditions prior expiration awards restricted stock units hp uses closing stock price grant date estimate fair value servicebased restricted stock units hp estimates fair value restricted stock units subject performanceadjusted vesting conditions using combination closing stock price grant date monte carlo simulation model weightedaverage fair value assumptions used measure fair value restricted stock units subject performanceadjusted vesting conditions monte carlo simulation model follows 1 weightedaverage fair value based performanceadjusted restricted stock units granted period 2 expected volatility estimated using historical volatility derived hp’s common stock 3 riskfree interest rate estimated based yield us treasury zerocoupon issues 4 expected performance period estimated based length remaining performance period grant date summary restricted stock units activity follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued 1 fiscal year 2015 hp assumed approximately 8 million shares restricted stock units acquisition weightedaverage grant date fair value 33 per share total grant date fair value restricted stock units vested fiscal years 2017 2016 2015 162 million 54 million 889 million respectively october 31 2017 total unrecognized pretax stockbased compensation expense related nonvested restricted stock units continuing operations 205 million expected recognized remaining weightedaverage vesting period 13 years stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value assumptions used measure fair value follows 1 weightedaverage fair value based stock options granted period 2 awards granted fiscal year 2017 2016 expected volatility estimated using leverageadjusted average termmatching volatilities peer companies due lack volume forward traded options precluded use implied volatility awards granted fiscal year 2015 expected volatility estimated using implied volatility derived options traded hp’s common stock 3 riskfree interest rate estimated based yield us treasury zerocoupon issues hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued 4 expected dividend yield represents constant dividend yield applied duration expected term award 5 awards subject servicebased vesting due lack historical exercise postvesting termination patterns postseparation employee base expected term estimated using simplified method awards granted fiscal year 2017 2016 expected term estimated using historical exercise postvesting termination patterns awards granted fiscal year 2015 performancecontingent awards expected term represents output lattice model summary stock options activity follows aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options last trading day fiscal years 2017 2016 2015 aggregate intrinsic value difference hp’s closing stock price last trading day fiscal year exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal years 2017 2016 2015 77 million 26 million 214 million respectively total grant date fair value options vested fiscal years 2017 2016 2015 19 million 11 million 131 million respectively hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued following table summarizes significant ranges outstanding exercisable stock options october 31 2017 total unrecognized pretax stockbased compensation expense related stock options continuing operations 57 million expected recognized weightedaverage vesting period 08 years employee stock purchase plan hp sponsors 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hp’s common stock pursuant terms 2011 espp employees purchase stock 2011 espp price equal 95 hp’s closing stock price purchase date stockbased compensation expense recorded connection purchases criteria noncompensatory plan met shares reserved shares available future grant shares reserved future issuance stockbased incentive compensation plans 2011 espp follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings provision taxes domestic foreign components earnings continuing operations taxes follows provision benefit taxes earnings continuing operations follows differences us federal statutory income tax rate hp’s effective tax rate follows jurisdictions favorable tax rates significant effective tax rate impact periods presented include puerto rico singapore china malaysia ireland extent hp plans reinvest earnings jurisdictions indefinitely outside united states us taxes provided indefinitely reinvested earnings fiscal year 2017 hp recorded 72 million net income tax benefits related discrete items provision taxes amounts primarily include tax benefits 84 million related restructuring charges 12 million related us federal provision return adjustments 45 million related samsung acquisitionrelated charges 13 million net tax benefits addition hp recorded tax charges 11 million related changes state valuation allowances 22 million state provision return adjustments 49 million related uncertain tax positions hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued fiscal year 2016 hp recorded 301 million net income tax charges related discrete items provision taxes continuing operations amounts primarily include uncertain tax positions charges 525 million related preseparation tax matters addition hp recorded 62 million net tax benefits restructuring charges 52 million net tax benefits related release foreign valuation allowances 41 million net tax benefits arising retroactive research development credit provided consolidated appropriations act 2016 signed law december 2015 70 million tax benefit fiscal year 2015 hp recorded 12 billion net income tax benefits related discrete items provision taxes continuing operations amounts included 17 billion tax benefits due release valuation allowances pertaining certain us deferred tax assets 449 million tax charges related uncertain tax positions pension transfers 70 million tax benefits related state tax impacts 6 million income tax charges related various items addition hp recorded 33 million income tax charges restructuring pensionrelated costs fiscal year 2017 addition discrete items mentioned hp recorded excess tax benefits 19 million stock options restricted stock performance share units reflected consolidated statements earnings component provision income taxes result early adoption asu 201609 “improvements employee share based payment accounting” see note 1 “basis presentation” details regarding guidance result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2027 gross income tax benefits attributable actions investments estimated 471 million 028 diluted net eps fiscal year 2017 341 million 020 diluted net eps fiscal year 2016 322 million 018 diluted net eps fiscal year 2015 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors uncertain tax positions reconciliation unrecognized tax benefits follows october 31 2017 amount unrecognized tax benefits 108 billion 39 billion would affect hp’s effective tax rate realized october 31 2016 amount unrecognized tax benefits 109 billion 39 billion would affect hp’s effective tax rate realized hp continues record tax liabilities related uncertain tax positions certain liabilities joint several liability hewlett packard enterprise hp recognizes interest income favorable settlements interest expense penalties accrued unrecognized tax benefits provision taxes consolidated statements earnings october 31 2017 hp accrued 257 million interest penalties hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expects complete resolution certain tax years various tax authorities within next 12 months also possible federal foreign state tax issues may concluded within next 12 months hp believes reasonably possible existing unrecognized tax benefits may reduced amount 27 billion within next 12 months hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued hp subject income tax united states approximately 58 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits federal state foreign tax authorities irs conducting audit hp’s 2009 2010 2011 2012 2013 2014 2015 income tax returns hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agent reports “rar” fiscal years 2001 2002 2006 2007 2008 tax years irs adjustments would sustained reduce benefits tax refund claims hp filed net operating loss carrybacks earlier fiscal years tax credit carryforwards subsequent years approximately 377 million us tax court ruled may 2012 hp related certain tax attributes claimed hp tax years 1999 2003 hp appealed us tax court determination filing formal notice appeal ninth circuit court appeals case argued ninth circuit november 2016 ninth circuit court appeals issued opinion november 2017 affirming tax court determinations hp currently assessing whether appeal respect major state foreign tax jurisdictions hp longer subject tax authority examinations years prior 1999 material tax deficiencies assessed major state foreign tax jurisdictions reporting period hp believes provided adequate reserves tax deficiencies reductions tax benefits could result federal state foreign tax audits hp regularly assesses likely outcomes audits order determine appropriateness hp’s tax provision hp adjusts uncertain tax positions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular audit however income tax audits inherently unpredictable assurance hp accurately predict outcome audits amounts ultimately paid resolution audit could materially different amounts previously included provision taxes therefore resolution one uncertainties particular period could material impact net income cash flows hp provided us federal income foreign withholding taxes 217 billion undistributed earnings nonus operations october 31 2017 hp intends reinvest earnings indefinitely outside us hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated hp determines advantageous business operations tax cash management reasons deferred income taxes significant components deferred tax assets deferred tax liabilities follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued longterm deferred tax assets liabilities included consolidated balance sheets follows hp periodically engages intercompany advanced royalty payment arrangements may result advance payments subsidiaries different tax jurisdictions local tax treatment intercompany licensing arrangements differs us gaap treatment deferred taxes recognized fiscal year 2017 fiscal year 2016 fiscal year 2015 hp executed intercompany advanced royalty payment arrangements resulting advanced payments 26 million 12 billion 38 billion respectively result recognition zero net us deferred tax assets fiscal year 2017 2016 2015 transactions payments received united states foreign consolidated affiliate deferral intercompany revenues term arrangements approximately 12 months fiscal year 2017 18 months fiscal year 2016 5 years fiscal year 2015 intercompany royalty revenue eliminated consolidation october 31 2017 hp 678 million 25 billion 281 billion federal state foreign net operating loss carryforwards respectively amounts included state foreign net operating loss carryforwards begin expire fiscal year 2018 amounts included federal net operating loss carryforwards begin expire 2024 hp also capital loss carryforwards approximately 8 million expire 2021 charitable contributions 30 million expire 2022 hp provided valuation allowance 93 million 85 billion deferred tax assets related state foreign net operating loss carryforwards respectively hp expect realize october 31 2017 hp recorded deferred tax assets various tax credit carryforwards follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued deferred tax asset valuation allowance deferred tax asset valuation allowance changes follows gross deferred tax assets october 31 2017 2016 2015 reduced valuation allowances 88 billion 85 billion 71 billion respectively total valuation allowance increased 03 billion fiscal year 2017 increased 14 billion fiscal year 2016 years associated primarily foreign net operating losses decreased 11 billion fiscal 2015 associated release valuation allowance deferred tax assets united states tax matters agreement income tax matters connection separation hp entered tax matters agreement “tma” hewlett packard enterprise effective november 1 2015 governs rights obligations hp hewlett packard enterprise certain preseparation tax liabilities tma provides hp hewlett packard enterprise share certain preseparation income tax liabilities certain jurisdictions hp hewlett packard enterprise joint several liability past income tax liabilities accordingly hp could legally liable applicable tax law liabilities required make additional tax payments addition distribution hewlett packard enterprise’s common shares hp stockholders determined taxable hewlett packard enterprise hp would share tax liability equally unless taxability distribution direct result action taken either hewlett packard enterprise hp subsequent distribution case party causing distribution taxable would responsible taxes imposed distribution upon completion separation november 1 2015 hp recorded income tax indemnification receivables hewlett packard enterprise certain income tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tma actual amount hewlett packard enterprise may obligated pay hp could vary depending upon outcome certain unresolved tax matters may resolved several years net receivable october 31 2017 october 31 2016 17 billion 16 billion respectively note 7 supplementary financial information accounts receivable hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued allowance doubtful accounts related accounts receivable changes follows hp thirdparty arrangements consisting revolving shortterm financing provide liquidity certain partners order facilitate working capital requirements financing arrangements certain circumstances may contain partial recourse result transfer hp’s receivables risk thirdparty transfers qualify true sales applicable accounting guidance receivables derecognized consolidated balance sheets upon transfer hp receives payment receivables thirdparty within mutually agreed upon time period arrangements involving element recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets recourse obligations october 31 2017 2016 material costs associated sales trade receivables fiscal year 2017 2016 material following summary activity arrangements 1 amounts outstanding third parties reported accounts receivable consolidated balance sheets inventory hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued current assets 1 see note 9 “fair value” note 10 “financial instruments” detailed information property plant equipment net depreciation expense 353 million 316 million 302 million fiscal years 2017 2016 2015 respectively noncurrent assets 1 connection tma discussed note 6 “taxes earnings” 2 includes availableforsale investments 61 million 55 million october 31 2017 2016 respectively hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued accrued liabilities noncurrent liabilities interest net 1 connection tma discussed note 6 “taxes earnings” note 8 goodwill allocated hp’s reportable segments changes carrying amount goodwill follows hp inc subsidiaries notes consolidated financial statements continued 1 goodwill net accumulated impairment losses 08 billion related corporate investments 2 divestiture technology assets including licensing distribution rights certain software offerings open text corporation see note 18 “divestitures” goodwill tested impairment reporting unit level october 31 2017 reporting units consistent reportable segments identified note 2 “segment information” goodwill impairments fiscal years 2017 2016 hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment note 9 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy hp uses valuation techniques based upon observable unobservable inputs observable inputs developed using market data publicly available information reflect assumptions market participants would use unobservable inputs developed using best information available assumptions market participants would use assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability marketcorroborated inputs level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs hp inc subsidiaries notes consolidated financial statements continued note 9 fair value continued following table presents hp’s assets liabilities measured fair value recurring basis 1 government debt includes instruments us treasury notes us agency securities nonus government bonds government debt money market funds active markets included level 1 transfers levels within fair value hierarchy fiscal years 2017 2016 valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including nav models utilizing market observable inputs fair value debt investments based quoted market prices modeldriven valuations using inputs primarily derived corroborated observable market data certain instances valuation models utilize assumptions cannot corroborated observable market data derivative instruments hp uses forward contracts interest rate total return swaps times option contracts hedge certain foreign currency interest rate exposures hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices currencies interest rates see note 10 “financial instruments” discussion hp’s use derivative instruments fair value disclosures hp inc subsidiaries notes consolidated financial statements continued note 9 fair value continued short longterm debt hp estimates fair value debt primarily using expected present value technique based observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considering credit risk portion hp’s debt hedged reflected consolidated balance sheets amount equal debt’s carrying amount fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates estimated fair value hp’s short longterm debt 81 billion october 31 2017 compared carrying amount 78 billion date estimated fair value hp’s short longterm debt 71 billion compared carrying value 68 billion october 31 2016 measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hp’s financial instruments primarily accounts receivable accounts payable financial liabilities included accrued liabilities carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 2 level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets hp’s nonmarketable equity investments nonfinancial assets intangible assets goodwill property plant equipment recorded fair value period impairment charge recognized measured fair value consolidated balance sheets would generally classified within level 3 fair value hierarchy hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments cash equivalents availableforsale investments 1 hp classifies marketable debt securities availableforsale investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2017 2016 carrying amount cash equivalents approximated fair value due short period time maturity interest income related cash equivalents debt securities approximately 66 million fiscal year 2017 24 million fiscal year 2016 75 million fiscal year 2015 estimated fair value availableforsale investments may representative values realized future contractual maturities investments availableforsale debt securities follows equity securities privately held companies include cost basis equity method investments included noncurrent assets consolidated balance sheets amounted 37 million 16 million october 31 2017 2016 respectively derivative instruments hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued hp uses derivatives offset business exposure foreign currency interest rate risk expected future cash flows certain existing assets liabilities part risk management strategy hp uses derivative instruments primarily forward contracts interest rate swaps total return swaps times option contracts hedge certain foreign currency interest rate lesser extent equity exposures hp may designate derivative contracts fair value hedges cash flow hedges hp classifies cash flows designated derivative contracts activities correspond underlying hedged items consolidated statements cash flows derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivative instruments fair value consolidated balance sheets result use derivative instruments hp exposed risk counterparties fail meet contractual obligations master netting agreements mitigate credit exposure counterparties permitting hp net amounts due hp counterparty amounts due hp counterparty certain conditions limit credit risk hp collateral security agreements allow hp hold collateral require hp post collateral counterparties aggregate derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hp’s counterparty’s credit rating falls specified credit rating either party right request full collateralization derivatives’ net liability position fair value derivatives credit contingent features net liability position 258 million 2 million october 31 2017 2016 respectively fully collateralized within two business days hp’s derivative contracts counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hp’s financial position cash flows october 31 2017 2016 fair value hedges hp enters fair value hedges interest rate swaps reduce exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar london interbank offered rate “libor”based floating interest expense derivative instruments designated qualify fair value hedges hp recognizes change fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change cash flow hedges hp uses forward contracts times option contracts designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost revenue operating expenses intercompany loans denominated currencies us dollar hp’s foreign currency cash flow hedges mature generally within twelve months however hedges related longerterm procurement arrangements extend several years forward contracts associated intercompany loans extend duration lease loan term typically range two five years derivative instruments designated qualify cash flow hedges hp initially records changes fair value effective portion derivative instrument accumulated comprehensive loss separate component stockholders’ deficit consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes fair value hedged item net investment hedges hp used forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency part separation hp disposed foreign subsidiaries longer utilizes net investment hedges hp recorded effective portion derivative instruments together changes fair value hedged items cumulative translation adjustment separate component stockholders’ deficit hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued derivatives designated hedging instruments consist primarily forward contracts used hedge foreign currencydenominated balance sheet exposures hp uses total return swaps hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change hedge effectiveness interest rate swaps designated fair value hedges hp measures hedge effectiveness offsetting change fair value hedged item change fair value derivative foreign currency options forward contracts designated cash flow hedges hp measures hedge effectiveness comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates hp recognizes ineffective portion hedge consolidated statements earnings period ineffectiveness occurs amounts excluded assessment effectiveness recognized consolidated statements earnings period arise fair value derivative instruments consolidated balance sheets gross notional fair value derivative instruments consolidated balance sheets follows offsetting derivative instruments hp recognizes derivative instruments gross basis consolidated balance sheets hp offset fair value derivative instruments fair value cash collateral posted collateral security agreements october 31 2017 2016 information related potential effect hp’s master netting agreements collateral security agreements follows hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued 1 represents cash collateral posted counterparties respective reporting date hp’s asset position net derivative amounts could offset generally two business days prior respective reporting date 2 represents collateral posted hp reuse counterparty cash collateral respective reporting date hp’s liability position net derivative amounts could offset generally two business days prior respective reporting date effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2017 2016 2015 follows pretax effect derivative instruments cash flow net investment hedging relationships fiscal years ended october 31 2017 2016 2015 follows hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued october 31 2017 2016 2015 portion hedging instruments’ gain loss excluded assessment effectiveness fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years 2017 2016 2015 october 31 2017 hp expects reclassify estimated net accumulated comprehensive income approximately 159 million net taxes earnings next twelve months along earnings effects related forecasted transactions associated cash flow hedges pretax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal years 2017 2016 2015 follows hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings notes payable shortterm borrowings longterm debt 1 hp may redeem fixedrate us dollar global notes time accordance terms thereof us dollar global notes senior unsecured debt 2 effective november 1 2016 hp adopted asu 201503 “simplifying presentation debt issuance costs” amended presentation debt issuance costs direct deduction carrying amount debt liability december 2016 hp filed shelf registration statement sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants disclosed note 10 “financial instruments” hp uses interest rate swaps mitigate exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar liborbased hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings continued floating interest expense interest rates shown table longterm debt adjusted reflect impact interest rate swaps october 31 2017 aggregate future maturities debt face value excluding unamortized debt issuance cost 19 million discounts debt issuance 6 million less fair value adjustment related hedged debt 8 million including capital lease obligations follows commercial paper november 1 2015 hp’s board directors authorized hp borrow total outstanding principal balance 40 billion equivalent foreign currencies use benefit hp’s subsidiaries issuance commercial paper execution promissory notes loan agreements letters credit agreements lines credit overdraft facilities october 31 2017 hp maintained two commercial paper programs hp’s us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 40 billion hp’s euro commercial paper program provides issuance commercial paper outside united states denominated us dollars euros british pounds maximum aggregate principal amount 40 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 40 billion authorized hp’s board directors credit facility october 31 2017 hp maintained 40 billion senior unsecured committed revolving credit facility support issuance commercial paper general corporate purposes commitments revolving credit facility available april 2 2019 commitment fees interest rates terms borrowing credit facilities vary based hp’s external credit ratings october 31 2017 hp compliance financial covenants credit agreement governing revolving credit facility available borrowing resources october 31 2017 hp’s hp’s subsidiaries available borrowing resources 846 million uncommitted lines credit addition senior unsecured committed revolving credit facility discussed note 12 stockholders’ deficit dividends stockholders hp common stock entitled receive dividends declared hp’s board directors dividends declared 053 per share common stock fiscal year 2017 050 per share common stock fiscal year 2016 067 per share common stock fiscal year 2015 share repurchase program hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued hp’s share repurchase program authorizes open market private repurchase transactions fiscal year 2017 hp executed share repurchases 80 million shares include 15 million shares settled november 2017 fiscal year 2017 hp settled total shares 14 billion fiscal year 2016 hp executed share repurchases 100 million shares fiscal year 2016 hp settled total shares 12 billion fiscal year 2015 hp executed share repurchases 75 million shares settled total shares 29 billion shares repurchased fiscal years 2017 2016 2015 open market repurchase transactions october 31 2017 hp remaining authorization approximately 25 billion future share repurchases 30 billion repurchase authorization approved hp’s board directors october 10 2016 taxes related comprehensive income loss hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued changes reclassifications related comprehensive income net taxes 1 reclassification pretax losses gains cash flow hedges consolidated statements earnings follows 2 components included computation net pension postretirement benefit credit charges note 4 “retirement postretirement benefit plans” hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued components accumulated comprehensive loss net taxes october 31 2017 changes fiscal year 2017 follows note 13 earnings per share hp calculates basic net eps using net earnings weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock units stock options performancebased awards shares purchased 2011 employee stock purchase plan reconciliation number shares used basic diluted net eps calculations follows 1 hp excludes stock options restricted stock units assumed proceeds exceed average market price calculation diluted net eps effect would antidilutive assumed proceeds stock option include sum exercise price average unrecognized compensation cost assumed proceeds restricted stock unit represent unrecognized compensation cost hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2017 reasonably possible material loss incurred excess amounts recognized hp’s financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case pursuant separation distribution agreement hp shares responsibility hewlett packard enterprise certain matters indicated hewlett packard enterprise agreed indemnify hp whole part respect certain matters based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hp’s potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies litigation proceedings investigations copyright levies proceedings ongoing concluded involving hp certain european countries including litigation belgium countries seeking impose modify levies upon equipment multifunction devices “mfds” pcs alleging devices enable production private copies copyrighted materials levies generally based upon number products sold perproduct amounts levies vary european countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes european countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based copying speed operated normal print mode set default device november 16 2012 court issued decision holding belgium law conformity european union “eu” law number respects ordered november 2013 reprobel substantiate amounts claimed reprobel commensurate harm resulting legitimate copying reprographic exception hp subsequently appealed court decision courts appeal brussels seeking confirm belgian law conformity eu law belgian law interpreted manner consistent eu law payments hp required alternatively payments already made hp sufficient comply obligations belgian law october 23 2013 court appeal brussels stayed proceedings referred several questions court justice european union “cjeu” relating whether belgian reprographic copyright levies system conformity eu law case heard cjeu january 29 2015 november 12 2015 cjeu published judgment providing national legislation belgian one issue main proceedings incompatible eu law multiple legal points argued hp court appeal issued appealable decision may 12 2017 providing belgian reprographic copyright levies due notwithstanding lack conformity system eu law certain aspects applicable levies calculated based objective speed mfd established expert appointed court appeal based industry opposition extension levies digital products hp’s assessments merits various proceedings hp’s estimates number units impacted amounts levies hp accrued amounts believes adequate address ongoing disputes hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued hewlettpackard company v oracle corporation june 15 2011 hp filed suit oracle corporation “oracle” california superior court santa clara county connection oracle’s march 2011 announcement discontinuing software support hp’s itaniumbased line mission critical servers hp asserted among things oracle’s actions breached contract signed parties part settlement litigation relating oracle’s hiring mark hurd matter eventually progressed trial bifurcated two phases hp prevailed first phase trial court ruled contract issue required oracle continue offer software products hp’s itaniumbased servers long hp decided sell servers second phase trial postponed oracle’s appeal trial court’s denial oracle’s “antislapp” motion oracle argued hp’s damages claim infringed oracle’s first amendment rights august 27 2015 california court appeals rejected oracle’s appeal matter remanded trial court second phase trial began may 23 2016 submitted jury june 29 2016 june 30 2016 jury returned verdict favor hp awarding hp approximately 30 billion damages included approximately17 billion past lost profits 13 billion future lost profits october 20 2016 court entered judgment hp amount interest accruing judgment paid oracle’s motion new trial denied december 19 2016 oracle filed notice appeal trial court’s judgment january 17 2017 february 2 2017 hp filed notice crossappeal challenging trial court’s denial prejudgment interest schedule appellate briefing argument yet established hp expects appeals process could take several years complete litigation unpredictable assurance hp recover damages award damages amount awarded jury’s verdict amount ultimately awarded would recorded period received adjustment recorded financial statements relation potential award pursuant terms separation distribution agreement hp hewlett packard enterprise share equally recovery oracle hewlett packard enterprise reimbursed costs incurred prosecution action prior separation forsyth et al vs hp inc hewlett packard enterprise purported class collective action filed august 18 2016 united states district court northern district california hp hewlett packard enterprise alleging defendants violated federal age discrimination employment act “adea” california fair employment housing act california public policy california business professions code terminating older workers replacing younger workers plaintiffs seek certify nationwide collective class action adea comprised us residents employed defendants employment terminated pursuant workforce reduction “wfr” plan may 23 2012 40 years age older plaintiffs also seek represent rule 23 class california law comprised persons 40 years older employed defendants state california terminated pursuant wfr plan may 23 2012 following partial motion dismiss motion strike motion compel arbitration defendants filed november 2016 plaintiffs amended complaint new plaintiffs added plaintiffs agreed class period nationwide collective action shortened starts december 9 2014 january 30 2017 defendants filed another partial motion dismiss motions compel arbitration several plaintiffs march 20 2017 defendants filed additional motions compel arbitration number optin plaintiffs september 20 2017 court granted motions compel arbitration plaintiffs optins signed wfr release agreements 17 individuals also stayed entire case arbitrations completed plaintiffs filed motion reconsideration still pending india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence “dri” issued show cause notices hewlettpackard india sales private limited “hp india” subsidiary hp seven hp india employees one former hp india employee alleging hp india underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp india deposited approximately 16 million dri agreed post provisional bond exchange dri’s agreement seize hp india products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hp india named individuals approximately 386 million hp india already deposited 9 million december 11 2012 hp india voluntarily deposited additional 10 million connection productsrelated show cause notice differential duty demand subject interest april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hp india certain named individuals approximately 17 million hp india already deposited 7 million hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued order hp india deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hp india filed appeals commissioner’s orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hp india deposit additional 24 million products order hp india deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hp india filed applications customs tribunal seeking early hearing appeals well extension stay deposit hp india individuals already granted final disposition appeals february 7 2014 application extension stay deposit granted customs tribunal disposal appeals october 27 2014 customs tribunal commenced hearings crossappeals commissioner’s orders customs tribunal rejected hp india’s request remand matter commissioner procedural grounds hearings scheduled reconvene april 6 2015 november 3 2015 april 11 2016 cancelled request customs tribunal pursuant separation distribution agreement hewlett packard enterprise agreed indemnify hp part based extent liability arises products spare parts hewlett packard enterprise’s businesses russia gpo anticorruption investigations german public prosecutor’s office “german ppo” conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard ise gmbh germany former subsidiary hp general prosecutor’s office russian federation approximately 35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network german ppo issued indictment four individuals including one current two former hp employees charges including bribery breach trust tax evasion german ppo also requested hp made associated party case request granted hp would participate portion court proceedings could ultimately bear question whether hp subject potential disgorgement profits based conduct indicted current former employees august 29 2017 regional court leipzig decided admit matter trial affirmed ruling result termination prosecution german ppo appealed decision appeal currently pending higher regional court dresden class actions authentication supplies five purported consumer class actions filed hp arising supplies authentication protocol certain officejet printers authentication protocol rejects thirdparty ink cartridges use nonhp security chips two cases dismissed remaining cases consolidated united states district court northern district california captioned hp printer firmware update litigation remaining plaintiffs’ operative consolidated complaint filed march 22 2017 alleging eleven causes action 1 unfair unlawful business practices violation unfair competition law cal bus prof code § 17200 et seq 2 fraudulent business practices violation unfair competition law cal bus prof code § 17200 et seq 3 violations false advertising law cal bus prof code § 17500 et seq 4 violations consumer legal remedies act cal civ code § 1750 et seq 5 violations texas deceptive trade practices consumer protection act tex bus com code ann § 1701 et seq 6 violations washington consumer protection act wash rev code ann § 1986010 et seq 7 violations new jersey consumer fraud act new jersey statutes ann 5681 et seq 8 violations computer fraud abuse act 18 usc § 1030 et seq 9 violations california computer data access fraud act cal penal code § 502 10 trespass chattels 11 tortious interference contractual relations andor prospective economic advantage plaintiffs seek certify primary class persons united states purchased owned officejet printers question alternatively seek certify subclasses printer purchasers owners california texas washington andor new jersey april 21 2017 hp filed motion dismiss consolidated complaint court held hearing july 14 2017 hp’s motion dismiss remains pending hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice “doj” sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hp’s acquisition autonomy january 19 2015 uk serious fraud office notified hp closing investigation decided cede jurisdiction investigation us authorities november 14 2016 doj announced federal grand jury indicted sushovan hussain former cfo autonomy charges conspiracy commit wire fraud multiple counts wire fraud indictment alleges hussain engaged scheme defraud purchasers sellers securities autonomy hp true performance autonomy’s business financial condition prospects growth trial matter scheduled begin february 26 2018 november 15 2016 sec announced stouffer egan former ceo autonomy’s usbased operations settled charges relating participation accounting scheme meet internal sales targets analyst revenue expectations hp continuing cooperate ongoing enforcement actions litigation described hp involved various stockholder litigation relating among things october 2011 acquisition autonomy november 20 2012 announcement recorded noncash charge impairment goodwill intangible assets within hewlett packard enterprise’s software segment approximately 88 billion fourth quarter 2012 fiscal year hp’s statements based hp’s findings ongoing investigation majority impairment charge related accounting improprieties misrepresentations market disclosure failures autonomy occurred prior connection hp’s acquisition autonomy impact improprieties failures misrepresentations expected future financial performance autonomy business long term stockholder litigation commenced among others certain current former hp executive officers certain current former members hp’s board directors certain advisors hp plaintiffs litigation matters seeking recover certain compensation paid hp defendants andor damages pursuant separation distribution agreement hp hewlett packard enterprise share equally cost damages arising litigation matters include following •in hewlettpackard shareholder derivative litigation “federal court derivative action” consists seven consolidated lawsuits filed beginning november 26 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hp’s acquisition autonomy financial performance hp’s enterprise services business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hp’s acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 one lawsuit alleges certain individual defendants engaged assisted insider trading thereby breached fiduciary duties unjustly enriched violated sections 25402 25403 california corporations code may 3 2013 lead plaintiff filed consolidated complaint alleging among things defendants concealed material information made false statements related hp’s acquisition autonomy’s intelligent data operating layer technology thereby violated sections 10b 20a exchange act breached fiduciary duties engaged “abuse control” hp corporate waste unjustly enriched litigation stayed june 2014 lead plaintiff filed stipulation proposed settlement june 30 2014 court declined grant preliminary approval settlement december 19 2014 also declined grant preliminary approval revised version settlement january 22 2015 lead plaintiff moved preliminary approval revised version settlement march 13 2015 court issued order granting preliminary approval settlement july 24 2015 court held hearing entertain remaining objections settlement decide whether grant final approval settlement july 30 2015 court granted final approval settlement denied remaining objections settlement three objectors settlement appealed court’s final approval order united states court appeals ninth circuit “ninth circuit” plaintiffsappellants filed opening briefs december 30 2015 hp’s response brief filed february 29 2016 reply briefs filed may 12 2016 oral argument occurred may 15 2017 november 28 2017 final approval order affirmed ninth circuit •autonomy corporation limited v michael lynch sushovan hussain april 17 2015 four hp subsidiaries autonomy corporation limited hewlett packard vision bv autonomy systems limited autonomy inc hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued initiated civil proceedings uk high court justice two members autonomy’s former management michael lynch sushovan hussain particulars claim seek damages excess 5 billion messrs lynch hussain breach fiduciary duties causing autonomy group companies engage improper transactions accounting practices october 1 2015 messrs lynch hussain filed defenses mr lynch also filed counterclaim autonomy corporation limited seeking 160 million damages among things alleged misstatements regarding lynch hewlett packard enterprise subsidiary claimants filed replies defenses asserted counterclaim march 11 2016 parties actively engaged disclosure process sixmonth trial scheduled begin january 28 2019 •in hp erisa litigation consists three consolidated putative class actions filed beginning december 6 2012 united states district court northern district california alleging among things august 18 2011 november 22 2012 defendants breached fiduciary obligations hp’s 401k plan participants thereby violated sections 404a1 405a employee retirement income security act 1974 amended concealing negative information regarding financial performance autonomy hp’s enterprise services business failing restrict participants investing hp stock august 16 2013 hp filed motion dismiss lawsuit march 31 2014 court granted hp’s motion dismiss action leave amend july 16 2014 plaintiffs filed second amended complaint containing substantially similar allegations seeking substantially similar relief first amended complaint june 15 2015 court granted hp’s motion dismiss second amended complaint entirety denied plaintiffs leave file another amended complaint july 2 2015 plaintiffs appealed court’s order ninth circuit oral argument occurred may 15 2017 environmental hp’s operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hp’s products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred “product takeback legislation” hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hp’s potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act “cercla” known “superfund” state laws similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies separation distribution agreement includes provisions provide allocation environmental liabilities hp hewlett packard enterprise including certain remediation obligations responsibilities arising chemical materials composition respective products safe use energy consumption obligations product take back legislation addresses collection recycling treatment disposal products environmental matters hp generally responsible environmental liabilities related properties assets including products allocated hp separation distribution agreement ancillary agreements hp indemnify hewlett packard enterprise liabilities specified ongoing remediation projects subject certain limitations hewlett packard enterprise payment obligation specified portion cost remediation projects addition hp share hewlett packard enterprise environmental liabilities set forth separation distribution agreement hp indemnified whole part hewlett packard enterprise liabilities hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued arising assets assigned hewlett packard enterprise certain environmental matters detailed separation distribution agreement note 15 guarantees indemnifications warranties guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors customers claims ip infringement made third parties arising vendors’ customers’ use hp’s software products services certain matters indemnifications may subject maximum loss clauses historically payments made related indemnifications immaterial crossindemnifications hewlett packard enterprise separation distribution agreement hp agreed indemnify hewlett packard enterprise subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hp part separation hewlett packard enterprise similarly agreed indemnify hp subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hewlett packard enterprise part separation hp expects hewlett packard enterprise fully perform terms separation distribution agreement information crossindemnifications related tax matter agreements litigations effective upon separation november 1 2015 see note 6 “taxes earnings” note 14 “litigation contingencies” respectively warranties hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hp’s baseline experience affect estimated warranty obligation hp’s aggregate product warranty liabilities changes follows hp inc subsidiaries notes consolidated financial statements continued note 16 commitments lease commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense continuing operations approximately 02 billion fiscal years 2017 2016 2015 october 31 2017 future minimum operating lease commitments follows unconditional purchase obligations october 31 2017 hp unconditional purchase obligations 1208 million unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations primarily related inventory service support unconditional purchase obligations exclude agreements cancelable without penalty october 31 2017 unconditional purchase obligations follows note 17 discontinued operations november 1 2015 hp completed separation hewlett packard enterprise separation hp beneficially shares hewlett packard enterprise common stock following table presents financial results hp’s discontinued operations hp inc subsidiaries notes consolidated financial statements continued 1 cost products cost services financing interest 2 expenses fiscal year 2016 primarily related separation costs 3 fiscal year 2015 allocation interest hewlett packard enterprise based using average effective interest rate debt assumed hewlett packard enterprise debt repaid part separation fiscal year 2015 interest net also includes loss early extinguishment debt connection review hp’s capital structure separation 4 connection tma interest net fiscal year 2017 fiscal year 2016 includes changes tax indemnifications amounts 47 million 208 million respectively provision taxes fiscal year 2017 fiscal year 2016 includes tax impact relating described changes 47 million 201 million respectively information tax indemnifications tma see note 6 “taxes earnings” following table presents significant noncash items capital expenditures hp’s discontinued operations note 18 divestitures fiscal year 2016 hp entered agreements divest certain technology assets including licensing distribution rights certain software offerings open text corporation enterprise information management company 475 million divestitures substantially completed fourth quarter fiscal year 2016 technology assets sold previously reported within commercial hardware business unit within printing segment total gain recognized divestitures 401 million gains associated divestitures included selling general administrative expenses consolidated statements earnings hp inc subsidiaries notes consolidated financial statements continued note 19 subsequent events november 1 2017 hp made cash payment 11 billion samsung electronics co ltd connection acquisition printer business cash payment subject adjustment expected final fiscal year 2018 hp inc subsidiaries quarterly summary unaudited millions except per share amounts 1 net eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year hence sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm stockholders board directors hp inc opinion financial statements audited accompanying consolidated balance sheets hp inc subsidiaries company october 31 2018 2017 related consolidated statements earnings comprehensive income stockholders equity deficit cash flows three years period ended october 31 2018 related notes collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company october 31 2018 2017 results operations cash flows three years period ended october 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting october 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated december 13 2018 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served company’s auditor since 2000 san jose california december 13 2018 report independent registered public accounting firm stockholders board directors hp inc opinion internal control financial reporting audited hp inc subsidiaries’ internal control financial reporting october 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion hp inc subsidiaries company maintained material respects effective internal control financial reporting october 31 2018 based coso criteria also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets hp inc subsidiaries october 31 2018 2017 related consolidated statements earnings comprehensive income stockholders equity deficit cash flows three years period ended october 31 2018 related notes report dated december 13 2018 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp san jose california december 13 2018 management’s report internal control financial reporting hp’s management responsible establishing maintaining adequate internal control financial reporting hp’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hp’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hp’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hp’s management assessed effectiveness hp’s internal control financial reporting october 31 2018 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 2013 framework based assessment hp’s management determined hp’s internal control financial reporting effective october 31 2018 effectiveness hp’s internal control financial reporting october 31 2018 audited ernst young llp hp’s independent registered public accounting firm stated report appears page 52 annual report form 10k hp inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements stockholders’ equity deficit accompanying notes integral part consolidated financial statements hp inc subsidiaries notes consolidated financial statements note 1 overview summary significant accounting policies overview connection separation hp entered separation distribution agreement well various agreements hewlett packard enterprise provide framework relationships parties including among others tax matters agreement employee matters agreement transition service agreement real estate matters agreement master commercial agreement information technology service agreement information impacts agreements see note 7 “supplementary financial information” note 14 “litigation contingencies” note 15 “guarantees indemnifications warranties” basis presentation accompanying consolidated financial statements hp whollyowned subsidiaries prepared conformity us gaap principles consolidation consolidated financial statements include accounts hp subsidiaries affiliates hp controlling financial interest primary beneficiary intercompany balances transactions eliminated reclassifications hp implemented organizational change align segment business unit financial reporting closely current business structure hp reflected change segment business unit information prior reporting periods asif basis reporting changes impact previously reported consolidated net revenue earnings operations net earnings net eps see note 2 “segment information” discussion hp’s segment business unit realignments use estimates preparation financial statements accordance us gaap requires management make estimates assumptions affect amounts reported hp’s consolidated financial statements accompanying notes actual results may differ materially estimates foreign currency translation hp uses us dollar functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses denominated nonus dollars recorded us dollars monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statements earnings recently adopted accounting pronouncements august 2018 financial accounting standards board “fasb” issued guidance requires customer cloud computing arrangement “cca” service contract follow internaluse software guidance determine implementation costs capitalize assets expense incurred capitalized implementation costs related cca service contract amortized term hosting arrangement beginning module component hosting arrangement ready intended use hp required adopt guidance first quarter fiscal year 2021 using prospective approach earlier adoption permitted hp early adopted guidance fiscal year 2018 prospective basis implementation guidance material impact consolidated financial statements january 2017 fasb issued guidance amended existing accounting standards business combinations amendments clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses hp required adopt guidance first quarter fiscal year 2019 earlier adoption permitted hp early adopted guidance fourth quarter fiscal year 2018 implementation guidance material impact consolidated financial statements hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued recently issued accounting pronouncements yet adopted february 2018 fasb issued guidance eliminates stranded tax effects comprehensive income resulting tcja amendments relate reclassification income tax effects tcja underlying guidance requires effect change tax laws rates included income continuing operations affected hp required adopt guidance first quarter fiscal year 2020 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements august 2017 fasb issued guidance amends existing accounting standards derivatives hedging amendment improves financial reporting hedging relationships better represent economic results entity’s risk management activities financial statements made certain targeted improvements simplify application hedge accounting guidance current us gaap hp required adopt guidance first quarter fiscal year 2020 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements november 2016 fasb issued guidance addresses presentation restricted cash statement cash flows guidance requires entities present changes total cash equivalents restricted cash restricted cash equivalents statement cash flows result entities longer present transfers cash equivalents restricted cash restricted cash equivalents statement cash flows hp required adopt guidance retrospectively first quarter fiscal year 2019 earlier adoption permitted hp adopt guidance first quarter fiscal year 2019 hp expects implementation guidance material impact consolidated financial statements october 2016 fasb issued guidance amends existing accounting intraentity transfers assets inventory guidance requires entity recognize income tax consequences intraentity transfers inventory transfer occurs also requires modified retrospective transition cumulative catchup adjustment opening retained earnings period adoption earlier adoption permitted hp adopt guidance first quarter fiscal year 2019 hp expects implementation guidance material impact consolidated financial statements august 2016 fasb issued guidance amends existing accounting standards classification certain cash receipts cash payments statement cash flows hp required adopt guidance first quarter fiscal year 2019 earlier adoption permitted hp adopt guidance first quarter fiscal year 2019 hp expects implementation guidance material impact consolidated financial statements june 2016 fasb issued guidance requires credit losses financial assets measured amortized cost basis presented net amount expected collected based incurred losses credit losses availableforsale debt securities recorded allowance credit losses limited amount fair value amortized cost hp required adopt guidance first quarter fiscal year 2021 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements february 2016 fasb issued guidance amends existing accounting standards leases consistent current guidance recognition measurement presentation expenses cash flows arising lease lessee primarily depend classification new guidance lessee required recognize assets liabilities leases lease terms twelve months hp adopt new lease standard first quarter fiscal year 2020 using modified retrospective approach hp currently evaluating impact guidance consolidated financial statements january 2016 fasb issued guidance amends existing accounting standards recognition measurement financial assets financial liabilities guidance primarily addresses certain aspects recognition measurement presentation disclosure financial instruments hp required adopt guidance first quarter fiscal year 2019 amendments applied means cumulativeeffect adjustment balance sheet beginning fiscal year adoption amendments related specifically equity securities without readily determinable fair values applied prospectively earlier adoption permitted hp adopt guidance first quarter fiscal year 2019 hp expects implementation guidance material impact consolidated financial statements may 2014 fasb issued guidance amends existing accounting standards revenue recognition amendments topic 606 based principle revenue recognized depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services amendments may applied retrospectively prior period presented “full retrospective hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued method” retrospectively cumulative effect recognized date initial application “modified retrospective method” hp adopt new revenue standard first quarter fiscal year 2019 apply modified retrospective method based hp’s assessment adoption expected material impact amount timing revenue recognized consolidated financial statements upon adoption standard affect timing accrual certain distributor programs incentive offerings recorded time revenue recognition rather sales incentives offered hp expects changes revenue recognition timing certain contracts revenue recognition currently limited amount contingent future performance hp capitalize eligible sales commission costs amortize costs expected period benefit net impact consolidated balance sheet november 1 2018 currently estimated 220 million addition retained deficit consolidated balance sheet certain reclassifications impacting accounts receivable inventory current assets deferred revenue accrued liabilities line requirements new standard completed assessment implemented policies processes controls meet standard’s accounting disclosure requirements revenue recognition general hp recognizes revenue persuasive evidence arrangement exists delivery occurred services rendered sales price fee fixed determinable collectability reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time delivery channel partners economic substance apart hp completed obligations related sale hp reduces revenue customer distributor programs incentive offerings including price protection rebates promotions volumebased incentives expected returns later date revenue recognition date sales incentive offered future market conditions product transitions may require hp take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered certain incentive programs hp estimates number customers expected redeem incentive based historical experience specific terms conditions incentive instances revenue derived sales thirdparty vendor products services hp records revenue gross basis hp principal transaction net basis hp acting agent customer vendor hp considers several factors determine whether acting principal agent notably whether hp primary obligor customer established pricing inventory credit risks hp reports revenue net taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority multiple element arrangements sales arrangement contains multiple elements deliverables hardware andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vsoe selling price available tpe vsoe selling price available esp neither vsoe selling price tpe available hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority hp evaluates tpe selling price reviewing largely similar interchangeable competitor products services standalone sales similarly situated customers hp establishes esp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product lifecycle consideration also given market conditions competitor pricing strategies technology industry life cycles arrangements multiple elements hp allocates transaction price individual units accounting inception arrangement based relative selling price hp limits amount revenue recognized delivered elements amount contingent future delivery products services future performance obligations subject customerspecified refund return rights hp evaluates deliverable arrangement determine whether represents separate unit accounting deliverable constitutes separate unit accounting standalone value customer deliverables standalone value hp recognizes revenue consistent pattern delivery final deliverable arrangement includes customernegotiated refund return right contingency relative delivered items delivery hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued performance undelivered items considered probable substantially within hp’s control delivered element constitutes separate unit accounting arrangements combined units accounting changes allocation transaction price among elements may impact timing revenue recognition contract change total revenue recognized contract net revenue hardware hp’s standard terms conditions sale hp transfers title risk loss customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations customer remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases revenue inception lease hp accrues estimated cost postsale obligations including standard product warranties based historical experience time hp recognizes revenue services hp recognizes revenue fixedprice support maintenance contracts ratably contract period recognizes costs associated contracts incurred deferred revenue hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria satisfied deferred revenue represents amounts invoiced advance product support contracts product sales shipping handling hp includes costs related shipping handling cost revenue stockbased compensation hp determines stockbased compensation expense based measurement date fair value award hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants limited cases hp amortizes actuarial gains losses using corridor approach see note 4 “retirement postretirement benefit plans” full description plans accounting funding policies advertising cost costs produce advertising expensed incurred production costs communicate advertising expensed advertising first run costs totaled approximately 568 million fiscal year 2018 544 million fiscal year 2017 586 million fiscal year 2016 restructuring charges hp records charges associated managementapproved restructuring plans reorganize one hp’s business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs including result separation distinct ongoing operational costs primarily relate information technology costs advisory consulting nonrecurring labor costs taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related interest penalties accounts receivable hp establishes allowance doubtful accounts receivable hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filing deterioration customer’s operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable hp thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers financing arrangements certain cases provide partial recourse result transfer hp’s trade receivables third party hp reflects amounts transferred yet collected third party accounts receivable consolidated balance sheets arrangements involving element recourse fair value recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets concentrations risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments receivables trade customers contract manufacturers derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographic regions hp’s policy designed limit exposure particular institution part risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate exposures contracts involve risk nonperformance counterparty could result material loss likelihood hp deems remote hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors’ resellers’ aggregated business deteriorates substantially hp’s operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 39 34 gross accounts receivable october 31 2018 2017 respectively single customer accounts 10 gross accounts receivable october 31 2018 2017 credit risk respect accounts receivable generally diversified due hp’s large customer base dispersion across many different industries geographic regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers may require collateral letters credit bank guarantees certain circumstances hp utilizes outsourced manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components outsourced manufacturers thereby creating receivable balances outsourced manufacturers three largest outsourced manufacturer receivable balances collectively represented 72 70 hp’s supplier receivables 1074 million 951 million october 31 2018 2017 respectively hp includes supplier receivables current assets consolidated balance sheets gross basis hp’s credit risk associated receivables mitigated wholly part amount hp owes outsourced manufacturers hp generally legal right offset payables outsourced manufacturers receivables hp reflect sale components net revenue recognize profit component sales related products sold hp time profit recognized reduction cost revenue hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hp’s relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hp’s net revenue gross margins upon completion separation november 1 2015 hp recorded net income tax indemnification receivables hewlett packard enterprise certain income tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement “tma” actual amount hewlett packard enterprise may obligated pay hp could vary depending outcome certain unresolved tax matters may resolved several years net receivable october 31 2018 2017 10 billion 17 billion respectively inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments required reduce cost inventory market net realizable value made estimated excess obsolete impaired balances property plant equipment net hp reflects property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation expense recognized straightline basis estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipment’s estimated residual value retirement disposition asset cost related accumulated depreciation removed consolidated balance sheets gain loss recognized consolidated statements earnings internal use software cloud computing arrangements hp capitalizes external costs directly attributable internal costs acquire create internal use software incurred subsequent completion preliminary project stage costs relate activities software design configuration coding testing installation costs related postimplementation activities training maintenance expensed incurred software substantially complete ready intended use capitalized development costs amortized straightline estimated useful life software exceed five years hp also enters certain cloudbased software hosting arrangements accounted service contracts significant relates current implementation cloudbased enterprise resource planning system internaluse software obtained hosting arrangement nature service contract hp incurs certain implementation costs integrating configuring software customization consistent costs incurred application development stage onpremise software hp applies guidance determine costs eligible capitalization arrangements hp amortizes capitalized development costs straightline fixed noncancellable term associated hosting arrangement plus reasonably certain renewal periods hp also applies impairment model internaluse software capitalized implementation costs software hosting arrangement nature service contract business combinations hp includes results operations acquired business hp’s consolidated results prospectively acquisition date hp allocates purchase consideration assets acquired liabilities assumed noncontrolling interests acquired entity generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquired entity recorded goodwill primary items generate goodwill include value synergies acquired company hp value acquired assembled workforce neither qualify recognition intangible asset acquisitionrelated charges recognized separately business combination expensed incurred charges primarily include direct thirdparty professional legal fees integrationrelated costs goodwill hp reviews goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable hp elect perform qualitative assessment test reporting unit’s goodwill impairment hp directly perform quantitative impairment test based qualitative assessment hp determines fair value reporting unit likely ie likelihood 50 percent less carrying amount quantitative impairment test performed hp inc subsidiaries notes consolidated financial statements continued note 1 overview summary significant accounting policies continued quantitative impairment test hp compares fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions hp bases discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach order assess reasonableness estimated fair value hp’s reporting units hp compares aggregate reporting unit fair value hp’s market capitalization overall basis calculates implied control premium excess sum reporting units’ fair value hp’s market capitalization overall basis hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium determined reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired fair value reporting unit less carrying amount goodwill impaired excess reporting unit’s carrying value fair value recognized impairment loss debt marketable equity securities investments hp determines appropriate classification investments time purchase reevaluates classifications balance sheet date debt marketable equity securities generally considered availableforsale highly liquid investments maturities three months less date purchase classified cash equivalents marketable debt securities maturities twelve months less classified shortterm investments marketable debt securities maturities greater twelve months classified based availability use current operations marketable equity securities including mutual funds classified either shortterm longterm based nature security availability use current operations debt marketable equity securities reported fair value unrealized gains losses net applicable taxes accumulated comprehensive loss consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included interest net consolidated statements earnings hp monitors investment portfolio potential impairment quarterly basis carrying amount investment debt securities exceeds fair value decline value determined otherthantemporary ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss remaining amount recorded accumulated comprehensive loss consolidated balance sheets derivatives hp uses derivative instruments primarily forwards swaps times options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative instruments speculative purposes see note 10 “financial instruments” full description hp’s derivative instrument activities related accounting policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability contingencies believes probable liability incurred amount loss reasonably estimated see note 14 “litigation contingencies” full description hp’s loss contingencies related accounting policies hp inc subsidiaries notes consolidated financial statements continued note 2 segment information hp leading global provider personal computing access devices imaging printing products related technologies solutions services hp sells individual consumers smbs large enterprises including customers government health education sectors hp’s operations organized three reportable segments personal systems printing corporate investments hp’s organizational structure based many factors chief operating decision maker uses evaluate view run business operations include limited customer base homogeneity products technology segments based organizational structure information reviewed hp’s chief operating decision maker evaluate segment results chief operating decision maker uses several metrics evaluate performance overall business including earnings operations uses results allocate resources segments summary description segment follows personal systems offers commercial consumer desktop notebook pcs workstations thin clients commercial mobility devices retail pos systems displays related accessories software support services hp groups commercial notebooks commercial desktops commercial services commercial mobility devices commercial detachables convertibles workstations retail pos systems thin clients commercial pcs consumer notebooks consumer desktops consumer services consumer detachables consumer pcs describing performance markets described hp’s global business capabilities within personal systems • commercial pcs optimized use customers including enterprise public sector smb customers focus robust designs security serviceability connectivity reliability manageability networked cloud based environments additionally hp offers range services solutions enterprise public sector smb customers help manage lifecycle pc mobility installed base • consumer pcs optimized consumer usage focusing gaming consuming multimedia entertainment personal life activities staying connected sharing information getting things done work including creating content staying informed security personal systems groups global business capabilities following business units reporting business performance • notebooks consists consumer notebooks commercial notebooks mobile workstations commercial mobility devices • desktops includes consumer desktops commercial desktops thin clients retail pos systems • workstations consists desktop workstations accessories • consists consumer commercial services well personal systems capabilities printing provides consumer commercial printer hardware supplies solutions services well scanning devices printing also focused imaging solutions commercial industrial markets described hp’s global business capabilities within printing • office printing solutions delivers hp’s office printers supplies services solutions smbs large enterprises also includes samsung branded oem hardware supplies solutions hp goes market extensive channel network directly hp sales ongoing key initiatives include design deployment a3 products solutions copier multifunction printer market printer security solutions pagewide solutions awardwinning jetintelligence laserjet products • home printing solutions delivers innovative printing products solutions home business micro business customers utilizing hp’s ink laser technologies initiatives instant ink continuous ink supply system provide business model innovation benefit expand hp’s existing customer base new technologies like photo lifestyle products drive print relevance mobile generation • graphics solutions delivers largeformat commercial industrial solutions print service providers packaging converters wide portfolio printers presses hp designjet hp latex hp scitex hp indigo hp pagewide web presses • 3d printing delivers hp multijet fusion 3d printing solution designed prototyping production functional parts functioning open platform facilitating development new 3d printing materials hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued printing groups global business capabilities following business units reporting business performance • commercial hardware consists office printing solutions graphics solutions 3d printing excluding supplies • consumer hardware includes home printing solutions excluding supplies • supplies comprises set highly innovative consumable products ranging ink laser cartridges media graphics supplies 3d printing supplies samsungbranded a4 a3 supplies oem supplies recurring use consumer commercial hardware corporate investments includes hp labs certain business incubation projects accounting policies hp uses derive segment results substantially used hp preparing financial statements hp derives results business segments directly internal management reporting system hp allocate certain operating expenses manages corporate level segments unallocated amounts include certain corporate governance costs marketrelated retirement credits stockbased compensation expense restructuring charges acquisitionrelated charges amortization intangible assets defined benefit plan settlement charges realignment effective beginning first quarter fiscal year 2018 hp implemented organizational change align segment business unit financial reporting closely current business structure organizational change resulted transfer long life consumables commercial supplies within printing segment certain revenues related service arrangements eliminated purposes reporting hp’s consolidated net revenue reclassified segments hp reflected change segment business unit information prior reporting periods asif basis reporting change impact previously reported consolidated net revenue earnings operations net earnings net eps hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued segment operating results continuing operations reconciliation hp consolidated results follows 1 fiscal year 2016 amount includes recognition revenue previously deferred relation sales preseparation finance entity segment assets hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets follows major customers single customer represented 10 hp’s net revenue fiscal year presented geographic information hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued net revenue country based upon sales location predominately represents customer location fiscal years 2018 2017 2016 united states country represented 10 hp net revenue net revenue country hp operates follows net property plant equipment country hp operates follows single country represented exceeds 10 hp’s total net property plant equipment fiscal year presented hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued net revenue segment business unit follows hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring charges summary restructuring plans hp’s restructuring activities fiscal years 2018 2017 2016 summarized plan follows 1 infrastructure includes adjustment carrying amount held sale assets 52 million fiscal year 2017 reversal adjustments 29 million fiscal year 2018 associated consolidation manufacturing global hubs 2 prp represents phased retirement program fiscal 2017 plan october 10 2016 hp’s board directors approved restructuring plan “fiscal 2017 plan” hp expected would implemented fiscal year 2019 may 26 2018 hp’s board directors approved amending fiscal 2017 plan hp expects approximately 4500 5000 employees exit end fiscal year 2019 hp estimates incur aggregate pretax charges approximately 700 million relating labor nonlabor actions hp estimates approximately half expected cumulative pretax costs relate severance remaining costs relate infrastructure nonlabor actions charges fiscal 2015 plan connection separation september 14 2015 hp’s board directors approved cost savings plan “fiscal 2015 plan” included labor nonlabor actions fiscal 2015 plan considered substantially complete october 31 2016 hp expect activity associated plan fiscal 2012 plan hp initiated restructuring plan fiscal year 2012 “fiscal 2012 plan” included severance infrastructure costs fiscal 2012 plan considered substantially complete october 31 2016 hp expect activity associated plan charges hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring charges continued charges include nonrecurring costs including result separation distinct ongoing operational costs primarily relate information technology costs advisory consulting nonrecurring labor costs hp incurred 33 million 135 million 30 million charges fiscal year 2018 2017 2016 respectively note 4 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant defined benefit plan hp inc pension plan “pension plan” frozen plan united states hp reduces benefit payable certain us employees pension plan service 1993 amounts due employee hp’s frozen defined contribution deferred profitsharing plan “dpsp” october 31 2018 2017 fair value plan assets dpsp 536 million 580 million respectively dpsp obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations pension plan dpsp remain entirely hp postseparation postretirement benefit plans hp sponsors retiree health welfare benefit plans significant united states hp inc retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partiallysubsidized medical coverage based years service retirement hp’s share premium cost capped subsidized medical coverage provided hp inc retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp inc retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered partially subsidized medical coverage programs employees hired 2002 august 2008 eligible credits hp inc retiree welfare benefits plan credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association upon attaining age 45 part early retirement programs retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 110 million fiscal year 2018 103 million fiscal year 2017 100 million fiscal year 2016 us employees automatically enrolled hp inc 401k plan meet eligibility requirements unless decline participation employer matching contributions hp inc 401k plan 100 employee’s contributions maximum 4 eligible compensation hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued pension postretirement benefit expense components hp’s pension postretirement credit benefit cost recognized consolidated statements earnings follows lump sum program fiscal year 2016 hp offered certain terminated vested participants pension plan option receiving pension benefit onetime voluntary lump sum specific window approximately 16000 plan participants elected receive benefits result pension plan trust paid 977 million lump sum payments participants fiscal year 2016 result lump sum program hp recognized settlement expense approximately 177 million october 2016 resulting remeasurement coincided annual year end plan remeasurement additional net periodic pension cost incurred fiscal year 2016 weightedaverage assumptions used calculate total periodic benefit credit cost follows funded status funded status defined benefit postretirement benefit plans follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued weightedaverage assumptions used calculate projected benefit obligations fiscal years ended october 31 2018 2017 follows net amounts noncurrent assets current noncurrent liabilities hp’s defined benefit postretirement benefit plans recognized hp’s consolidated balance sheet follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans following table summarizes hp’s pretax net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss recognized components net periodic benefit cost credit next fiscal year defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued fair value plan assets table sets forth fair value plan assets asset category within fair value hierarchy october 31 2018 refer note 9 “fair value” details fair value hierarchy per asu 201507 certain investments measured fair value using net asset value nav per share practical expedient categorized fair value hierarchy fair value amounts presented table provide reconciliation fair value hierarchy total value plan assets table sets forth fair value plan assets asset category within fair value hierarchy october 31 2017 hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued 1 investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded 2 fair value corporate government assetbacked debt securities based observable inputs comparable market transactions also included category debt issued national state local governments agencies 3 department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships certain common collective trusts interests 10312 entities valued using nav practical expedient 4 includes publicly traded funds investment companies registered sec funds publicly traded nonus fundoffund arrangement nonus fundoffund arrangement custom portfolio valued nav consisting primarily fixed income common contractual funds 5 includes cash equivalents shortterm marketable securities cash equivalents include money market funds valued based nav assets classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety 6 includes primarily reverse repurchase agreements unsettled transactions derivative instruments 7 alternative investments primarily include private equities hedge funds valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based nav reported asset manager investment company adjusted cash flows necessary making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager • private equities include limited partnerships equity buyout venture capital real estate similar funds invest united states internationally foreign currencies hedged • hedge funds include limited partnerships invest long short primarily common stocks credit relative value eventdriven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued net long position net short position 8 common contractual fund investment arrangement institutional investors pool assets units may acquired different subfunds focused equities fixed income alternative investments emerging markets subfund invested accordance fund’s investment objective units issued relation subfund subfunds publicly traded custodian strikes nav either twice month depending subfund assets valued using nav practical expedient plan asset allocations refer fair value hierarchy table actual assets allocations across benefit plans weightedaverage target asset allocations across benefit plans represented fair value tables follows investment policy hp’s investment strategy seek competitive rate return relative appropriate level risk depending funded status plan timing expected benefit payments majority plans’ investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans’ investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives affect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp believes appropriate relative plan’s liability structure return goals hp conducts periodic assetliability studies us plans model various potential asset allocations comparison plan’s forecasted liabilities liquidity needs develop policy glide path adjusts asset allocation funded status 2018 assetliability study reconfirmed current policy glide path us pension plan due higher interest rates capital market performance us pension plan funded ratio increased therefore investment portfolio risk reduced increasing fixed income holdings accordance policy glide path hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside united states asset allocation decisions typically made independent board trustees specific plan united states investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixed income securities would otherwise deployed hp reviews investment strategy provides recommended list investment managers country plan final decisions asset allocation investment managers made board trustees specific plan basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected real returns considers country’s specific inflation outlook hp’s investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees future contributions funding policy hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued fiscal year 2019 hp expects contribute approximately 46 million nonus pension plans 32 million cover benefit payments us nonqualified plan participants 6 million cover benefit claims hp’s postretirement benefit plans hp’s policy fund pension plans makes least minimum contribution required local government funding taxing authorities estimated future benefits payments october 31 2018 hp estimates future benefits payments retirement postretirement plans follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation hp’s stockbased compensation plans include incentive compensation plans employee stock purchase plan “espp” stockbased compensation expense related income tax benefits operations stockbased compensation expense resulting tax benefits operations follows connection separation accordance employee matters agreement hp made certain adjustments exercise price number stockbased compensation awards intention preserving intrinsic value awards prior separation exercisable nonexercisable stock options converted similar awards entity employee working postseparation restricted stock unit awards performancecontingent awards adjusted provide holders restricted stock units awards performancecontingent awards company employs employee following separation pretax stockbased compensation expense due adjustments 2 million fiscal year 2016 outstanding restricted stock units stock options employees transferred hewlett packard enterprise canceled connection separation cash received option exercises purchases hp inc 2011 employee stock purchase plan “2011 espp” 158 million fiscal year 2018 118 million fiscal year 2017 48 million fiscal year 2016 benefit realized tax deduction option exercises fiscal years 2018 2017 2016 23 million 15 million 9 million respectively stockbased incentive compensation plans hp’s stockbased incentive compensation plans include equity plans adopted 2004 2000 amended restated “principal equity plans” well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased awards employees meeting certain employment qualifications eligible receive stockbased awards aggregate number shares hp’s stock authorized issuance 2004 principal equity plan 5931 million grants may made 2000 principal equity plan outstanding awards plan remain outstanding according terms plan restricted stock awards nonvested stock awards may include grants restricted stock restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior lapse restrictions awards generally vest one three years date grant vesting period ownership restricted stock cannot transferred restricted stock dividend voting rights common stock considered issued outstanding upon grant dividends paid restricted stock nonforfeitable restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding upon grant however shares underlying restricted stock units included calculation diluted net eps restricted stock units forfeitable dividend equivalent rights equal dividend paid common stock hp expenses fair value restricted stock awards ratably period restrictions lapse majority restricted stock units issued hp contain service vesting conditions however starting fiscal year 2014 hp began granting performanceadjusted restricted stock units vest satisfaction service achievement certain performance goals including market conditions prior expiration awards stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal closing price hp’s stock option grant date majority stock options issued hp contain service vesting conditions however starting fiscal year 2011 fiscal year 2016 hp granted performancecontingent stock options vest satisfaction service market conditions prior expiration awards hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued restricted stock units hp uses closing stock price grant date estimate fair value servicebased restricted stock units hp estimates fair value restricted stock units subject performanceadjusted vesting conditions using combination closing stock price grant date monte carlo simulation model weightedaverage fair value assumptions used measure fair value restricted stock units subject performanceadjusted vesting conditions monte carlo simulation model follows 1 weightedaverage fair value based performanceadjusted restricted stock units granted period 2 expected volatility estimated using historical volatility derived hp’s common stock 3 riskfree interest rate estimated based yield us treasury zerocoupon issues 4 expected performance period estimated based length remaining performance period grant date summary restricted stock units activity follows total grant date fair value restricted stock units vested fiscal years 2018 2017 2016 224 million 162 million 54 million respectively october 31 2018 total unrecognized pretax stockbased compensation expense related nonvested restricted stock units operations 238 million expected recognized remaining weightedaverage vesting period 14 years stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value assumptions used measure fair value follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued 1 weightedaverage fair value based stock options granted period 2 awards granted fiscal year 2018 expected volatility estimated based blended volatility 50 historical volatility 50 implied volatility traded options hps common stock awards granted fiscal year 2017 2016 expected volatility estimated using leverageadjusted average termmatching volatilities peer companies due lack volume forward traded options precluded use implied volatility 3 riskfree interest rate estimated based yield us treasury zerocoupon issues 4 expected dividend yield represents constant dividend yield applied duration expected term award 5 awards subject servicebased vesting due lack historical exercise postvesting termination patterns postseparation employee base expected term estimated using simplified method performancecontingent awards expected term represents output lattice model summary stock options activity follows aggregate intrinsic value table represents total pretax intrinsic value option holders would realized option holders exercised options last trading day fiscal years 2018 2017 2016 aggregate intrinsic value difference hp’s closing stock price last trading day fiscal year exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal years 2018 2017 2016 109 million 77 million 26 million respectively total grant date fair value options vested fiscal years 2018 2017 2016 12 million 19 million 11 million respectively hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued following table summarizes significant ranges outstanding exercisable stock options october 31 2018 total unrecognized pretax stockbased compensation expense related stock options operations 01 million expected recognized weightedaverage vesting period less 1 month employee stock purchase plan hp sponsors 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hp’s common stock pursuant terms 2011 espp employees purchase stock 2011 espp price equal 95 hp’s closing stock price purchase date stockbased compensation expense recorded connection purchases criteria noncompensatory plan met aggregate number shares hp’s stock authorized issuance 2011 espp 100 million shares reserved shares available future grant shares reserved future issuance stockbased incentive compensation plans 2011 espp follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings provision taxes december 22 2017 tcja signed president united states enacted law includes significant changes us corporate income tax system including federal corporate rate reduction 35 21 limitations deductibility interest expense executive compensation transition us international taxation worldwide tax system territorial tax system asc 740 accounting income taxes requires companies recognize effect tax law changes period enactment even though effective date provisions tax years beginning december 31 2017 “effective date” case certain provisions january 1 2018 us federal tax rate change occurs fiscal year taxpayers required compute weighted daily average rate fiscal year enactment result tcja hp calculated blended us federal statutory corporate income tax rate 23 fiscal year ending october 31 2018 blended us federal statutory corporate income tax rate 23 weighted daily average rate preenactment us federal statutory tax rate 35 applicable hp’s 2018 fiscal year prior effective date postenactment us federal statutory tax rate 21 applicable 2018 fiscal year thereafter hp expects us federal statutory rate 21 fiscal years beginning october 31 2018 given significance legislation sec staff issued staff accounting bulletin 118 sab 118 allows registrants record provisional amounts one year “measurement period” measurement period impacts tcja expected recorded time reasonable estimate portion effects made provisional amounts recognized adjusted information becomes available prepared analyzed sab 118 summarizes threestep process applied reporting period account qualitatively disclose 1 effects change tax law accounting complete 2 provisional amounts adjustments provisional amounts effects tax law accounting complete reasonable estimate determined 3 reasonable estimate cannot yet made therefore taxes reflected accordance law prior enactment tcja october 31 2018 hp completed accounting tax effects tcja however certain cases hp made reasonable estimate effects remeasurement existing deferred tax balances onetime transition tax updated recently proposed treasury regulations respect global intangible low taxed income “global minimum tax” provisions discussed hp able make reasonable estimate continues account item based existing accounting asc 740 income taxes provisions tax laws effect immediately prior enactment impact tcja may differ materially estimate due changes interpretations assumptions hp made additional guidance may issued actions hp may take result tcja impacts hps estimates described hp yet completed analysis impact deferred tax balances october 31 2018 hp recorded provisional income tax expense 12 billion related remeasurement deferred tax assets liabilities new statutory rate 317 million related remeasurement us deferred tax assets expected realized lower rate recording valuation allowance hp still analyzing certain aspects tcja refining calculations could potentially affect measurement balances potentially give rise new deferred tax amounts tcja also includes onetime mandatory deemed repatriation transition tax net accumulated post1986 earnings profits “ep” us taxpayer’s foreign subsidiaries hp computed provisional deemed repatriation tax approximately 33 billion half expected offset tax attributes reducing hp’s cash outlay us treasury department recently issued proposed regulations related onetime mandatory deemed repatriation hp yet completed analysis proposed regulations believes material changes provisional amounts reported period ending october 31 2018 hp completes evaluation potential impact proposed regulations hp finalize provisional amount next quarter measurement period closed companies may elect pay tax 8 years hp intends make election hp yet completed calculation total post1986 ep foreign subsidiaries transition tax based part amount earnings held cash specified assets amount may change hp finalizes calculation post1986 ep previously deferred us federal taxation finalizes amounts held cash specified assets additional income taxes provided remaining undistributed foreign earnings subject transition tax additional outside basis difference inherent entities amounts continue indefinitely reinvested foreign operations hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued result deemed repatriation tax noted based hp’s total post1986 deferred foreign income hp redetermined 56 billion us deferred tax liability unremitted earnings provisional tax payable 33 billion noted resulted net benefit tax benefit provisional hp still analyzing certain aspects legislation refining calculations could potentially materially affect measurement amounts hp yet completed accounting realizability deferred tax assets calculate realizability deferred tax assets hp estimated existing deferred taxes settled realized realizability deferred tax assets included financial statements subject revisions current estimates different actual future operating results january 2018 fasb released guidance accounting tax global minimum tax provisions tcja global minimum tax provisions impose tax foreign income excess deemed return tangible assets foreign corporations guidance indicates either accounting deferred taxes related global minimum tax inclusions treat taxes global minimum tax inclusions period cost acceptable methods subject accounting policy election hp still evaluating whether make policy election treat global minimum tax period cost provide us deferred taxes foreign temporary differences expected generate global minimum tax income reverse future years could additional changes hps deferred taxes completes evaluations domestic foreign components earnings continuing operations taxes follows benefit provision taxes earnings continuing operations follows result us tax reform hp revised estimated annual effective tax rate reflect change us federal statutory tax rate 35 21 since hp fiscal year ending october 31 subject transitional tax rate rules therefore blended rate 23 computed effective current fiscal year differences us federal statutory income tax rate hp’s effective tax rate follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued jurisdictions favorable tax rates significant effective tax rate impact periods presented include puerto rico singapore china malaysia ireland gross income tax benefits related favorable tax rates addition transitional impacts us tax reform resolution various audits tax litigation extent hp reinvest certain earnings jurisdictions indefinitely outside united states us taxes provided indefinitely reinvested earnings fiscal year 2018 hp recorded 28 billion net income tax benefits related discrete items provision taxes include impacts tcja noted hp yet completed analysis full impact tcja however october 31 2018 hp recorded provisional tax benefit 760 million related 56 billion net benefit decrease deferred tax liability unremitted foreign earnings partially offset 33 billion net expense deemed repatriation tax payable installments eight years 12 billion net expense remeasurement deferred assets liabilities new us statutory tax rate 317 million valuation allowance net expense related deferred tax assets expected realized lower rate hp also recorded tax benefits related audit settlements 15 billion valuation allowance releases 601 million pertaining change ability utilize certain foreign us deferred tax assets due change geographic earnings mix benefits partially offset net tax charges 34 million fiscal year 2018 addition discrete items mentioned hp recorded excess tax benefits 42 million stock options restricted stock units performanceadjusted restricted stock units fiscal year 2017 hp recorded 72 million net income tax benefits related discrete items provision taxes amounts primarily include tax benefits 84 million related restructuring charges 12 million related us federal provision return adjustments 45 million related samsung acquisitionrelated charges 13 million net tax benefits addition hp recorded tax charges 11 million related changes state valuation allowances 22 million state provision return adjustments 49 million related uncertain tax positions fiscal year 2017 addition discrete items mentioned hp recorded excess tax benefits 19 million stock options restricted stock units performanceadjusted restricted stock units reflected consolidated statements earnings component provision income taxes fiscal year 2016 hp recorded 301 million net income tax charges related discrete items provision taxes continuing operations amounts primarily include uncertain tax positions charges 525 million related preseparation tax matters addition hp recorded 62 million net tax benefits restructuring charges 52 million net tax benefits related release foreign valuation allowances 41 million net tax benefits arising retroactive research development credit provided consolidated appropriations act 2016 signed law december 2015 70 million tax benefit result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2027 gross income tax benefits attributable actions investments estimated 578 million 035 diluted eps fiscal year 2018 471 million 028 diluted net eps fiscal year 2017 341 million 020 diluted net eps fiscal year 2016 uncertain tax positions hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued reconciliation unrecognized tax benefits follows october 31 2018 amount unrecognized tax benefits 78 billion 15 billion would affect hp’s effective tax rate realized october 31 2017 amount unrecognized tax benefits 108 billion 39 billion would affect hp’s effective tax rate realized amount unrecognized tax benefits decreased 30 billion primarily related resolution various audits hp recognizes interest income favorable settlements interest expense penalties accrued unrecognized tax benefits provision taxes consolidated statements earnings october 31 2018 2017 2016 hp accrued 160 million 257 million 193 million respectively interest penalties hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expects complete resolution certain tax years various tax authorities within next 12 months also possible federal foreign state tax issues may concluded within next 12 months hp believes reasonably possible existing unrecognized tax benefits may reduced amount 64 billion within next 12 months unrecognized tax benefits associated gain contingencies would settled period resulting net release 740 million hp subject income tax united states approximately 60 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits federal state foreign tax authorities us internal revenue service conducting audit hp’s 2013 2014 2015 income tax returns us tax court ruled may 2012 hp related certain tax attributes claimed hp tax years 1999 2003 hp appealed us tax court determination filing formal notice appeal ninth circuit court appeals case argued ninth circuit november 2016 ninth circuit court appeals issued opinion november 2017 affirming tax court determinations hp decided appeal respect major state foreign tax jurisdictions hp longer subject tax authority examinations years prior 1999 material tax deficiencies assessed major state foreign tax jurisdictions october 31 2018 hp believes provided adequate reserves tax deficiencies reductions tax benefits could result federal state foreign tax audits hp regularly assesses likely outcomes audits order determine appropriateness hp’s tax provision hp adjusts uncertain tax positions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular audit however income tax audits inherently unpredictable assurance hp accurately predict outcome audits amounts ultimately paid resolution audit could materially different amounts previously included provision taxes therefore resolution one uncertainties particular period could material impact net income cash flows hp provided us federal income foreign withholding taxes 54 billion undistributed earnings nonus operations october 31 2018 hp intends reinvest earnings indefinitely outside united states determination amount unrecognized deferred tax liability related earnings practicable tcja taxed hp’s historic earnings profits nonus subsidiaries hp remit taxed reinvested earnings hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued deferred us federal withholding taxes provided excess cash accumulated hp determines advantageous business operations tax cash management reasons deferred income taxes significant components deferred tax assets deferred tax liabilities follows longterm deferred tax assets liabilities included consolidated balance sheets follows october 31 2018 hp recorded deferred tax assets net operating loss carryforwards follows october 31 2018 hp recorded deferred tax assets various tax credit carryforwards follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued deferred tax asset valuation allowance deferred tax asset valuation allowance changes follows gross deferred tax assets october 31 2018 2017 2016 reduced valuation allowances 79 billion 88 billion 85 billion respectively total valuation allowance decreased 901 million fiscal year 2018 associated primarily foreign net operating losses us deferred tax assets anticipated realized lower effective rate federal statutory tax rate due certain future us international tax reform implications increased 287 million 14 billion fiscal years 2017 2016 respectively associated primarily foreign net operating losses note 7 supplementary financial information accounts receivable net allowance doubtful accounts related accounts receivable changes follows hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued hp thirdparty arrangements consisting revolving shortterm financing provide liquidity certain partners facilitate working capital requirements financing arrangements certain circumstances may contain partial recourse result transfer hp’s receivables risk thirdparty transfers qualify true sales applicable accounting guidance receivables derecognized consolidated balance sheets upon transfer hp receives payment receivables thirdparty within mutually agreed upon time period arrangements involving element recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets recourse obligations october 31 2018 2017 material costs associated sales trade receivables fiscal year 2018 2017 2016 material following summary activity arrangements 1 amounts outstanding third parties reported accounts receivable consolidated balance sheets inventory current assets 1 see note 9 “fair value” note 10 “financial instruments” detailed information property plant equipment net hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued depreciation expense 448 million 353 million 316 million fiscal years 2018 2017 2016 respectively noncurrent assets 1 twelve months ended october 31 2018 hp adjusted 676 million indemnification receivable pursuant resolution various income tax audit settlements see note 15 “guarantees indemnifications warranties” information 2 see note 6 “taxes earnings” detailed information 3 includes intangible assets 453 million october 31 2018 primarily acquisition samsung’s printer business see note 8 “goodwill intangible assets” information 4 includes marketable equity securities mutual funds classified availableforsale investments 53 million 61 million october 31 2018 2017 respectively hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued accrued liabilities noncurrent liabilities 1 see note 6 “taxes earnings” detailed information interest net 1 fiscal year ended october 31 2018 includes adjustment 676 million indemnification receivable pursuant resolution various income tax audit settlements see note 15 “guarantees indemnifications warranties” information note 8 goodwill intangible assets goodwill allocated hp’s reportable segments changes carrying amount goodwill follows hp inc subsidiaries notes consolidated financial statements continued note 8 goodwill intangible assets continued 1 goodwill net accumulated impairment losses 08 billion related corporate investments goodwill tested impairment reporting unit level october 31 2018 reporting units consistent reportable segments identified note 2 “segment information” goodwill impairments fiscal years 2018 2017 2016 personal systems negative carrying amount net assets october 31 2018 2017 primarily result favorable cash conversion cycle hp continue evaluate goodwill annual basis first day fourth fiscal quarter whenever events changes circumstances indicate may potential impairment intangible assets hp’s acquired intangible assets composed fiscal year 2018 increase gross intangible assets primarily due intangible assets resulting acquisition samsung’s printer business october 31 2018 estimated future amortization expense related intangible assets follows note 9 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy hp uses valuation techniques based upon observable unobservable inputs observable inputs developed using market data publicly available information reflect assumptions market participants would use unobservable inputs developed using best information available assumptions market participants would use hp inc subsidiaries notes consolidated financial statements continued note 9 fair value continued assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability marketcorroborated inputs level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs following table presents hp’s assets liabilities measured fair value recurring basis 1 government debt includes instruments us treasury notes us agency securities nonus government bonds money market funds invested government debt trade active markets included level 1 transfers levels within fair value hierarchy fiscal years 2018 2017 valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including nav models utilizing market observable inputs fair value debt investments based quoted market prices modeldriven valuations using inputs primarily derived corroborated observable market data certain instances valuation models utilize assumptions cannot corroborated observable market data hp inc subsidiaries notes consolidated financial statements continued note 9 fair value continued derivative instruments time hp uses forward contracts interest rate total return swaps times option contracts hedge certain foreign currency interest rate exposures hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices currencies interest rates see note 10 “financial instruments” discussion hp’s use derivative instruments fair value disclosures short longterm debt hp estimates fair value debt primarily using expected present value technique based observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considering credit risk portion hp’s debt hedged reflected consolidated balance sheets amount equal debt’s carrying amount fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates estimated fair value hp’s short longterm debt 60 billion october 31 2018 compared carrying amount 60 billion date estimated fair value hp’s short longterm debt 81 billion compared carrying value 78 billion october 31 2017 measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hp’s financial instruments primarily accounts receivable accounts payable financial liabilities included accrued liabilities carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 2 level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets hp’s nonmarketable equity investments nonfinancial assets intangible assets goodwill property plant equipment recorded fair value period impairment charge recognized measured fair value consolidated balance sheets would generally classified within level 3 fair value hierarchy hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments cash equivalents availableforsale investments 1 hp classifies marketable debt securities availableforsale investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2018 2017 carrying amount cash equivalents approximated fair value due short period time maturity interest income related cash equivalents debt securities approximately 116 million fiscal year 2018 66 million fiscal year 2017 24 million fiscal year 2016 estimated fair value availableforsale investments may representative values realized future contractual maturities investments availableforsale debt securities follows equity securities privately held companies include cost basis equity method investments included noncurrent assets consolidated balance sheets amounted 36 million 37 million october 31 2018 2017 respectively derivative instruments hp uses derivatives offset business exposure foreign currency interest rate risk expected future cash flows certain existing assets liabilities part risk management strategy hp uses derivative instruments primarily forward contracts interest rate swaps total return swaps times option contracts hedge certain foreign currency interest rate lesser extent equity exposures hp may designate derivative contracts fair value hedges cash flow hedges hp classifies cash flows designated derivative contracts activities correspond underlying hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued hedged items additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivative instruments fair value consolidated balance sheets result use derivative instruments hp exposed risk counterparties fail meet contractual obligations master netting agreements mitigate credit exposure counterparties permitting hp net amounts due hp counterparty amounts due hp counterparty certain conditions limit credit risk hp collateral security agreements allow hp hold collateral require hp post collateral counterparties aggregate derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hp’s counterparty’s credit rating falls specified credit rating either party right request full collateralization derivatives’ net liability position fair value derivatives credit contingent features net liability position 68 million 258 million october 31 2018 2017 respectively fully collateralized within two business days hp’s derivative contracts counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hp’s financial position cash flows october 31 2018 2017 fair value hedges hp enters fair value hedges interest rate swaps reduce exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar london interbank offered rate “libor”based floating interest expense derivative instruments designated qualify fair value hedges hp recognizes change fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change cash flow hedges hp uses forward contracts times option contracts designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost revenue operating expenses intercompany loans denominated currencies us dollar hp’s foreign currency cash flow hedges mature generally within twelve months however hedges related longerterm procurement arrangements extend several years forward contracts associated intercompany loans extend duration lease loan term typically range two five years derivative instruments designated qualify cash flow hedges hp initially records changes fair value effective portion derivative instrument accumulated comprehensive loss separate component stockholders’ deficit consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes fair value hedged item derivatives designated hedging instruments consist primarily forward contracts used hedge foreign currencydenominated balance sheet exposures hp uses total return swaps hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change hedge effectiveness interest rate swaps designated fair value hedges hp measures hedge effectiveness offsetting change fair value hedged item change fair value derivative foreign currency options forward contracts designated cash flow hedges hp measures hedge effectiveness comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates hp recognizes ineffective portion hedge consolidated statements earnings period ineffectiveness occurs amounts excluded assessment effectiveness recognized consolidated statements earnings period arise hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued fair value derivative instruments consolidated balance sheets gross notional fair value derivative instruments consolidated balance sheets follows march 2018 hp terminated several interest rate swaps notional amount 15 billion dedesignated fair value hedges certain fixed rate debt securities see note 11 “borrowings” detailed information offsetting derivative instruments hp recognizes derivative instruments gross basis consolidated balance sheets hp offset fair value derivative instruments fair value cash collateral posted collateral security agreements october 31 2018 2017 information related potential effect hp’s master netting agreements collateral security agreements follows 1 represents cash collateral posted counterparties respective reporting date hp’s asset position net derivative amounts could offset generally two business days prior respective reporting date 2 represents collateral posted hp cash reuse counterparty cash collateral respective reporting date hp’s liability position net derivative amounts could offset generally two business days prior respective reporting date hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2018 2017 2016 follows pretax effect derivative instruments cash flow hedging relationships fiscal years ended october 31 2018 2017 2016 follows october 31 2018 2017 2016 portion hedging instruments’ gain loss excluded assessment effectiveness fair value cash flow hedges hedge ineffectiveness fair value cash flow hedges material fiscal years 2018 2017 2016 october 31 2018 hp expects reclassify estimated net accumulated comprehensive income approximately 248 million net taxes earnings next twelve months along earnings effects related forecasted transactions associated cash flow hedges pretax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal years 2018 2017 2016 follows hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings notes payable shortterm borrowings longterm debt 1 hp may redeem fixedrate us dollar global notes time accordance terms thereof us dollar global notes senior unsecured debt december 2016 hp filed shelf registration statement sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants disclosed note 10 “financial instruments” hp uses interest rate swaps mitigate exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar liborbased floating interest expense interest rates shown table longterm debt adjusted reflect impact interest rate swaps october 31 2018 aggregate future maturities debt face value excluding unamortized debt issuance cost 17 million discounts debt issuance 3 million less fair value adjustment related hedged debt 28 million including capital lease obligations follows hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings continued extinguishment debt march 2018 hp commenced completed cash tender offer “tender offer purchase approximately 185 billion aggregate principal amount outstanding us dollar 4650 global notes due december 9 2021 4375 global notes due september 15 2021 4300 global notes due june 1 2021 connection tender offer hp also solicited consents holders 4650 notes due december 2021 “4650 notes” amend indenture 4650 notes issued among things eliminate substantially restrictive covenants indenture “proposed amendments” holders majority principal amount outstanding 4650 notes consented proposed amendments result supplemental indenture executed march 26 2018 effect proposed amendments extinguishment debt resulted loss 126 million recorded interest net consolidated statements earnings year ended october 31 2018 commercial paper november 1 2015 hp’s board directors authorized hp borrow total outstanding principal balance 40 billion equivalent foreign currencies use benefit hp’s subsidiaries issuance commercial paper execution promissory notes loan agreements letters credit agreements lines credit overdraft facilities hp increased issuance authorization commercial paper program 40 billion 60 billion november 2017 october 31 2018 hp maintained two commercial paper programs hp’s us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 60 billion hp’s euro commercial paper program provides issuance commercial paper outside united states denominated us dollars euros british pounds maximum aggregate principal amount 60 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 60 billion authorized hp’s board directors credit facility october 31 2018 hp maintained 40 billion senior unsecured committed revolving credit facility support issuance commercial paper general corporate purposes commitments revolving credit facility available march 30 2023 commitment fees interest rates terms borrowing credit facilities vary based hp’s external credit ratings october 31 2018 hp compliance financial covenants credit agreement governing revolving credit facility december 2017 hp also entered additional revolving credit facility certain institutional lenders provided hp 15 billion available borrowings november 30 2018 hp elected terminate 15 billion revolving credit facility early effective august 17 2018 available borrowing resources october 31 2018 hp’s subsidiaries available borrowing resources 667 million uncommitted lines credit addition senior unsecured committed revolving credit facility discussed note 12 stockholders’ deficit dividends stockholders hp common stock entitled receive dividends declared hp’s board directors dividends declared 056 per share common stock fiscal year 2018 053 per share common stock fiscal year 2017 050 per share common stock fiscal year 2016 hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued share repurchase program hp’s share repurchase program authorizes open market private repurchase transactions fiscal year 2018 hp executed share repurchases 111 million shares settled total shares 26 billion fiscal year 2017 hp executed share repurchases 80 million shares settled total shares 14 billion fiscal year 2016 hp executed share repurchases 100 million shares settled total shares 12 billion share repurchases executed fiscal years 2018 2017 included 10 million shares 15 million shares settled november 2018 november 2017 respectively outstanding shares executed fiscal year 2016 settled november 2016 shares repurchased fiscal years 2018 2017 2016 open market repurchase transactions june 19 2018 hp’s board directors authorized additional 40 billion future repurchases outstanding shares common stock october 31 2018 hp approximately 39 billion remaining share repurchase authorizations approved hp’s board directors taxes related comprehensive income loss hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued changes reclassifications related comprehensive income loss net taxes 1 components included computation net pension postretirement benefit credit charges note 4 “retirement postretirement benefit plans” components accumulated comprehensive loss net taxes october 31 2018 changes fiscal year 2018 follows hp inc subsidiaries notes consolidated financial statements continued note 13 earnings per share hp calculates basic net eps using net earnings weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock units stock options performancebased awards shares purchased 2011 employee stock purchase plan reconciliation number shares used basic diluted net eps calculations follows 1 hp excludes stock options restricted stock units assumed proceeds exceed average market price calculation diluted net eps effect would antidilutive assumed proceeds stock option include sum exercise price average unrecognized compensation cost assumed proceeds restricted stock unit represent unrecognized compensation cost hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2018 reasonably possible material loss incurred excess amounts recognized hp’s financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case pursuant separation distribution agreement hp shares responsibility hewlett packard enterprise certain matters indicated hewlett packard enterprise agreed indemnify hp whole part respect certain matters based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hp’s potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies litigation proceedings investigations copyright levies proceedings ongoing concluded involving hp certain european countries including litigation belgium countries seeking impose modify levies upon equipment multifunction devices “mfds” pcs alleging devices enable production private copies copyrighted materials levies generally based upon number products sold perproduct amounts levies vary european countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes european countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders reprobel collecting society administering remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively payments already made hp sufficient comply obligations court appeal brussels “court appeal” stayed proceedings referred several questions court justice european union “cjeu” november 12 2015 cjeu published judgment providing national legislation belgian one issue main proceedings incompatible eu law multiple legal points argued hp returned proceedings referring court may 12 2017 court appeal held 1 reprographic copyright levies due notwithstanding lack conformity belgian system eu law certain aspects 2 applicable levies calculated based objective speed mfd established expert appointed court appeal hp appealed decision belgian supreme court january 18 2018 based industry opposition extension levies digital products hp’s assessments merits various proceedings hp’s estimates number units impacted amounts levies hp accrued amounts believes adequate address ongoing disputes hewlettpackard company v oracle corporation june 15 2011 hp filed suit oracle corporation “oracle” california superior court santa clara county connection oracle’s march 2011 announcement discontinuing software support hp’s itaniumbased line mission critical servers hp asserted among things oracle’s actions breached contract signed parties part settlement litigation relating oracle’s hiring mark hurd matter eventually progressed trial bifurcated two phases hp prevailed first phase trial court ruled contract issue required oracle continue offer software products hp’s itaniumbased servers long hp decided sell servers second phase trial postponed oracle’s appeal trial court’s denial oracle’s “antislapp” motion oracle argued hp’s hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued damages claim infringed oracle’s first amendment rights august 27 2015 california court appeals rejected oracle’s appeal matter remanded trial court second phase trial began may 23 2016 submitted jury june 29 2016 june 30 2016 jury returned verdict favor hp awarding hp approximately 30 billion damages included approximately 17 billion past lost profits 13 billion future lost profits october 20 2016 court entered judgment hp amount interest accruing judgment paid oracle’s motion new trial denied december 19 2016 oracle filed notice appeal trial court’s judgment january 17 2017 february 2 2017 hp filed notice crossappeal challenging trial court’s denial prejudgment interest schedule appellate briefing argument yet established hp expects appeals process could take several years complete litigation unpredictable assurance hp recover damages award damages amount awarded jury’s verdict amount ultimately awarded would recorded period received adjustment recorded financial statements relation potential award pursuant terms separation distribution agreement hp hewlett packard enterprise share equally recovery oracle hewlett packard enterprise reimbursed costs incurred prosecution action prior separation forsyth et al vs hp inc hewlett packard enterprise purported class collective action filed august 18 2016 united states district court northern district california hp hewlett packard enterprise alleging defendants violated federal age discrimination employment act “adea” california fair employment housing act california public policy california business professions code terminating older workers replacing younger workers plaintiffs seek certify nationwide collective class action adea comprised us residents employed defendants employment terminated pursuant workforce reduction “wfr” plan may 23 2012 40 years age older plaintiffs also seek represent rule 23 class california law comprised persons 40 years older employed defendants state california terminated pursuant wfr plan may 23 2012 following partial motion dismiss motion strike motion compel arbitration defendants filed november 2016 plaintiffs amended complaint new plaintiffs added plaintiffs agreed class period nationwide collective action shortened starts december 9 2014 january 30 2017 defendants filed another partial motion dismiss motions compel arbitration several plaintiffs march 20 2017 defendants filed additional motions compel arbitration number optin plaintiffs september 20 2017 court granted motions compel arbitration plaintiffs optins signed wfr release agreements also stayed entire case arbitrations completed november 30 2017 three named plaintiffs twelve optin plaintiffs filed single arbitration demand additional arbitration claimant added later stipulation december 22 2017 defendants filed motion 1 stay case pending arbitrations 2 enjoin demanded arbitration require plaintiff file separate arbitration demand february 6 2018 court granted motion stay denied motion enjoin prearbitration mediation proceedings took place october 4 5 2018 claims 16 arbitration claimants resolved case return federal court remaining named optin plaintiffs jackson et al v hp inc hewlett packard enterprise putative nationwide class action filed july 24 2017 federal district court san jose california plaintiffs purport bring lawsuit behalf similarly situated africanamericans individuals age forty plaintiffs allege defendants engaged pattern practice racial age discrimination layoffs promotions plaintiffs filed amended complaint september 29 2017 january 12 2018 defendants moved transfer matter federal district court northern district georgia defendants also moved dismiss claims various grounds strike certain aspects proposed class definition court dismissed action basis improper venue july 23 2018 plaintiffs refiled case northern district georgia august 9 2018 plaintiffs also filed notice appeal dismissal order united states court appeals ninth circuit october 1 2018 georgia court granted plaintiffs’ unopposed motion stay administratively close georgia action ninth circuit appeal decided india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence “dri” issued show cause notices hewlettpackard india sales private limited “hp india” subsidiary hp seven hp india employees one former hp india employee alleging hp india underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp india deposited approximately 16 million dri hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued agreed post provisional bond exchange dri’s agreement seize hp india products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hp india named individuals approximately 386 million hp india already deposited 9 million december 11 2012 hp india voluntarily deposited additional 10 million connection productsrelated show cause notice differential duty demand subject interest april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hp india certain named individuals approximately 17 million hp india already deposited 7 million order hp india deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hp india filed appeals commissioner’s orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hp india deposit additional 24 million products order hp india deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hp india filed applications customs tribunal seeking early hearing appeals well extension stay deposit hp india individuals already granted final disposition appeals february 7 2014 application extension stay deposit granted customs tribunal disposal appeals october 27 2014 customs tribunal commenced hearings crossappeals commissioner’s orders customs tribunal rejected hp india’s request remand matter commissioner procedural grounds hearings scheduled reconvene april 6 2015 november 3 2015 april 11 2016 cancelled request customs tribunal hearing merits appeal scheduled january 15 2019 pursuant separation distribution agreement hewlett packard enterprise agreed indemnify hp part based extent liability arises products spare parts hewlett packard enterprise’s businesses class actions authentication supplies five purported consumer class actions filed hp arising supplies authentication protocol certain officejet printers authentication protocol rejects thirdparty ink cartridges use nonhp security chips two cases dismissed remaining cases consolidated united states district court northern district california captioned hp printer firmware update litigation remaining plaintiffs’ consolidated amended complaint filed february 15 2018 alleging eleven causes action 1 unfair unlawful business practices violation unfair competition law cal bus prof code § 17200 et seq 2 fraudulent business practices violation unfair competition law cal bus prof code § 17200 et seq 3 violations false advertising law cal bus prof code § 17500 et seq 4 violations consumer legal remedies act cal civ code § 1750 et seq 5 violations texas deceptive trade practices consumer protection act tex bus com code ann § 1701 et seq 6 violations washington consumer protection act wash rev code ann § 1986010 et seq 7 violations new jersey consumer fraud act new jersey statutes ann 5681 et seq 8 violations computer fraud abuse act 18 usc § 1030 et seq 9 violations california computer data access fraud act cal penal code § 502 10 trespass chattels 11 tortious interference contractual relations andor prospective economic advantage february 7 2018 plaintiffs moved certify injunctive relief class “all persons california class printer” “unfair” prong california unfair competition statute class “all persons united states purchased class printer experienced print failure using nonhp aftermarket cartridge period march 1 2015 december 31 2017” computer fraud abuse act common law trespass chattels march 29 2018 court granted part denied part hp’s motion dismiss court dismissed plaintiffs’ claim “unfair” prong california unfair competition statute claims noncalifornia consumer protection statutes claim tortious interference contractual relations andor prospective economic advantage court also dismissed part plaintiffs’ fraudbased claims california consumer protection statutes computer hacking claims computer fraud abuse act california computer data access fraud act court denied hp’s motion dismiss respect plaintiffs’ claim trespass chattels claim “unlawful” prong california unfair competition statute court granted plaintiffs leave amend dismissed claims except california computer data access fraud act claim extent based two specific subsections statute september 18 2018 parties entered settlement agreement release pursuant plaintiffs agreed dismiss claims hp exchange 15 million payment hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued class agreement hp would reinstall authentication protocol printers issue settlement subject approval court plaintiffs filed motion preliminary approval settlement granted court november 19 2018 notice settlement given class beginning january 7 2019 class members 120 days opt object settlement final approval hearing scheduled april 25 2019 autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice “doj” sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hp’s acquisition autonomy january 19 2015 uk serious fraud office notified hp closing investigation decided cede jurisdiction investigation us authorities november 14 2016 doj announced federal grand jury indicted sushovan hussain former cfo autonomy mr hussain charged conspiracy commit wire fraud securities fraud multiple counts wire fraud indictment alleged mr hussain engaged scheme defraud purchasers sellers securities autonomy hp true performance autonomy’s business financial condition prospects growth jury trial commenced february 26 2018 april 30 2018 jury found mr hussain guilty charges november 15 2016 sec announced stouffer egan former ceo autonomy’s usbased operations settled charges relating participation accounting scheme meet internal sales targets analyst revenue expectations november 29 2018 doj announced federal grand jury indicted michael lynch former ceo autonomy stephen chamberlain former vp finance autonomy dr lynch mr chamberlain charged conspiracy commit wire fraud multiple counts wire fraud hp continuing cooperate ongoing enforcement actions autonomy corporation limited v michael lynch sushovan hussain april 17 2015 four formerhp subsidiaries became subsidiaries hewlett packard enterprise time separation autonomy corporation limited hewlett packard vision bv autonomy systems limited autonomy inc initiated civil proceedings uk high court justice two members autonomy’s former management michael lynch sushovan hussain particulars claim seek damages excess 5 billion messrs lynch hussain breach fiduciary duties causing autonomy group companies engage improper transactions accounting practices october 1 2015 messrs lynch hussain filed defenses mr lynch also filed counterclaim autonomy corporation limited seeking 160 million damages among things alleged misstatements regarding lynch hewlett packard enterprise subsidiary claimants filed replies defenses asserted counterclaim march 11 2016 parties actively engaged disclosure process sixmonth trial scheduled begin march 25 2019 environmental hp’s operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hp’s products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred “product takeback legislation” hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hp’s potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act “cercla” known “superfund” state laws hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies separation distribution agreement includes provisions provide allocation environmental liabilities hp hewlett packard enterprise including certain remediation obligations responsibilities arising chemical materials composition respective products safe use energy consumption obligations product take back legislation addresses collection recycling treatment disposal products environmental matters hp generally responsible environmental liabilities related properties assets including products allocated hp separation distribution agreement ancillary agreements hp indemnify hewlett packard enterprise liabilities specified ongoing remediation projects subject certain limitations hewlett packard enterprise payment obligation specified portion cost remediation projects addition hp share hewlett packard enterprise environmental liabilities set forth separation distribution agreement hp indemnified whole part hewlett packard enterprise liabilities arising assets assigned hewlett packard enterprise certain environmental matters detailed separation distribution agreement note 15 guarantees indemnifications warranties guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote crossindemnifications hewlett packard enterprise separation distribution agreement hp agreed indemnify hewlett packard enterprise subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hp part separation hewlett packard enterprise similarly agreed indemnify hp subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hewlett packard enterprise part separation hp expects hewlett packard enterprise fully perform terms separation distribution agreement connection separation hp entered tax matters agreement “tma” hewlett packard enterprise effective november 1 2015 tma provides hp hewlett packard enterprise share certain preseparation income tax liabilities addition distribution hewlett packard enterprise’s common shares hp stockholders determined taxable hewlett packard enterprise hp would share tax liability equally unless taxability distribution direct result action taken either hewlett packard enterprise hp subsequent distribution case party causing distribution taxable would responsible taxes imposed distribution information cross indemnifications related litigations effective upon separation november 1 2015 see note 14 “litigation contingencies” respectively indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors customers claims intellectual property infringement made third parties arising vendors’ customers’ use hp’s software products services certain matters indemnifications may subject maximum loss clauses historically payments made related indemnifications immaterial hp records tax indemnification receivables various third parties certain tax liabilities hp jointly severally liable indemnified third parties existing legal agreements actual hp inc subsidiaries notes consolidated financial statements continued note 15 guarantees indemnifications warranties continued amount third parties pay may obligated pay hp could vary depending outcome certain unresolved tax matters may resolved several years net receivable october 31 2018 10 billion warranties hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hp’s baseline experience affect estimated warranty obligation hp’s aggregate product warranty liabilities changes follows hp inc subsidiaries notes consolidated financial statements continued note 16 commitments lease commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense continuing operations approximately 02 billion fiscal years 2018 2017 2016 october 31 2018 future minimum operating lease commitments follows unconditional purchase obligations october 31 2018 hp unconditional purchase obligations 704 million unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations primarily related inventory service support unconditional purchase obligations exclude agreements cancelable without penalty october 31 2018 unconditional purchase obligations follows hp inc subsidiaries notes consolidated financial statements continued note 17 discontinued operations november 1 2015 hp completed separation hewlett packard enterprise separation hp beneficially shares hewlett packard enterprise common stock following table presents financial results hp’s discontinued operations 1 expenses fiscal year 2016 primarily related separation costs connection tma interest net fiscal year 2017 fiscal year 2016 relates changes tax indemnifications amounts provision taxes fiscal year 2017 fiscal year 2016 includes tax impact relating described changes 47 million 201 million respectively information tax indemnifications tma see note 15 “guarantees indemnifications warranties” note 18 acquisitions divestitures acquisitions fiscal year 2018 november 1 2017 hp completed acquisition samsung’s printer business acquisition hp offers industry’s strongest portfolio a3 multifunction printers deliver simplicity printers high performance copiers fully integrated portfolio including nextgeneration pagewide technologies offers opportunities grow managed print document services sales models shift transactional contractual hp reports financial results business printing segment table presents purchase price allocation divestitures prior years fiscal year 2016 hp entered agreements divest certain technology assets including licensing distribution rights certain software offerings open text corporation enterprise information management company 475 million divestitures substantially completed fourth quarter fiscal year 2016 technology assets sold previously reported within commercial hardware business unit within printing segment total gain recognized divestitures 401 million gains associated divestitures included selling general administrative expenses consolidated statements earnings hp inc subsidiaries notes consolidated financial statements continued note 19 subsequent events november 1 2018 hp made cash payment 422 million connection acquisition apogee group uk based office equipment dealer “oed” provider print outsourced services document process technology cash payment subject customary closing adjustments would finalized future periods hp inc subsidiaries quarterly summary unaudited millions except per share amounts 1 net eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year hence sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm stockholders board directors hp inc opinion financial statements audited accompanying consolidated balance sheets hp inc subsidiaries company october 31 2019 2018 related consolidated statements earnings comprehensive income stockholders deficit cash flows three years period ended october 31 2019 related notes collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company october 31 2019 2018 results operations cash flows three years period ended october 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting october 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated december 12 2019 expressed unqualified opinion thereon adoption new accounting standard discussed note 1 consolidated financial statements company changed method recognizing revenue result adoption accounting standards update asu 201409 revenue contracts customers topic 606 amendments effective november 1 2018 modified retrospective method see discussion related critical audit matter basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate income taxes description matter described notes 1 6 consolidated financial statements company subject income taxes united states approximately 58 countries subject routine corporate income tax audits many jurisdictions uncertainty company’s tax positions may arise tax laws subject interpretation company’s positions subject examination taxing authorities may result assessments additional amounts owed determining income tax provision potential assessments recording related effects requires significant management judgment estimating whether tax position’s technical merits morelikelythannot sustained measuring amount tax benefit qualifies recognition additionally company records valuation allowance reduce deferred tax assets amount likely realized determining need valuation allowance company considers certain subjective factors future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies assessment management’s analyses reserve uncertain tax positions realizability deferred tax assets significant audit amounts material financial statements assessment process involves significant judgment example management’s assumptions may affected future market economic conditions interpretations tax laws legal rulings challenging audit addressed matter audit tested controls management’s processes relating recording unrecognized tax benefits including controls company’s process assess technical merits uncertain tax positions realizability deferred tax assets including development described assumptions judgments audit procedures included evaluation company’s key assumptions judgments testing completeness accuracy underlying data used determine amount unrecognized tax benefits recognized example evaluated measurement amounts recorded taking consideration applicable tax laws also evaluated key assumptions judgments used management determining need valuation allowance testing completeness accuracy underlying data used company’s process example compared projections future taxable income actual results prior periods well management’s consideration current industry economic trends areas involved tax professionals assess technical merits company’s tax positions included assessing company’s correspondence relevant tax authorities evaluating income tax opinions thirdparty advice obtained company revenue recognition description matter described note 1 consolidated financial statements company enters certain contracts sell products services contain nonstandard terms conditions multiple performance obligations contracts significant interpretation may required determine appropriate accounting including allocation transaction price among performance obligations arrangement timing transfer control promised goods services performance obligations addition company reduces revenue customer distributor programs incentive offerings including rebates promotions volumebased incentives expected returns company uses significant estimates determine expected variable consideration programs based factors like historical experience forecasted sales expected customer behavior market conditions also discussed company adopted new revenue recognition standard added complexity judgment related transition amount recorded date adoption assessment management’s evaluation appropriate accounting revenue contracts determination variable consideration sales incentives implementation new revenue recognition standard significant audit amounts material financial statements assessment process involves significant judgment addressed matter audit tested relevant controls identified risks related company’s implementation new revenue recognition standard accounting revenue recognition including controls evaluate appropriate accounting treatment contracts containing nonstandard terms conditions multiple performance obligations controls related estimation process record variable consideration related certain sales incentives audit procedures included among others evaluating company applied new revenue recognition standard contracts assessing company applied judgment determine transition amount disclosures inspection contracts entered period evaluation management’s judgments related interpretation certain contract provisions including identification performance obligations method allocating transaction price performance obligations arrangement assessment appropriateness amount revenue recognized also evaluated company’s key assumptions judgments tested completeness accuracy underlying data used determine variable consideration sales incentives included analyzing data related historical experience sales incentive payments well understanding current market dynamics affect estimate variable consideration assess company’s judgments estimates ernst young llp served company’s auditor since 2000 san jose california december 12 2019 report independent registered public accounting firm stockholders board directors hp inc opinion internal control financial reporting audited hp inc subsidiaries’ internal control financial reporting october 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion hp inc subsidiaries company maintained material respects effective internal control financial reporting october 31 2019 based coso criteria also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets hp inc subsidiaries october 31 2019 2018 related consolidated statements earnings comprehensive income stockholders deficit cash flows three years period ended october 31 2019 related notes report dated december 12 2019 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp san jose california december 12 2019 management’s report internal control financial reporting hp’s management responsible establishing maintaining adequate internal control financial reporting hp’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hp’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hp’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hp’s management assessed effectiveness hp’s internal control financial reporting october 31 2019 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 2013 framework based assessment hp’s management determined hp’s internal control financial reporting effective october 31 2019 effectiveness hp’s internal control financial reporting october 31 2019 audited ernst young llp hp’s independent registered public accounting firm stated report appears page 54 annual report form 10k hp inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements stockholders’ deficit accompanying notes integral part consolidated financial statements hp inc subsidiaries notes consolidated financial statements note 1 summary significant accounting policies basis presentation accompanying consolidated financial statements hp whollyowned subsidiaries prepared conformity us gaap principles consolidation consolidated financial statements include accounts hp subsidiaries affiliates hp controlling financial interest primary beneficiary intercompany balances transactions eliminated reclassifications effective beginning first quarter fiscal year 2019 hp implemented organizational change align business unit financial reporting closely current business structure hp reflected change business unit information prior reporting periods asif basis reporting change impact previously reported segment net revenue consolidated net revenue earnings operations net earnings net eps hp reclassified certain prioryear amounts conform currentyear presentation result adoption accounting standards update “asu” 201707 “compensation retirement benefits topic 715 improving presentation net periodic pension cost net periodic postretirement benefit cost” adoption impact previously reported consolidated net revenue net earnings net eps detailed discussion see note 2 “segment information” use estimates preparation financial statements accordance us gaap requires management make estimates assumptions affect amounts reported hp’s consolidated financial statements accompanying notes actual results may differ materially estimates foreign currency translation hp predominantly uses us dollar functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses denominated nonus dollars recorded us dollars monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statements earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive loss separation transaction connection separation hp hewlett packard enterprise entered separation distribution agreement employee matters agreement various agreements remain enforceable provide framework continuing relationships parties information impacts agreements see note 7 “supplementary financial information” note 14 “litigation contingencies” note 15 “guarantees indemnifications warranties” recently adopted accounting pronouncements february 2018 fasb issued guidance eliminates stranded tax effects comprehensive income resulting tcja amendments relate reclassification income tax effects tcja underlying guidance requires effect change tax laws rates included income operations affected hp early adopted guidance third quarter fiscal year 2019 implementation guidance resulted 69 million reclassification accumulated comprehensive loss accumulated deficit march 2017 financial accounting standards board “fasb” issued guidance addresses improvement presentation net periodic pension net periodic postretirement benefit cost guidance requires entities present service cost component net periodic benefit cost income statement line item compensation costs arising services rendered period additionally guidance requires companies present components net periodic benefit cost separately line item includes service cost subtotal income operations amendments guidance applied retrospectively presentation consolidated statements earnings practical expedient allows companies use amount disclosed pension postretirement plan note prior comparative periods estimation basis applying retrospective presentation hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued requirements hp adopted guidance first quarter fiscal year 2019 elected use practical expedient adoption guidance impact net earnings reclassification resulted increase total cost expenses reduction interest net 233 million twelve months ended october 31 2018 november 2016 fasb issued guidance addresses presentation restricted cash statement cash flows guidance requires entities present changes total cash equivalents restricted cash restricted cash equivalents statement cash flows result entities longer present transfers cash equivalents restricted cash restricted cash equivalents statement cash flows hp adopted guidance first quarter fiscal year 2019 implementation guidance impact consolidated financial statements october 2016 fasb issued guidance amends existing accounting intraentity transfers assets inventory guidance topic 740 requires entity recognize income tax consequences intraentity transfers inventory transfer occurs also requires modified retrospective transition cumulative catchup adjustment opening retained earnings period adoption hp adopted guidance first quarter fiscal year 2019 implementation guidance resulted 353 million net reduction prepaid tax asset adjusted accumulated deficit fourth quarter fiscal year 2019 hp corrected impact 47 million recording deferred tax asset adjusted accumulated deficit august 2016 fasb issued guidance amends existing accounting standards classification certain cash receipts cash payments statement cash flows hp adopted guidance first quarter fiscal year 2019 implementation guidance impact consolidated financial statements january 2016 fasb issued guidance amends existing accounting standards recognition measurement financial assets financial liabilities guidance topic 82510 primarily addresses certain aspects recognition measurement presentation disclosure financial instruments amendments applied means cumulativeeffect adjustment balance sheet beginning fiscal year adoption amendments related specifically equity securities without readily determinable fair values applied prospectively hp adopted guidance first quarter fiscal year 2019 implementation guidance material impact consolidated financial statements may 2014 fasb issued guidance amends existing accounting standards revenue recognition amendments topic 606 based principle revenue recognized depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services hp adopted new revenue standard first quarter fiscal year 2019 using modified retrospective method applied contracts completed november 1 2018 hp recognized net impact adoption increase accumulated deficit 212 million net tax november 1 2018 primary changes impact consolidated financial statements variable consideration hp estimates transaction price elements consideration variable nature certain distributor programs incentive offerings recorded date sales incentives offered recorded time revenue recognition based estimates costs obtain contract incremental costs obtain contract primarily comprised eligible sales commissions previously expensed incurred hp capitalized eligible sales commission costs contracts terms one year amortized costs expected period benefit adoption led certain balance sheet reclassifications pertaining return asset liability repurchase reserves impacts accounts receivable net inventory current assets current liabilities balances recently issued accounting pronouncements yet adopted august 2017 fasb issued guidance amends existing accounting standards derivatives hedging amendment improves financial reporting hedging relationships better represent economic results entity’s risk management activities financial statements made certain targeted improvements simplify application hedge accounting guidance current us gaap hp required adopt guidance first quarter fiscal year 2020 earlier adoption permitted based current assessment hp expects implementation guidance material impact consolidated financial statements june 2016 fasb issued guidance requires credit losses financial assets measured amortized cost basis presented net amount expected collected based incurred losses credit losses availableforsale debt securities recorded allowance credit losses limited amount fair value hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued amortized cost hp required adopt guidance first quarter fiscal year 2021 earlier adoption permitted hp currently evaluating timing impact guidance consolidated financial statements february 2016 fasb issued guidance “topic 842” amends existing accounting standards leases consistent current guidance recognition measurement presentation expenses cash flows arising lease lessee primarily depend classification new guidance lessee required recognize assets liabilities leases lease terms twelve months hp adopt guidance first quarter fiscal year 2020 apply modified retrospective transition option made available july 2018 fasb whereby comparative periods retrospectively presented consolidated financial statements hp also elect package practical expedients reassess prior conclusions related contracts containing leases lease classification initial direct costs lessee practical expedient combine lease nonlease components certain asset classes hp established crossfunctional implementation team assist determining scope impact identifying changes business processes implementing new system solution evaluating changes internal controls support adoption new standard hp currently expects adoption topic 842 result increase right use assets corresponding increase lease liabilities consolidated balance sheet approximately 10 billion 15 billion upon adoption hp also record revenue upfront certain aspects mps daas offerings reflect financing offerings cash flows financing activities statement cash flows hp substantially completed process quantifying impacts result applying new guidance assessment finalized first quarter fiscal year 2020 revenue recognition general hp recognizes revenues point time depicting transfer promised goods services customers amount reflects consideration hp expects entitled exchange goods services hp follows fivestep model revenue recognition summarized 1 identify contract customer contract customer exists approved signed parties ii party’s rights obligations identified iii payment terms defined iv commercial substance v customer ability intent pay hp evaluates customers’ ability pay based various factors like historical payment experience financial metrics customer credit scores majority sales contracts contain standard terms conditions certain contracts nonstandard terms conditions 2 identify performance obligations contract hp evaluates performance obligation arrangement determine whether distinct hardware andor service performance obligation constitutes distinct goods services customer benefit goods services either together resources readily available customer performance obligation distinct within context contract 3 determine transaction price transaction price amount consideration hp expects entitled exchange transferring goods services customer transaction price includes variable amount hp estimates amount expects entitled using either expected value likely amount method hp reduces transaction price time revenue recognition customer distributor programs incentive offerings rebates promotions volumebased incentives expected returns hp uses estimates determine expected variable consideration programs based factors like historical experience expected consumer behavior market conditions hp elected practical expedient accounting significant financing components period revenue recognition customer pays product service one year less 4 allocate transaction price performance obligations contract sales arrangement contains multiple performance obligations hardware andor services hp allocates revenue performance obligation proportion selling price selling price performance obligation based ssp hp establishes ssp using price charged performance obligation sold separately “observable price” instances using price established management relevant authority observable price available hp establishes ssp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product lifecycle consideration also given market conditions competitor pricing strategies technology industry life cycles 5 recognize revenue performance obligation satisfied revenue recognized performance obligation satisfied transferring control promised good service customer hp generally invoices customer upon delivery goods services payments due per contract terms fixed hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued price support maintenance contracts nature standready obligations payments generally received advance customers revenue recognized straightline basis duration contract hp reports revenue net taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority hp includes costs related shipping handling cost revenue hp records revenue gross basis hp principal transaction net basis hp acting agent customer vendor hp considers several factors determine whether acting principal agent notably whether hp primary obligor customer established pricing inventory credit risks hardware hp transfers control products customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations customer remain unfulfilled services hp recognizes revenue fixedprice support maintenance service contracts time depicting pattern service delivery recognizes costs associated contracts incurred contract assets liabilities contract assets rights consideration exchange goods services hp transferred customer right conditional something passage time contract assets material hp’s consolidated financial statements contract liabilities recorded deferred revenues amounts invoiced customers revenues recognized payments received advance fixed price support maintenance contracts shortterm longterm deferred revenues reported within current liabilities noncurrent liabilities respectively cost obtain contract fulfillment cost incremental direct costs obtaining contract primarily consist sales commissions hp elected practical expedient expense incurred costs obtain contract benefit period equal less one year contracts period benefit greater one year hp capitalizes incremental costs obtaining contract customer amortizes costs expected period benefit provided costs recoverable fulfillment costs consist setup transition costs related service contracts costs generate enhance resources hp used satisfying performance obligation future capitalized amortized expected period benefit provided costs recoverable see note 7 “supplementary financial information” details net revenue region cost obtain contract fulfillment cost contract liabilities value remaining performance obligations transition disclosure accordance modified retrospective method transition requirements hp presented financial statement line items impacted adjusted compare presentation prior gaap consolidated balance sheet october 31 2019 consolidated statement earnings fiscal year ended october 31 2019 hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued opening balance sheet adjustments following table presents adoption impact new accounting standards hp’s previously reported financial statements 1 includes 47 million adjustment related topic 740 stockbased compensation hp determines stockbased compensation expense based measurement date fair value award hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants limited cases hp amortizes actuarial gains losses using corridor approach see note 4 “retirement postretirement benefit plans” full description plans accounting funding policies advertising cost costs produce advertising expensed incurred production costs communicate advertising expensed advertising first run costs totaled approximately 652 million 568 million 544 million fiscal years 2019 2018 2017 respectively restructuring charges hp records charges associated managementapproved restructuring plans reorganize one hp’s business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs reduce specified number hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued employees enhanced early retirement incentives infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations committed early retirements site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs including result separation information technology rationalization efforts distinct ongoing operational costs taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related interest penalties accounts receivable hp establishes allowance doubtful accounts receivable hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filing deterioration customer’s operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable hp thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers financing arrangements certain cases provide partial recourse result transfer hp’s trade receivables third party hp reflects amounts transferred yet collected third party accounts receivable consolidated balance sheets arrangements involving element recourse fair value recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets concentrations risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments receivables trade customers contract manufacturers derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographic regions hp’s policy designed limit exposure particular institution part risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate certain investment exposures contracts involve risk nonperformance counterparty could result material loss likelihood hp deems remote hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors’ resellers’ aggregated business deteriorates substantially hp’s operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 32 39 gross accounts receivable october 31 2019 2018 respectively single customer accounts 10 gross accounts receivable october 31 2019 2018 credit risk respect accounts receivable generally diversified due hp’s large customer base dispersion across many different industries geographic markets hp performs ongoing credit evaluations financial condition thirdparty hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued distributors resellers customers may require collateral letters credit bank guarantees certain circumstances hp utilizes outsourced manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components outsourced manufacturers thereby creating receivable balances outsourced manufacturers three largest outsourced manufacturer receivable balances collectively represented 77 72 hp’s supplier receivables 1165 million 1074 million october 31 2019 2018 respectively hp includes supplier receivables current assets consolidated balance sheets gross basis hp’s credit risk associated receivables mitigated wholly part amount hp owes outsourced manufacturers hp generally legal right offset payables outsourced manufacturers receivables hp reflect sale components net revenue recognize profit component sales related products sold hp time profit recognized reduction cost revenue hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hp’s relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hp’s net revenue gross margins upon completion separation november 1 2015 hp recorded net income tax indemnification receivables hewlett packard enterprise certain income tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement “tma” tma terminated fourth quarter fiscal year 2019 net payable october 31 2019 98 million net receivable october 31 2018 10 billion inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments required reduce cost inventory market net realizable value made estimated excess obsolete impaired balances property plant equipment net hp reflects property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation expense recognized straightline basis estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipment’s estimated residual value retirement disposition asset cost related accumulated depreciation removed consolidated balance sheets gain loss recognized consolidated statements earnings internal use software cloud computing arrangements hp capitalizes external costs directly attributable internal costs acquire create internal use software incurred subsequent completion preliminary project stage costs relate activities software design configuration coding testing installation costs related postimplementation activities training maintenance expensed incurred software substantially complete ready intended use capitalized development costs amortized straightline estimated useful life software exceed five years hp also enters certain cloudbased software hosting arrangements accounted service contracts internaluse software obtained hosting arrangement nature service contract hp incurs certain implementation costs integrating configuring software customization consistent costs incurred application development stage onpremise software hp applies guidance determine costs eligible capitalization arrangements hp amortizes capitalized development costs straightline fixed noncancellable term associated hosting arrangement plus reasonably certain renewal periods hp also applies impairment model internaluse software capitalized implementation costs software hosting arrangement nature service contract business combinations hp includes results operations acquired business hp’s consolidated results prospectively acquisition date hp allocates purchase consideration assets acquired liabilities assumed noncontrolling interests acquired entity generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued acquired entity recorded goodwill primary items generate goodwill include value synergies acquired company hp value acquired assembled workforce neither qualify recognition intangible asset acquisitionrelated charges recognized separately business combination expensed incurred charges primarily include direct thirdparty professional legal fees integrationrelated costs goodwill hp reviews goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable hp elect perform qualitative assessment test reporting unit’s goodwill impairment hp directly perform quantitative impairment test based qualitative assessment hp determines fair value reporting unit likely ie likelihood 50 percent less carrying amount quantitative impairment test performed quantitative impairment test hp compares fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions hp bases discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach order assess reasonableness estimated fair value hp’s reporting units hp compares aggregate reporting unit fair value hp’s market capitalization overall basis calculates implied control premium excess sum reporting units’ fair value hp’s market capitalization overall basis hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium determined reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired fair value reporting unit less carrying amount goodwill impaired excess reporting unit’s carrying value fair value recognized impairment loss debt marketable equity securities investments hp determines appropriate classification investments time purchase reevaluates classifications balance sheet date debt marketable equity securities generally considered availableforsale highly liquid investments maturities three months less date purchase classified cash equivalents marketable debt securities maturities twelve months less classified shortterm investments marketable debt securities maturities greater twelve months classified based availability use current operations marketable equity securities including mutual funds classified either shortterm longterm based nature security availability use current operations debt marketable equity securities reported fair value unrealized gains losses net applicable taxes accumulated comprehensive loss consolidated statement earnings consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included interest net consolidated statements earnings hp monitors investment portfolio potential impairment quarterly basis carrying amount investment debt securities exceeds fair value decline value determined otherthantemporary ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss remaining amount recorded accumulated comprehensive loss consolidated balance sheets derivatives hp uses derivative instruments primarily forwards swaps times options hedge certain foreign currency interest rate return certain investment exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative instruments hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued speculative purposes see note 10 “financial instruments” full description hp’s derivative instrument activities related accounting policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability contingencies believes probable liability incurred amount loss reasonably estimated see note 14 “litigation contingencies” full description hp’s loss contingencies related accounting policies hp inc subsidiaries notes consolidated financial statements continued note 2 segment information hp leading global provider personal computing access devices imaging printing products related technologies solutions services hp sells individual consumers smbs large enterprises including customers government health education sectors hp’s operations organized three reportable segments personal systems printing corporate investments hp’s organizational structure based many factors chief operating decision maker “codm” uses evaluate view run business operations include limited customer base homogeneity products technology segments based organizational structure information reviewed hp’s codm evaluate segment results codm uses several metrics evaluate performance overall business including earnings operations uses results allocate resources segments summary description segment follows personal systems offers commercial consumer desktop notebook pcs workstations thin clients commercial mobility devices retail pos systems displays related accessories software support services hp groups commercial notebooks commercial desktops commercial services commercial mobility devices commercial detachables convertibles workstations retail pos systems thin clients commercial pcs consumer notebooks consumer desktops consumer services consumer detachables consumer pcs describing performance markets described hp’s global business capabilities within personal systems • commercial pcs optimized use enterprise public sector smb customers focus robust designs security serviceability connectivity reliability manageability networked cloud based environments additionally hp offers range services solutions enterprise public sector smb customers help manage lifecycle pc mobility installed base • consumer pcs optimized consumer usage focusing gaming consuming multimedia entertainment managing personal life activities staying connected sharing information getting things done work including creating content staying informed security personal systems groups global business capabilities following business units reporting business performance • notebooks consists consumer notebooks commercial notebooks mobile workstations commercial mobility devices • desktops includes consumer desktops commercial desktops thin clients retail pos systems • workstations consists desktop workstations accessories • consists consumer commercial services well personal systems capabilities printing provides consumer commercial printer hardware supplies solutions services well scanning devices printing also focused imaging solutions commercial industrial markets described hp’s global business capabilities within printing • office printing solutions delivers hp’s office printers supplies services solutions smbs large enterprises also includes samsungbranded oem hardware solutions hp goes market extensive channel network directly hp sales • home printing solutions delivers innovative printing products supplies services solutions home business micro business customers utilizing hp’s ink laser technologies including laser technology samsungbranded products • graphics solutions delivers largeformat commercial industrial solutions supplies print service providers packaging converters wide portfolio printers presses hp designjet hp latex hp stitch hp indigo hp pagewide web presses related components • 3d printing digital manufacturing offers portfolio additive manufacturing solutions supplies help customers succeed additive digital manufacturing journey hp offers complete solutions collaboration ecosystem partners printing groups global business capabilities following business units reporting business performance hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued • commercial hardware consists office printing solutions graphics solutions 3d printing digital manufacturing excluding supplies • consumer hardware consists home printing solutions excluding supplies • supplies comprises set highly innovative consumable products ranging ink laser cartridges media graphics supplies 3d printing digital manufacturing supplies recurring use consumer commercial hardware corporate investments includes hp labs certain business incubation investment projects accounting policies hp uses derive segment results substantially used hp preparing financial statements hp derives results business segments directly internal management reporting system hp allocate certain operating expenses manages corporate level segments unallocated amounts include certain corporate governance costs infrastructure investments stockbased compensation expense restructuring charges acquisitionrelated charges amortization intangible assets pursuant adoption asu 201707 first quarter fiscal year 2019 hp reclassifies marketrelated retirement credits components excluding service cost component net periodic benefit cost interest net consolidated statement earnings hp reflected change prior reporting periods asif basis adoption material impact previously reported segment earnings operations realignment effective beginning first quarter fiscal year 2019 hp implemented organizational change align business unit financial reporting closely current business structure organizational change resulted transfer certain samsungbranded product categories commercial consumer within printing segment hp reflected change business unit information prior reporting periods asif basis reporting change impact previously reported segment net revenue consolidated net revenue earnings operations net earnings net eps hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued segment operating results operations reconciliation hp consolidated results follows segment assets hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets follows hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued major customers single customer represented 10 hp’s net revenue fiscal year presented geographic information net revenue country based upon sales location predominately represents customer location fiscal years 2019 2018 2017 united states country represented 10 hp net revenue net revenue country hp operates follows net property plant equipment country hp operates follows single country represented exceeds 10 hp’s total net property plant equipment fiscal year presented hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring charges summary restructuring plans hp’s restructuring activities fiscal years 2019 2018 2017 summarized plan follows 1 infrastructure includes adjustment carrying amount held sale assets 52 million fiscal year 2017 reversal adjustments 29 million fiscal year 2018 associated consolidation manufacturing global hubs 2 includes prioryear plans substantially complete hp expect material activity associated plans 3 includes reclassification liability related enhanced early retirement “eer” plan 6m certain healthcare medical savings account benefits pension post retirement plans see note 4 “retirement postretirement benefit plans” information fiscal 2020 plan september 30 2019 hp’s board directors approved fiscal 2020 plan intended optimize simplify operating model cost structure hp expects implemented fiscal 2022 hp expects reduce global headcount approximately 7000 9000 employees combination employee exits voluntary eer hp estimates incur pretax charges approximately 10 billion relating labor nonlabor actions hp expects incur approximately 09 billion primarily labor costs related workforce reductions remaining costs relate infrastructure nonlabor actions charges fiscal 2017 plan october 10 2016 hp’s board directors approved fiscal 2017 plan included severance costs related labor actions infrastructure costs related nonlabor actions charges approximately 5300 employees exited part fiscal 2017 plan hp incurred 390 million severance costs 305 million infrastructure costs related nonlabor charges fiscal 2017 plan substantially complete hp expect costs associated plan charges hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring charges continued charges include nonrecurring costs including result separation information technology rationalization efforts distinct ongoing operational costs primarily relate information technology costs advisory consulting nonrecurring labor costs hp incurred 28 million 33 million 135 million charges fiscal year 2019 2018 2017 respectively note 4 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant defined benefit plan hp inc pension plan “pension plan” frozen plan united states hp reduces benefit payable certain us employees pension plan service 1993 amounts due employee hp’s frozen defined contribution deferred profitsharing plan “dpsp” october 31 2019 2018 fair value plan assets dpsp 543 million 536 million respectively dpsp obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations pension plan dpsp remain entirely hp postseparation postretirement benefit plans hp sponsors retiree health welfare benefit plans significant united states hp inc retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partiallysubsidized medical coverage based years service retirement hp’s share premium cost capped subsidized medical coverage provided hp inc retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp inc retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered partially subsidized medical coverage programs employees hired 2002 august 2008 eligible credits hp inc retiree welfare benefits plan credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association upon attaining age 45 part early retirement programs retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 107 million fiscal year 2019 110 million fiscal year 2018 103 million fiscal year 2017 us employees automatically enrolled hp inc 401k plan meet eligibility requirements unless decline participation employer matching contributions hp inc 401k plan 100 employee’s contributions maximum 4 eligible compensation hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued pension postretirement benefit expense components hp’s pension postretirement credit benefit cost recognized consolidated statements earnings follows components net periodic benefit costs service cost component included interest net consolidated statements earnings weightedaverage assumptions used calculate total periodic benefit credit cost follows funded status funded status defined benefit postretirement benefit plans follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued weightedaverage assumptions used calculate projected benefit obligations fiscal years ended october 31 2019 2018 follows net amounts noncurrent assets current noncurrent liabilities hp’s defined benefit postretirement benefit plans recognized hp’s consolidated balance sheet follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans following table summarizes hp’s pretax net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss recognized components net periodic benefit cost credit next fiscal year defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued fair value plan assets table sets forth fair value plan assets asset category within fair value hierarchy october 31 2019 refer note 9 “fair value” details fair value hierarchy certain investments measured fair value using net asset value “nav” per share practical expedient categorized fair value hierarchy fair value amounts presented table provide reconciliation fair value hierarchy total value plan assets table sets forth fair value plan assets asset category within fair value hierarchy october 31 2018 hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued 1 investments publiclytraded equity securities valued using closing price measurement date reported stock exchange individual securities traded 2 fair value corporate government assetbacked debt securities based observable inputs comparable market transactions also included category debt issued national state local governments agencies 3 department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships certain common collective trusts interests 10312 entities valued using nav practical expedient 4 includes publicly traded funds investment companies registered sec funds publicly traded nonus fundoffund arrangement nonus fundoffund arrangement custom portfolio valued nav consisting primarily fixed income common contractual funds 5 includes cash equivalents shortterm marketable securities cash equivalents include money market funds valued based nav assets classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety 6 includes primarily reverse repurchase agreements unsettled transactions derivative instruments 7 alternative investments primarily include private equities hedge funds valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based nav reported asset manager investment company adjusted cash flows necessary making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager • private equities include limited partnerships equity buyout venture capital real estate similar funds invest united states internationally foreign currencies hedged • hedge funds include limited partnerships invest long short primarily common stocks credit relative value eventdriven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued net long position net short position 8 common contractual fund investment arrangement institutional investors pool assets units may acquired different subfunds focused equities fixed income alternative investments emerging markets subfund invested accordance fund’s investment objective units issued relation subfund subfunds publicly traded custodian strikes nav either twice month depending subfund assets valued using nav practical expedient plan asset allocations refer fair value hierarchy table actual assets allocations across benefit plans weightedaverage target asset allocations across benefit plans represented fair value tables follows investment policy hp’s investment strategy seek competitive rate return relative appropriate level risk depending funded status plan timing expected benefit payments majority plans’ investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans’ investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives affect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp believes appropriate relative plan’s liability structure return goals hp conducts periodic assetliability studies us plans model various potential asset allocations comparison plan’s forecasted liabilities liquidity needs develop policy glide path adjusts asset allocation funded status 2018 assetliability study reconfirmed current policy glide path us pension plan due higher interest rates beginning fiscal year 2019 investment portfolio interest rate exposure increased accordance policy hedge path hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside united states asset allocation decisions typically made independent board trustees specific plan united states investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixed income securities would otherwise deployed hp reviews investment strategy provides recommended list investment managers country plan final decisions asset allocation investment managers made board trustees specific plan basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected real returns considers country’s specific inflation outlook hp’s investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees retirement incentive program hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued part fiscal 2020 plan hp announced voluntary eer program us employees october 2019 voluntary participation eer program limited employees least 50 years old 20 years service hp employees accepted eer program leave hp dates ranging december 31 2019 september 30 2020 eer benefit cash lump sum payment calculated based years service hp time retirement ranging 13 52 weeks pay employees participating eer program offered opportunity continue health care coverage active employee contribution rates 36 months following retirement addition hp providing 12000 employer credits retirement medical savings account program hp recognize special termination benefits expense restructuring charges future contributions funding policy fiscal year 2020 hp expects contribute approximately 76 million nonus pension plans 36 million cover benefit payments us nonqualified plan participants 6 million cover benefit claims hp’s postretirement benefit plans hp’s policy fund pension plans makes least minimum contribution required local government funding taxing authorities estimated future benefits payments october 31 2019 hp estimates future benefits payments retirement postretirement plans follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation hp’s stockbased compensation plans include incentive compensation plans employee stock purchase plan stockbased compensation expense related income tax benefits operations stockbased compensation expense resulting tax benefits operations follows cash received option exercises purchases hp inc 2011 employee stock purchase plan “2011 espp” 59 million fiscal year 2019 158 million fiscal year 2018 118 million fiscal year 2017 benefit realized tax deduction option exercises fiscal years 2019 2018 2017 3 million 23 million 15 million respectively stockbased incentive compensation plans hp’s stockbased incentive compensation plans include equity plans adopted 2004 2000 amended restated “principal equity plans” well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased awards employees meeting certain employment qualifications eligible receive stockbased awards aggregate number shares hp’s stock authorized issuance 2004 principal equity plan 5931 million grants may made 2000 principal equity plan outstanding awards plan remain outstanding according terms plan restricted stock awards nonvested stock awards may include grants restricted stock restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior lapse restrictions awards generally vest one three years date grant vesting period ownership restricted stock cannot transferred restricted stock dividend voting rights common stock considered issued outstanding upon grant dividends paid restricted stock nonforfeitable restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding upon grant however shares underlying restricted stock units included calculation diluted net eps restricted stock units forfeitable dividend equivalent rights equal dividend paid common stock hp expenses fair value restricted stock awards ratably period restrictions lapse majority restricted stock units issued hp contain service vesting conditions however starting fiscal year 2014 hp began granting performanceadjusted restricted stock units vest satisfaction service achievement certain performance goals including market conditions prior expiration awards stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal closing price hp’s stock option grant date majority stock options issued hp contain service vesting conditions however starting fiscal year 2011 fiscal year 2016 hp granted performancecontingent stock options vest satisfaction service market conditions prior expiration awards restricted stock units hp uses closing stock price grant date estimate fair value servicebased restricted stock units hp estimates fair value restricted stock units subject performanceadjusted vesting conditions using combination closing stock price grant date monte carlo simulation model weightedaverage fair value assumptions used measure fair value restricted stock units subject performanceadjusted vesting conditions monte carlo simulation model follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued 1 weightedaverage fair value based performanceadjusted restricted stock units granted period 2 expected volatility estimated using historical volatility derived hp’s common stock 3 riskfree interest rate estimated based yield us treasury zerocoupon issues 4 expected performance period estimated based length remaining performance period grant date summary restricted stock units activity follows total grant date fair value restricted stock units vested fiscal years 2019 2018 2017 273 million 224 million 162 million respectively october 31 2019 total unrecognized pretax stockbased compensation expense related nonvested restricted stock units operations 267 million expected recognized remaining weightedaverage vesting period 14 years stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value assumptions used measure fair value follows 1 weightedaverage fair value based stock options granted period 2 awards granted fiscal year 2019 2018 expected volatility estimated based blended volatility 50 historical volatility 50 implied volatility traded options hps common stock awards granted hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued fiscal year 2017 expected volatility estimated using leverageadjusted average termmatching volatilities peer companies due lack volume forward traded options precluded use implied volatility 3 riskfree interest rate estimated based yield us treasury zerocoupon issues 4 expected dividend yield represents constant dividend yield applied duration expected term award 5 awards subject servicebased vesting expected term estimated using simplified method performancecontingent awards expected term represents output lattice model summary stock options activity follows aggregate intrinsic value table represents total pretax intrinsic value option holders would realized option holders exercised options last trading day fiscal years 2019 2018 2017 aggregate intrinsic value difference hp’s closing stock price last trading day fiscal year exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal years 2019 2018 2017 20 million 109 million 77 million respectively total grant date fair value options vested fiscal years 2019 2018 2017 9 million 12 million 19 million respectively october 31 2019 total unrecognized pretax stockbased compensation expense related stock options 8 million expected recognized weightedaverage vesting period 2 years employee stock purchase plan hp sponsors 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hp’s common stock pursuant terms 2011 espp employees purchase stock 2011 espp price equal 95 hp’s closing stock price purchase date stockbased compensation expense recorded connection purchases criteria noncompensatory plan met aggregate number shares hp’s stock authorized issuance 2011 espp 100 million shares reserved shares available future grant shares reserved future issuance stockbased incentive compensation plans 2011 espp follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings provision taxes december 22 2017 tcja enacted law given significance legislation sec staff issued staff accounting bulletin 118 sab 118 allows registrants record provisional amounts one year “measurement period” january 31 2019 hp completed accounting tax effects tcja material changes provisional amounts recorded measurement period january 2018 fasb released guidance accounting tax global minimum tax provisions tcja global minimum tax provisions impose tax foreign income excess deemed return tangible assets foreign corporations hp elected treat global minimum tax inclusions period costs domestic foreign components earnings taxes follows benefit provision taxes earnings follows result us tax reform hp revised estimated annual effective tax rate reflect change us federal statutory tax rate 35 233 fiscal year 2018 transitional tax rate rules 21 fiscal year 2019 differences us federal statutory income tax rate hp’s effective tax rate follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued jurisdictions favorable tax rates significant effective tax rate impact periods presented include puerto rico singapore china malaysia ireland fiscal year 2019 hp recorded 13 billion net income tax benefits related discrete items provision taxes amount includes tax benefits related audit settlements 10 billion 75 million due ability utilize tax attributes 57 million restructuring benefits net valuation allowance releases 94 million hp also recorded benefits 78 million related us tax reform result new guidance issued us internal revenue service “irs” benefits partially offset uncertain tax position charges 51 million fiscal year 2019 addition discrete items mentioned hp recorded excess tax benefits 20 million associated stock options restricted stock units performanceadjusted restricted stock units fiscal year 2018 hp recorded 28 billion net income tax benefits related discrete items provision taxes include impacts tcja hp yet completed analysis full impact tcja however october 31 2018 hp recorded provisional tax benefit 760 million related 56 billion net benefit decrease deferred tax liability unremitted foreign earnings partially offset 33 billion net expense deemed repatriation tax payable installments eight years 12 billion net expense remeasurement deferred assets liabilities new us statutory tax rate 317 million valuation allowance net expense related deferred tax assets expected realized lower rate hp also recorded tax benefits related audit settlements 15 billion valuation allowance releases 601 million pertaining change ability utilize certain foreign us deferred tax assets due change geographic earnings mix benefits partially offset net tax charges 34 million fiscal year 2018 addition discrete items mentioned hp recorded excess tax benefits 42 million associated stock options restricted stock units performanceadjusted restricted stock units fiscal year 2017 hp recorded 72 million net income tax benefits related discrete items provision taxes amounts primarily include tax benefits 84 million related restructuring charges 12 million related us federal provision return adjustments 45 million related samsung acquisitionrelated charges 13 million net tax benefits addition hp recorded tax charges 11 million related changes state valuation allowances 22 million state provision return adjustments 49 million related uncertain tax positions fiscal year 2017 addition discrete items mentioned hp recorded excess tax benefits 19 million associated stock options restricted stock units performanceadjusted restricted stock units reflected consolidated statements earnings component provision income taxes result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2027 gross income tax benefits attributable actions investments estimated 386 million 025 diluted eps fiscal year 2019 578 million 035 diluted net eps fiscal year 2018 471 million 028 diluted net eps fiscal year 2017 uncertain tax positions hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued reconciliation unrecognized tax benefits follows october 31 2019 amount unrecognized tax benefits 929 million 803 million would affect hp’s effective tax rate realized october 31 2018 amount unrecognized tax benefits 78 billion 15 billion would affect hp’s effective tax rate realized amount unrecognized tax benefits decreased 68 billion primarily related resolution various audits hp recognizes interest income favorable settlements interest expense penalties accrued unrecognized tax benefits provision taxes consolidated statements earnings october 31 2019 2018 2017 hp accrued 56 million 160 million 257 million respectively interest penalties hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution certain tax years various tax authorities next 12 months reasonably possible existing unrecognized tax benefits may reduced immaterial amount within next 12 months hp subject income tax united states approximately 58 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits federal state foreign tax authorities irs conducting audit hp’s 2016 income tax return respect major state foreign tax jurisdictions hp longer subject tax authority examinations years prior 2002 material tax deficiencies assessed major state foreign tax jurisdictions october 31 2019 us tax court ruled may 2012 hp related certain tax attributes claimed hp tax years 1999 2003 hp appealed us tax court determination filing formal notice appeal ninth circuit court appeals case argued ninth circuit november 2016 ninth circuit court appeals issued opinion november 2017 affirming tax court determinations fiscal year 2018 hp decided appeal hp believes provided adequate reserves tax deficiencies reductions tax benefits could result federal state foreign tax audits hp regularly assesses likely outcomes audits order determine appropriateness hp’s tax provision hp adjusts uncertain tax positions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular audit however income tax audits inherently unpredictable assurance hp accurately predict outcome audits amounts ultimately paid resolution audit could materially different amounts previously included provision taxes therefore resolution one uncertainties particular period could material impact net income cash flows hp provided us federal income foreign withholding taxes 57 billion undistributed earnings nonus operations october 31 2019 hp intends reinvest earnings indefinitely outside united states determination amount unrecognized deferred tax liability related earnings practicable tcja taxed hp’s historic earnings profits nonus subsidiaries hp remit taxed reinvested earnings deferred us federal withholding taxes provided excess cash accumulated hp determines advantageous business operations tax cash management reasons deferred income taxes hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued significant components deferred tax assets deferred tax liabilities follows deferred tax assets liabilities included consolidated balance sheets follows october 31 2019 hp recorded deferred tax assets net operating loss carryforwards follows october 31 2019 hp recorded deferred tax assets various tax credit carryforwards follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued deferred tax asset valuation allowance deferred tax asset valuation allowance changes follows gross deferred tax assets october 31 2019 2018 2017 reduced valuation allowances 79 billion 79 billion 88 billion respectively fiscal year 2019 deferred tax asset valuation allowance increased 24 million primarily associated recognition income tax consequences intraentity transfers inventory see note 1 “summary significant accounting policies” detailed information increase partially offset impact tax rate changes foreign jurisdictions state valuation allowance releases fiscal year 2018 deferred tax valuation allowance decreased 901 million primarily associated foreign net operating losses us deferred tax assets anticipated realized lower effective rate federal statutory tax rate due certain future us international tax reform implications fiscal year 2017 deferred tax asset valuation allowance increased 287 million primarily associated foreign net operating losses note 7 supplementary financial information accounts receivable net allowance doubtful accounts related accounts receivable changes follows hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued hp thirdparty arrangements consisting revolving shortterm financing provide liquidity certain partners facilitate working capital requirements financing arrangements certain circumstances may contain partial recourse result transfer hp’s receivables risk thirdparty transfers qualify true sales applicable accounting guidance receivables derecognized consolidated balance sheets upon transfer hp receives payment receivables thirdparty within mutually agreed upon time period arrangements involving element recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets recourse obligations october 31 2019 2018 material costs associated sales trade receivables fiscal year 2019 2018 2017 material following summary activity arrangements 1 amounts outstanding third parties reported accounts receivable consolidated balance sheets inventory current assets 1 see note 9 “fair value” note 10 “financial instruments” detailed information property plant equipment net hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued depreciation expense 623 million 448 million 353 million fiscal years 2019 2018 2017 respectively noncurrent assets 1 see note 6 “taxes earnings” detailed information 2 see note 15 “guarantees indemnifications warranties” detailed information 3 see note 8 “goodwill intangible assets” detailed information 4 includes marketable equity securities mutual funds classified availableforsale investments 56 million 53 million october 31 2019 2018 respectively see note 10 “financial instruments” detailed information current liabilities hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued noncurrent liabilities 1 see note 6 “taxes earnings” detailed information interest net 1 fiscal year ended october 31 2019 2018 includes adjustment 764 million 676 million respectively indemnification receivable primarily related resolution various income tax audit settlements fiscal year ended october 31 2019 also includes adjustment 417 million pursuant termination tma hewlett packard enterprise see note 15 “guarantees indemnifications warranties” information net revenue region value remaining performance obligations october 31 2019 estimated value transaction price allocated remaining performance obligations 44 billion hp expects recognize approximately 18 billion unearned amount next 12 months 26 billion thereafter hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued hp elected practical expedients accordingly disclose aggregate amount transaction price allocated remaining performance obligations • contract original expected duration one year less • revenue performance obligation recognized time asinvoiced basis amount corresponds directly value customer • portion transaction price variable nature allocated entirely wholly unsatisfied performance obligation remaining performance obligations subject change may affected various factors termination contracts contract modifications adjustment currency costs obtaining contracts october 31 2019 deferred contract fulfillment acquisition costs balances 47 million 30 million included current assets noncurrent assets respectively consolidated balance sheet twelve months ended october 31 2019 company amortized 108 million costs contract liabilities october 31 2019 november 1 2018 hp’s contract liabilities balances 21 billion 19 billion included current liabilities noncurrent liabilities respectively consolidated balance sheet increase contract liabilities balance fiscal year 2019 primarily driven sales fixed price support maintenance services partially offset 922 million revenue recognized included opening contract liabilities balance november 1 2018 note 8 goodwill intangible assets goodwill allocated hp’s reportable segments changes carrying amount goodwill follows 1 goodwill net accumulated impairment losses 08 billion related corporate investments goodwill tested impairment reporting unit level october 31 2019 reporting units consistent reportable segments identified note 2 “segment information” goodwill impairments fiscal years 2019 2018 2017 personal systems negative carrying amount net assets october 31 2019 2018 primarily result favorable cash conversion cycle intangible assets hp’s acquired intangible assets composed hp inc subsidiaries notes consolidated financial statements continued note 8 goodwill intangible assets continued fiscal year 2019 increase gross intangible assets primarily due intangible assets resulting acquisition apogee group weightedaverage useful lives intangible assets acquired period follows october 31 2019 estimated future amortization expense related intangible assets follows note 9 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy hp uses valuation techniques based upon observable unobservable inputs observable inputs developed using market data publicly available information reflect assumptions market participants would use unobservable inputs developed using best information available assumptions market participants would use assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability marketcorroborated inputs level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs hp inc subsidiaries notes consolidated financial statements continued note 9 fair value continued following table presents hp’s assets liabilities measured fair value recurring basis 1 government debt includes instruments us treasury notes us agency securities nonus government bonds money market funds invested government debt trade active markets included level 1 valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including net asset value models utilizing market observable inputs fair value debt investments based quoted market prices modeldriven valuations using inputs primarily derived corroborated observable market data certain instances valuation models utilize assumptions cannot corroborated observable market data derivative instruments time hp uses forward contracts interest rate total return swaps past option contracts hedge certain foreign currency interest rate return certain investment exposures hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices currencies interest rates see note 10 “financial instruments” discussion hp’s use derivative instruments fair value disclosures short longterm debt hp estimates fair value debt primarily using expected present value technique based observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considering credit risk portion hp’s debt hedged reflected consolidated balance sheets amount equal debt’s carrying amount fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates fair value hp inc subsidiaries notes consolidated financial statements continued note 9 fair value continued hp’s short longterm debt 54 billion october 31 2019 compared carrying amount 51 billion date fair value hp’s short longterm debt 60 billion compared carrying value 60 billion october 31 2018 measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hp’s financial instruments primarily accounts receivable accounts payable financial liabilities included current liabilities consolidated balance sheets carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 2 level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets hp’s nonmarketable equity investments measured cost less impairment adjusted observable price changes hp’s nonfinancial assets intangible assets goodwill property plant equipment recorded fair value period impairment charge recognized measured fair value consolidated balance sheets would generally classified within level 3 fair value hierarchy hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments cash equivalents availableforsale investments 1 hp classifies marketable debt securities availableforsale investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2019 2018 carrying amount cash equivalents approximated fair value due short period time maturity interest income related cash equivalents debt securities approximately 80 million fiscal year 2019 116 million fiscal year 2018 66 million fiscal year 2017 estimated fair value availableforsale investments may representative values realized future equity securities privately held companies included noncurrent assets consolidated balance sheets amounted 46 million 36 million october 31 2019 2018 respectively derivative instruments hp uses derivatives offset business exposure foreign currency interest rate risk expected future cash flows certain existing assets liabilities part risk management strategy hp uses derivative instruments primarily forward contracts interest rate swaps total return swaps times option contracts hedge certain foreign currency interest rate return certain investment exposures hp may designate derivative contracts fair value hedges cash flow hedges classifies cash flows activities correspond underlying hedged items additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivative instruments fair value consolidated balance sheets result use derivative instruments hp exposed risk counterparties fail meet contractual obligations master netting agreements mitigate credit exposure counterparties permitting hp net amounts due hp counterparty amounts due hp counterparty certain conditions limit credit risk hp collateral security agreements allow hp’s custodian hold collateral require hp post collateral counterparties aggregate derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hp’s counterparty’s credit rating falls specified credit rating either party right request full collateralization derivatives’ net liability position fair value derivatives credit contingent features net liability position 45 million 68 million october 31 2019 2018 respectively fully collateralized within two business days hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued hp’s derivative contracts counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hp’s financial position cash flows october 31 2019 2018 fair value hedges hp enters fair value hedges interest rate swaps reduce exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar london interbank offered rate “libor”based floating interest expense derivative instruments designated qualify fair value hedges hp recognizes change fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change cash flow hedges hp uses forward contracts times option contracts designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost revenue operating expenses hp’s foreign currency cash flow hedges mature predominantly within twelve months however hedges related longterm procurement arrangements extend several years derivative instruments designated qualify cash flow hedges hp initially records changes fair value effective portion derivative instrument accumulated comprehensive loss separate component stockholders’ deficit consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes fair value hedged item derivatives designated hedging instruments consist primarily forward contracts used hedge foreign currencydenominated balance sheet exposures hp uses total return swaps hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change hedge effectiveness interest rate swaps designated fair value hedges hp measures hedge effectiveness offsetting change fair value hedged item change fair value derivative foreign currency options forward contracts designated cash flow hedges hp measures hedge effectiveness comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates hp recognizes ineffective portion hedge consolidated statements earnings period ineffectiveness occurs amounts excluded assessment effectiveness recognized consolidated statements earnings period arise hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued fair value derivative instruments consolidated balance sheets gross notional fair value derivative instruments consolidated balance sheets follows offsetting derivative instruments hp recognizes derivative instruments gross basis consolidated balance sheets hp offset fair value derivative instruments fair value cash collateral posted collateral security agreements october 31 2019 2018 information related potential effect hp’s master netting agreements collateral security agreements follows 1 represents cash collateral posted counterparties respective reporting date hp’s asset position net derivative amounts could offset generally two business days prior respective reporting date 2 represents collateral posted hp reuse counterparty cash collateral respective reporting date hp’s liability position net derivative amounts could offset generally two business days prior respective reporting date hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2019 2018 2017 follows pretax effect derivative instruments cash flow hedging relationships fiscal years ended october 31 2019 2018 2017 follows october 31 2019 2018 2017 portion hedging instruments’ gain loss excluded assessment effectiveness fair value cash flow hedges hedge ineffectiveness fair value cash flow hedges material fiscal years 2019 2018 2017 october 31 2019 hp expects reclassify estimated accumulated comprehensive income approximately 104 million net taxes earnings within next twelve months associated cash flow hedges along earnings effects related forecasted transactions amounts ultimately reclassified earnings could different amounts previously included accumulated oci based change market rate therefore could different impact earnings pretax effect derivative instruments designated hedging instruments recognized interest net consolidated statements earnings fiscal years 2019 2018 2017 follows hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings notes payable shortterm borrowings longterm debt 1 hp may redeem fixedrate us dollar global notes time accordance terms thereof us dollar global notes senior unsecured debt december 2016 hp filed shelf registration statement “2016 shelf registration statement” sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants disclosed note 10 “financial instruments” hp uses interest rate swaps mitigate exposure debt portfolio changes fair value resulting changes interest rates achieving primarily us dollar liborbased floating interest expense interest rates shown table longterm debt adjusted reflect impact interest rate swaps october 31 2019 aggregate future maturities debt face value excluding unamortized debt issuance cost 16 million discounts debt issuance 2 million less fair value adjustment related hedged debt 4 million including capital lease obligations follows hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings continued extinguishment debt march 2018 hp commenced completed cash tender offer “tender offer purchase approximately 185 billion aggregate principal amount outstanding us dollar 4650 global notes due december 9 2021 4375 global notes due september 15 2021 4300 global notes due june 1 2021 connection tender offer hp also solicited consents holders 4650 notes due december 2021 “4650 notes” amend indenture 4650 notes issued among things eliminate substantially restrictive covenants indenture “proposed amendments” holders majority principal amount outstanding 4650 notes consented proposed amendments result supplemental indenture executed march 26 2018 effect proposed amendments extinguishment debt resulted loss 126 million recorded interest net consolidated statements earnings year ended october 31 2018 commercial paper october 31 2019 hp maintained two commercial paper programs hp’s us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 60 billion hp’s euro commercial paper program provides issuance commercial paper outside united states denominated us dollars euros british pounds maximum aggregate principal amount 60 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 60 billion authorized hp’s board directors credit facility october 31 2019 hp maintained 40 billion senior unsecured committed revolving credit facility support issuance commercial paper general corporate purposes commitments revolving credit facility available march 30 2023 commitment fees interest rates terms borrowing credit facilities vary based hp’s external credit ratings october 31 2019 hp compliance financial covenants credit agreement governing revolving credit facility available borrowing resources october 31 2019 hp’s subsidiaries available borrowing resources 724 million uncommitted lines credit addition senior unsecured committed revolving credit facility discussed note 12 stockholders’ deficit share repurchase program hp’s share repurchase program authorizes open market private repurchase transactions fiscal year 2019 hp executed share repurchases 118 million shares settled total shares 24 billion fiscal year 2018 hp executed share repurchases 111 million shares settled total shares 26 billion fiscal year 2017 hp executed share repurchases 80 million shares settled total shares 14 billion share repurchases executed fiscal years 2019 2018 2017 included 09 million shares 10 million shares 15 million shares settled november 2019 november 2018 november 2017 respectively shares repurchased fiscal years 2019 2018 2017 open market repurchase transactions june 19 2018 hp’s board directors authorized 40 billion future repurchases outstanding shares common stock september 30 2019 board authorized additional 50 billion future repurchases outstanding shares common stock october 31 2019 hp approximately 65 billion remaining share repurchase authorizations approved hp’s board directors hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued taxes related comprehensive loss income hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued changes reclassifications related comprehensive loss income net taxes 1 components included computation net pension postretirement benefit credit charges note 4 “retirement postretirement benefit plans” components accumulated comprehensive loss net taxes october 31 2019 changes fiscal year 2019 follows hp inc subsidiaries notes consolidated financial statements continued note 13 earnings per share hp calculates basic net eps using net earnings weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock units stock options performancebased awards shares purchased 2011 employee stock purchase plan reconciliation number shares used basic diluted net eps calculations follows 1 hp excludes calculation diluted net eps stock options restricted stock units assumed proceeds exceed average market price effect would antidilutive assumed proceeds stock option include sum exercise price average unrecognized compensation cost assumed proceeds restricted stock unit represent unrecognized compensation cost hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2019 reasonably possible material loss incurred excess amounts recognized hp’s financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case pursuant separation distribution agreement hp shares responsibility hewlett packard enterprise certain matters indicated hewlett packard enterprise agreed indemnify hp whole part respect certain matters based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hp’s potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies litigation proceedings investigations copyright levies proceedings ongoing concluded involving hp certain european countries including litigation belgium countries seeking impose modify levies upon equipment multifunction devices “mfds” pcs alleging devices enable production private copies copyrighted materials levies generally based upon number products sold perproduct amounts levies vary european countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes european countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders reprobel collecting society administering remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively payments already made hp sufficient comply obligations court appeal brussels “court appeal” stayed proceedings referred several questions court justice european union “cjeu” november 12 2015 cjeu published judgment providing national legislation belgian one issue main proceedings incompatible eu law multiple legal points argued hp returned proceedings referring court may 12 2017 court appeal held 1 reprographic copyright levies due notwithstanding lack conformity belgian system eu law certain aspects 2 applicable levies calculated based objective speed mfd established expert appointed court appeal hp appealed decision belgian supreme court january 18 2018 based industry opposition extension levies digital products hp’s assessments merits various proceedings hp’s estimates number units impacted amounts levies hp accrued amounts believes adequate address ongoing disputes hewlettpackard company v oracle corporation june 15 2011 hp filed suit oracle corporation “oracle” california superior court santa clara county connection oracle’s march 2011 announcement discontinuing software support hp’s itaniumbased line mission critical servers hp asserted among things oracle’s actions breached contract signed parties part settlement litigation relating oracle’s hiring mark hurd matter eventually progressed trial bifurcated two phases hp prevailed first phase trial court ruled contract issue required oracle continue offer software products hp’s itaniumbased servers long hp decided sell servers second phase trial postponed oracle’s appeal trial court’s denial oracle’s “antislapp” motion oracle argued hp’s damages claim infringed oracle’s first amendment rights august 27 2015 california court appeals rejected oracle’s appeal matter remanded trial court second phase trial began may 23 2016 submitted jury june 29 2016 june 30 2016 jury returned verdict favor hp awarding hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued approximately 30 billion damages included approximately 17 billion past lost profits 13 billion future lost profits october 20 2016 court entered judgment hp amount interest accruing judgment paid oracle’s motion new trial denied december 19 2016 oracle filed notice appeal trial court’s judgment january 17 2017 february 2 2017 hp filed notice crossappeal challenging trial court’s denial prejudgment interest case fully briefed awaiting court appeals schedule oral argument hp expects appeals process could take several years complete litigation unpredictable assurance hp recover damages award damages amount awarded jury’s verdict amount ultimately awarded would recorded period received adjustment recorded financial statements relation potential award pursuant terms separation distribution agreement hp hewlett packard enterprise share equally recovery oracle hewlett packard enterprise reimbursed costs incurred prosecution action prior separation forsyth et al vs hp inc hewlett packard enterprise purported class collective action filed august 18 2016 united states district court northern district california hp hewlett packard enterprise alleging defendants violated federal age discrimination employment act “adea” california fair employment housing act california public policy california business professions code terminating older workers replacing younger workers plaintiffs seek certify nationwide collective class action adea comprised us residents employed defendants employment terminated pursuant workforce reduction “wfr” plan may 23 2012 40 years age older plaintiffs also seek represent rule 23 class california law comprised persons 40 years older employed defendants state california terminated pursuant wfr plan may 23 2012 following partial motion dismiss motion strike motion compel arbitration defendants filed november 2016 plaintiffs amended complaint new plaintiffs added plaintiffs agreed class period nationwide collective action shortened starts december 9 2014 january 30 2017 defendants filed another partial motion dismiss motions compel arbitration several plaintiffs march 20 2017 defendants filed additional motions compel arbitration number optin plaintiffs september 20 2017 court granted motions compel arbitration plaintiffs optins signed wfr release agreements also stayed entire case arbitrations completed november 30 2017 three named plaintiffs twelve optin plaintiffs filed single arbitration demand additional arbitration claimant added later stipulation december 22 2017 defendants filed motion 1 stay case pending arbitrations 2 enjoin demanded arbitration require plaintiff file separate arbitration demand february 6 2018 court granted motion stay denied motion enjoin prearbitration mediation proceedings took place october 4 5 2018 claims 16 arbitration claimants resolved november 2018 april 2019 additional 154 individuals filed consents optin action partyplaintiffs new optins 145 signed separation agreements include class waivers mandatory arbitration provisions addition optins brings total number named optin plaintiffs 193 mediation proceedings took place june 2019 respect 145 optins signed separation agreements parties continuing engage settlement discussions stay litigation remains place jackson et al v hp inc hewlett packard enterprise putative nationwide class action filed july 24 2017 federal district court san jose california plaintiffs purport bring lawsuit behalf similarly situated africanamericans individuals age 40 plaintiffs allege defendants engaged pattern practice racial age discrimination layoffs promotions plaintiffs filed amended complaint september 29 2017 january 12 2018 defendants moved transfer matter federal district court northern district georgia defendants also moved dismiss claims various grounds strike certain aspects proposed class definition court dismissed action basis improper venue july 23 2018 plaintiffs refiled case northern district georgia august 9 2018 plaintiffs also filed notice appeal dismissal order united states court appeals ninth circuit october 1 2018 georgia court granted plaintiffs’ unopposed motion stay administratively close georgia action ninth circuit appeal decided india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence “dri” issued show cause notices hewlettpackard india sales private limited “hp india” subsidiary hp seven hp india employees one former hp india employee alleging hp india underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp india deposited approximately 16 million dri agreed post provisional bond exchange dri’s agreement seize hp india products spare parts interrupt transaction business hp india hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hp india named individuals approximately 386 million hp india already deposited 9 million december 11 2012 hp india voluntarily deposited additional 10 million connection productsrelated show cause notice differential duty demand subject interest april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hp india certain named individuals approximately 17 million hp india already deposited 7 million order hp india deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hp india filed appeals commissioner’s orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hp india deposit additional 24 million products order hp india deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hp india filed applications customs tribunal seeking early hearing appeals well extension stay deposit hp india individuals already granted final disposition appeals february 7 2014 application extension stay deposit granted customs tribunal disposal appeals october 27 2014 customs tribunal commenced hearings crossappeals commissioner’s orders customs tribunal rejected hp india’s request remand matter commissioner procedural grounds hearings scheduled reconvene april 6 2015 november 3 2015 april 11 2016 canceled request customs tribunal hearing merits appeal scheduled january 15 2019 cancelled pursuant separation distribution agreement hewlett packard enterprise agreed indemnify hp part based extent liability arises products spare parts hewlett packard enterprise’s businesses neodron patent litigation united states may 21 2019 neodron ltd “neodron” filed patent infringement lawsuit hewlett packard enterprise us district court western district texas day neodron filed companion complaint us international trade commission “itc” pursuant section 337 tariff act 1930 seven sets respondents including hewlett packard enterprise may 23 june 14 2019 neodron filed amended complaints itc western district texas respectively replace hewlett packard enterprise hp complaints allege certain touchcontrolled devices infringe four patents owned neodron june 19 2019 itc instituted investigation itc hearing scheduled begin march 23 2020 itc’s target date completion investigation october 26 2020 district court action stayed pending resolution itc proceedings itc proceeding neodron seeks order enjoining hp importing selling importation selling importation certain touchcontrolled notebook computers tablets june 28 2019 neodron filed second lawsuit western district texas asserting four additional patents hp touchcontrolled devices neodron amended complaint second lawsuit assert total eight patents hp touchcontrolled devices neodron seeks unspecified damages permanent injunction among remedies germany october 29 2019 neodron served hp claim patent infringement munich state court germany patent asserted german case related patent asserted itc case consist initial hearing march 2020 formal hearing late 2020 german court finds infringement valid patent court may issue injunction part remedy slingshot printing llc litigation june 11 2019 slingshot printing llc filed three complaints us district court western district texas alleging hp infringes infringed sixteen patents september 20 2019 slingshot filed fourth complaint amended three earlier complaints alleging hp infringes infringed thirtytwo patents accused products include inkjet printers cartridges printheads complaints seek monetary damages parziale v hp inc august 27 2019 purported consumer class action filed hp arising supplies authentication protocol certain officejet printers complaint filed united states district court northern district california captioned parziale v hp inc alleges two causes action florida consumer protection statutes 1 violation florida deceptive unfair trade practices act fsa §§ 501201 et seq 2 violation florida misleading advertisement law fsa §§ 81741 et seq named plaintiff florida resident purchased officejet printers florida seeks represent nationwide class “all united states citizens applicable statute limitations present hp printer modified reject third party ink cartridges refilled hp ink cartridges” october 30 2019 hp moved dismiss complaint november 13 2019 plaintiff filed hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued amended complaint adding following new causes action case 1 violation computer fraud abuse act 18 usc § 1030 et seq 2 trespass chattels 3 tortious interference business relations autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice “doj” sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hp’s acquisition autonomy january 19 2015 uk serious fraud office notified hp closing investigation decided cede jurisdiction investigation us authorities november 14 2016 doj announced federal grand jury indicted sushovan hussain former cfo autonomy mr hussain charged conspiracy commit wire fraud securities fraud multiple counts wire fraud indictment alleged mr hussain engaged scheme defraud purchasers sellers securities autonomy hp true performance autonomy’s business financial condition prospects growth jury trial commenced february 26 2018 april 30 2018 jury found mr hussain guilty charges november 15 2016 sec announced stouffer egan former ceo autonomy’s usbased operations settled charges relating participation accounting scheme meet internal sales targets analyst revenue expectations november 29 2018 doj announced federal grand jury indicted michael lynch former ceo autonomy stephen chamberlain former vp finance autonomy dr lynch mr chamberlain charged conspiracy commit wire fraud multiple counts wire fraud hp continuing cooperate ongoing enforcement actions autonomy corporation limited v michael lynch sushovan hussain april 17 2015 four former hp subsidiaries became subsidiaries hewlett packard enterprise time separation autonomy corporation limited hewlett packard vision bv autonomy systems limited autonomy inc initiated civil proceedings uk high court justice two members autonomy’s former management michael lynch sushovan hussain particulars claim seek damages excess 5 billion messrs lynch hussain breach fiduciary duties causing autonomy group companies engage improper transactions accounting practices october 1 2015 messrs lynch hussain filed defenses mr lynch also filed counterclaim autonomy corporation limited seeking 160 million damages among things alleged misstatements regarding lynch hewlett packard enterprise subsidiary claimants filed replies defenses asserted counterclaim march 11 2016 parties actively engaged disclosure process trial began march 25 2019 scheduled continue remainder 2019 environmental hp’s business subject various federal state local foreign laws regulations could result costs sanctions adversely affect business results operations example hp subject laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hp’s products recycling treatment disposal products including batteries particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products climate change laws regulations product repairability reuse takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hp’s potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act “cercla” known “superfund” state laws similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies separation distribution agreement includes provisions provide allocation environmental liabilities hp hewlett packard enterprise including certain remediation obligations responsibilities arising chemical materials composition respective products safe use energy consumption obligations product take back legislation addresses collection recycling treatment disposal products hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued environmental matters hp generally responsible environmental liabilities related properties assets including products allocated hp separation distribution agreement ancillary agreements hp indemnify hewlett packard enterprise liabilities specified ongoing remediation projects subject certain limitations hewlett packard enterprise payment obligation specified portion cost remediation projects addition hp share hewlett packard enterprise environmental liabilities set forth separation distribution agreement hp indemnified whole part hewlett packard enterprise liabilities arising assets assigned hewlett packard enterprise certain environmental matters detailed separation distribution agreement note 15 guarantees indemnifications warranties guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote crossindemnifications hewlett packard enterprise separation distribution agreement hp agreed indemnify hewlett packard enterprise subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hp part separation hewlett packard enterprise similarly agreed indemnify hp subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hewlett packard enterprise part separation hp expects hewlett packard enterprise fully perform terms separation distribution agreement information crossindemnifications hewlett packard enterprise litigation matters see note 14 “litigation contingencies” connection separation hp entered tma hewlett packard enterprise effective november 1 2015 tma provided hp hewlett packard enterprise share certain preseparation income tax liabilities tma terminated fourth quarter fiscal year 2019 indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors customers claims intellectual property infringement made third parties arising vendors’ customers’ use hp’s software products services certain matters indemnifications may subject maximum loss clauses historically payments made related indemnifications immaterial hp records tax indemnification receivables various third parties certain tax liabilities hp jointly severally liable indemnified third parties existing legal agreements hp records tax indemnification payable various third parties agreements management believes probable liability incurred amount reasonably estimated actual amount parties pay may obligated pay could vary depending outcome certain unresolved tax matters may resolved several years net payable net receivable october 31 2019 october 31 2018 57 million 10 billion respectively fiscal year 2019 10 billion indemnification receivables reduced primarily due resolution various tax matters amounting 08 billion warranties hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hp’s baseline experience affect estimated warranty obligation hp inc subsidiaries notes consolidated financial statements continued note 15 guarantees indemnifications warranties continued hp’s aggregate product warranty liabilities changes follows hp inc subsidiaries notes consolidated financial statements continued note 16 commitments lease commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense approximately 02 billion fiscal years 2019 2018 2017 october 31 2019 future minimum operating lease commitments follows unconditional purchase obligations october 31 2019 hp unconditional purchase obligations 372 million unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations primarily related inventory service support unconditional purchase obligations exclude agreements cancelable without penalty october 31 2019 unconditional purchase obligations follows hp inc subsidiaries notes consolidated financial statements continued note 17 acquisitions fiscal year 2019 november 1 2018 hp completed acquisition apogee group acquisition furthers hp’s plan disrupt a3 copier market builds printing strategy enhance a3 a4 product portfolio build differentiated solutions tools expand mps invest direct indirect gotomarket capabilities apogee augments hp’s services portfolio contractual office printing mps solutions increasingly important smbs hp reports financial results business printing segment table presents purchase price allocation acquisitions fiscal year 2018 november 1 2017 hp completed acquisition samsung’s printer business acquisition hp offers industry’s strongest portfolio a3 multifunction printers deliver simplicity printers high performance copiers fully integrated portfolio including nextgeneration pagewide technologies offers opportunities grow managed print document services sales models shift transactional contractual hp reports financial results business printing segment table presents purchase price allocation hp inc subsidiaries quarterly summary unaudited millions except per share amounts 1 net eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year hence sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm stockholders board directors hp inc opinion financial statements audited accompanying consolidated balance sheets hp inc subsidiaries company october 31 2020 2019 related consolidated statements earnings comprehensive income stockholders deficit cash flows three years period ended october 31 2020 related notes collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company october 31 2020 2019 results operations cash flows three years period ended october 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting october 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated december 10 2020 expressed unqualified opinion thereon adoption new accounting standard discussed note 1 consolidated financial statements company changed method recognizing revenue 2019 due adoption accounting standards update asu 201409 revenue contracts customers topic 606 amendments effective november 1 2018 method accounting leases 2020 due adoption accounting standards update asu 201602 leases topic 842 effective november 1 2019 basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate income taxes description matter described notes 1 6 consolidated financial statements company subject income taxes united states several countries subject routine corporate income tax audits many jurisdictions uncertainty company’s tax positions may arise tax laws subject interpretation company’s positions subject examination taxing authorities may result assessments additional amounts owed determining income tax provision potential assessments recording related effects requires significant management judgment estimating whether tax position’s technical merits morelikelythannot sustained measuring amount tax benefit qualifies recognition additionally company records valuation allowance reduce deferred tax assets amount likely realized determining need valuation allowance company considers certain subjective factors future market growth forecasted earnings future taxable income mix earnings jurisdictions operate prudent feasible tax planning strategies assessment management’s analyses reserve uncertain tax positions realizability deferred tax assets significant audit amounts material financial statements assessment process involves significant judgment example management’s assumptions may affected future market economic conditions interpretations tax laws legal rulings challenging audit addressed matter auditwe tested controls management’s processes relating recording unrecognized tax benefits including controls company’s process assess technical merits uncertain tax positions realizability deferred tax assets including development described assumptions judgments audit procedures included evaluation company’s key assumptions judgments testing completeness accuracy underlying data used determine amount unrecognized tax benefits recognized example evaluated measurement amounts recorded taking consideration applicable tax laws company’s positions examined taxing authorities also evaluated key assumptions judgments used management determining need valuation allowance testing completeness accuracy underlying data used company’s process example compared projections future taxable income actual results prior periods well management’s consideration current industry economic trends areas involved tax professionals assess technical merits company’s tax positions included assessing company’s correspondence relevant tax authorities evaluating income tax opinions thirdparty advice obtained company revenue recognition description matteras described note 1 consolidated financial statements company enters certain contracts sell products services contain nonstandard terms conditions multiple performance obligations contracts significant interpretation may required determine appropriate accounting including allocation transaction price among performance obligations arrangement timing transfer control promised goods services performance obligations addition company reduces revenue customer distributor programs incentive offerings including rebates promotions volumebased incentives expected returns company uses significant estimates determine expected variable consideration programs based factors like historical experience forecasted sales expected customer behavior market conditions assessment management’s evaluation appropriate accounting revenue contracts determination variable consideration sales incentives significant audit amounts material financial statements assessment process involves significant judgment addressed matter auditwe tested relevant controls identified risks related company’s accounting revenue recognition including controls evaluate appropriate accounting treatment contracts containing nonstandard terms conditions multiple performance obligations controls related estimation process record variable consideration related certain sales incentives audit procedures included among others inspection contracts entered period evaluation management’s judgments related interpretation certain contract provisions including identification performance obligations method allocating transaction price performance obligations arrangement assessment appropriateness amount revenue recognized also evaluated company’s key assumptions judgments tested completeness accuracy underlying data used determine variable consideration sales incentives included analyzing data related historical experience sales incentive payments well understanding current market dynamics affect estimate variable consideration assess company’s judgments estimates ernst young llp served company’s auditor since 2000 san jose california december 10 2020 report independent registered public accounting firm stockholders board directors hp inc opinion internal control financial reporting audited hp inc subsidiaries’ internal control financial reporting october 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion hp inc subsidiaries company maintained material respects effective internal control financial reporting october 31 2020 based coso criteria also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets hp inc subsidiaries october 31 2020 2019 related consolidated statements earnings comprehensive income stockholders deficit cash flows three years period ended october 31 2020 related notes report dated december 10 2020 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp san jose california december 10 2020 management’s report internal control financial reporting hp’s management responsible establishing maintaining adequate internal control financial reporting hp’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hp’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hp’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hp’s management assessed effectiveness hp’s internal control financial reporting october 31 2020 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework 2013 framework based assessment hp’s management determined hp’s internal control financial reporting effective october 31 2020 effectiveness hp’s internal control financial reporting october 31 2020 audited ernst young llp hp’s independent registered public accounting firm stated report appears page 56 annual report form 10k hp inc subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hp inc subsidiaries consolidated statements stockholders’ deficit accompanying notes integral part consolidated financial statements hp inc subsidiaries notes consolidated financial statements note 1 summary significant accounting policies basis presentation accompanying consolidated financial statements hp whollyowned subsidiaries prepared conformity us gaap principles consolidation consolidated financial statements include accounts hp subsidiaries affiliates hp controlling financial interest primary beneficiary intercompany balances transactions eliminated reclassifications hp reclassified certain prioryear amounts conform currentyear presentation use estimates preparation financial statements accordance us gaap requires management make estimates assumptions affect amounts reported hp’s consolidated financial statements accompanying notes actual results may differ materially estimates october 31 2020 extent covid19 pandemic impact business going forward depends numerous dynamic factors cannot reliably predict result many estimates assumptions required increased judgment may carry higher degree variability volatility events continue evolve respect pandemic estimates may materially change future periods foreign currency translation hp predominantly uses us dollar functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue costs expenses denominated nonus dollars recorded us dollars monthly average exchange rates prevailing period hp includes gains losses foreign currency remeasurement interest net consolidated statements earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive loss separation transaction november 1 2015 hewlettpackard company completed separation hewlett packard enterprise company “hewlett packard enterprise” hewlettpackard company’s former enterprise technology infrastructure software services financing businesses “separation” connection separation hp hewlett packard enterprise entered separation distribution agreement employee matters agreement various agreements remain enforceable provide framework continuing relationships parties information impacts agreements see note 7 “supplementary financial information” note 14 “litigation contingencies” note 15 “guarantees indemnifications warranties” recently adopted accounting pronouncements august 2017 fasb issued guidance amends existing accounting standards derivatives hedging amendment improves financial reporting hedging relationships better represent economic results entity’s risk management activities financial statements made certain targeted improvements simplify application hedge accounting guidance current us gaap hp adopted guidance first quarter fiscal year 2020 implementation guidance material impact consolidated financial statements february 2016 fasb issued amended guidance accounting leasing transactions primary objective update increase transparency comparability among organizations requiring lessees recognize lease liability obligation make lease payments rightofuse “rou” asset right use underlying asset lease term guidance also results changes lessor accounting requires additional disclosures leasing arrangements hp adopted standard “new lease standard” november 1 2019 using modified retrospective approach cumulative effect adjustment opening balance accumulated deficit adoption date hp elected apply practical expedient using transition option whereby prior comparative periods retrospectively adjusted consolidated financial statements hp also elected package practical expedients require reassessment initial direct costs classification lease definition lease company elected record leases initial term 12 months less consolidated balance sheets lease expense leases recognized straightline basis lease term hp also elected lessee practical expedient combine lease nonlease components certain asset classes hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued adoption new lease standard resulted recognition 12 billion operating lease liabilities 12 billion related rou assets consolidated balance sheets net impact adoption accumulated deficit november 1 2019 material november 1 2019 material finance leases hp lessee new lease standard also made changes lessor accounting including alignment new revenue recognition standard hp records revenue upfront certain aspects asaservice offerings reflects financing offerings cash flows financing activities consolidated statements cash flows changes material impact consolidated financial statements refer note 17 “leases” additional disclosures related leases recently issued accounting pronouncements yet adopted june 2016 fasb issued guidance requires credit losses financial assets measured amortized cost basis presented net amount expected collected based incurred losses credit losses availableforsale debt securities recorded allowance credit losses limited amount fair value amortized cost hp adopt guidance first quarter fiscal year 2021 using modified retrospective approach hp evaluated impact standard consolidated financial statements including accounting policies processes systems expect material impact consolidated financial statements revenue recognition general hp recognizes revenues point time depicting transfer promised goods services customers amount reflects consideration hp expects entitled exchange goods services hp follows fivestep model revenue recognition summarized 1 identify contract customer contract customer exists approved signed parties ii party’s rights obligations identified iii payment terms defined iv commercial substance v customer ability intent pay hp evaluates customers’ ability pay based various factors like historical payment experience financial metrics customer credit scores majority sales contracts contain standard terms conditions certain contracts nonstandard terms conditions 2 identify performance obligations contract hp evaluates performance obligation arrangement determine whether distinct hardware andor service performance obligation constitutes distinct goods services customer benefit goods services either together resources readily available customer performance obligation distinct within context contract 3 determine transaction price transaction price amount consideration hp expects entitled exchange transferring goods services customer transaction price includes variable amount hp estimates amount expects entitled using either expected value likely amount method hp reduces transaction price time revenue recognition customer distributor programs incentive offerings rebates promotions volumebased incentives expected returns hp uses estimates determine expected variable consideration programs based factors like historical experience expected consumer behavior market conditions hp elected practical expedient accounting significant financing components period revenue recognition customer pays product service one year less 4 allocate transaction price performance obligations contract sales arrangement contains multiple performance obligations hardware andor services hp allocates revenue performance obligation proportion selling price selling price performance obligation based standalone selling price “ssp” hp establishes ssp using price charged performance obligation sold separately “observable price” instances using price established management relevant authority observable price available hp establishes ssp based management judgment considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies technology industry life cycles 5 recognize revenue performance obligation satisfied revenue recognized performance obligation satisfied transferring control promised good service customer hp generally invoices customer upon delivery goods services payments due per contract terms fixed price support maintenance contracts nature standready obligations payments generally received advance customers revenue recognized straightline basis duration contract hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp reports revenue net taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority hp includes costs related shipping handling cost revenue hp records revenue gross basis hp principal transaction net basis hp acting agent customer vendor hp considers several factors determine whether acting principal agent notably whether hp primary obligor customer established pricing inventory credit risks hardware hp transfers control products customer time product delivered customer recognizes revenue accordingly unless customer acceptance uncertain significant obligations customer remain unfulfilled hp records revenue sale equipment salestype leases revenue commencement lease services hp recognizes revenue fixedprice support maintenance service contracts time depicting pattern service delivery recognizes costs associated contracts incurred contract assets liabilities contract assets rights consideration exchange goods services hp transferred customer right conditional something passage time contract assets material hp’s consolidated financial statements contract liabilities recorded deferred revenues amounts invoiced customers revenues recognized payments received advance fixedprice support maintenance contracts shortterm longterm deferred revenues reported within current liabilities noncurrent liabilities respectively cost obtain contract fulfillment cost incremental direct costs obtaining contract primarily consist sales commissions hp elected practical expedient expense incurred costs obtain contract benefit period equal less one year contracts period benefit greater one year hp capitalizes incremental costs obtaining contract customer amortizes costs expected period benefit provided costs recoverable fulfillment costs consist setup transition costs related service contracts costs generate enhance resources hp used satisfying performance obligation future capitalized amortized expected period benefit provided costs recoverable see note 7 “supplementary financial information” details net revenue region cost obtain contract fulfillment cost contract liabilities value remaining performance obligations hp adopted new revenue standard first quarter fiscal year 2019 using modified retrospective method applied contracts completed november 1 2018 hp recognized net impact adoption increase accumulated deficit 212 million net tax november 1 2018 leases inception contract hp assesses whether contract contains lease assessment based 1 whether contract involves use distinct identified asset 2 whether hp obtains right substantially economic benefit use asset throughout period 3 whether hp right direct use asset significant lease arrangements recognized lease commencement leases lease term 12 months less inception recorded consolidated balance sheets expensed straightline basis lease term consolidated statement earnings hp determines lease term assuming exercise renewal options reasonably certain leases provide implicit interest rate hp uses unsecured borrowing rate riskadjusts rate approximate collateralized rate commencement date determine present value future payments reasonably certain stockbased compensation hp determines stockbased compensation expense based measurement date fair value award hp recognizes compensation cost awards expected meet service performance vesting conditions straightline basis requisite service period award hp determines compensation costs aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis average remaining estimated service life participants limited cases hp amortizes actuarial gains losses using corridor approach see note 4 “retirement postretirement benefit plans” full description plans accounting funding policies advertising cost costs produce advertising expensed incurred production costs communicate advertising expensed advertising first run costs totaled approximately 578 million 652 million 568 million fiscal years 2020 2019 2018 respectively restructuring charges hp records charges associated managementapproved restructuring plans reorganize one hp’s business segments remove duplicative headcount infrastructure associated business acquisitions simplify business processes accelerate innovation restructuring charges include severance costs reduce specified number employees enhanced early retirement incentives infrastructure charges vacate facilities consolidate operations contract cancellation costs hp records restructuring charges based estimated employee terminations committed early retirements site closure consolidation plans hp accrues severance employee separation costs actions probable benefits paid amount reasonably estimable rates used determining severance accruals based existing plans historical experiences negotiated settlements charges include nonrecurring costs including result separation information technology rationalization efforts proxy contest activities distinct ongoing operational costs taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized hp records accruals uncertain tax positions hp believes likely tax position sustained examination taxing authorities based technical merits position hp makes adjustments accruals facts circumstances change closing tax audit refinement estimate provision income taxes includes effects adjustments uncertain tax positions well related interest penalties accounts receivable hp establishes allowance doubtful accounts receivable hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filing deterioration customer’s operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables hp maintains bad debt reserves customers based variety factors including use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers length time receivables past due trends weightedaverage risk rating portfolio macroeconomic conditions information derived competitive benchmarking significant onetime events historical experience past due delinquency status receivable based contractual payment terms receivable hp thirdparty shortterm financing arrangements intended facilitate working capital requirements certain customers financing arrangements certain cases provide partial recourse result transfer hp’s trade receivables third party hp reflects amounts transferred yet collected third party accounts receivable consolidated balance sheets arrangements involving element recourse fair value recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets concentrations risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments receivables trade customers contract manufacturers derivatives hp maintains cash equivalents investments derivatives certain financial instruments various financial institutions financial institutions located many different geographic regions hp’s policy designed limit exposure particular institution part risk management processes hp performs periodic evaluations hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes derivative contracts protect effects foreign currency interest rate certain investment exposures contracts involve risk nonperformance counterparty could result material loss likelihood hp deems remote hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors’ resellers’ aggregated business deteriorates substantially hp’s operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 47 32 gross accounts receivable october 31 2020 2019 respectively single customer accounts 10 gross accounts receivable october 31 2020 2019 credit risk respect accounts receivable generally diversified due hp’s large customer base dispersion across many different industries geographic markets hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers may require collateral letters credit bank guarantees certain circumstances hp utilizes outsourced manufacturers around world manufacture hpdesigned products hp may purchase product components suppliers sell components outsourced manufacturers thereby creating receivable balances outsourced manufacturers three largest outsourced manufacturer receivable balances collectively represented 89 77 hp’s supplier receivables 12 billion 12 billion october 31 2020 2019 respectively hp includes supplier receivables current assets consolidated balance sheets gross basis hp’s credit risk associated receivables mitigated wholly part amount hp owes outsourced manufacturers hp generally legal right offset payables outsourced manufacturers receivables hp reflect sale components net revenue recognize profit component sales related products sold hp time profit recognized reduction cost revenue hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hp’s relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hp’s net revenue cash flows gross margins upon completion separation november 1 2015 hp recorded net income tax indemnification receivables hewlett packard enterprise certain income tax liabilities hp jointly severally liable indemnified hewlett packard enterprise tax matters agreement “tma” tma terminated fourth quarter fiscal year 2019 inventory hp values inventory lower cost market cost computed using standard cost approximates actual cost firstin firstout basis adjustments required reduce cost inventory market net realizable value made estimated excess obsolete impaired balances property plant equipment net hp reflects property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation expense recognized straightline basis estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipment’s estimated residual value retirement disposition asset cost related accumulated depreciation removed consolidated balance sheets gain loss recognized consolidated statements earnings internal use software cloud computing arrangements hp capitalizes external costs directly attributable internal costs acquire create internal use software incurred subsequent completion preliminary project stage costs relate activities software design configuration coding testing installation costs related postimplementation activities training maintenance expensed incurred software substantially complete ready intended use capitalized development costs amortized straightline estimated useful life software generally exceed five years hp also enters certain cloudbased software hosting arrangements accounted service contracts internaluse software obtained hosting arrangement nature service contract hp incurs certain implementation costs integrating configuring software customization consistent costs incurred hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued application development stage onpremise software hp applies guidance determine costs eligible capitalization arrangements hp amortizes capitalized development costs straightline fixed noncancellable term associated hosting arrangement plus reasonably certain renewal periods hp also applies impairment model internaluse software capitalized implementation costs software hosting arrangement nature service contract business combinations hp includes results operations acquired business hp’s consolidated results prospectively acquisition date hp allocates purchase consideration assets acquired liabilities assumed noncontrolling interests acquired entity generally based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed noncontrolling interests acquired entity recorded goodwill primary items generate goodwill include value synergies acquired company hp value acquired assembled workforce neither qualify recognition intangible asset acquisitionrelated charges recognized separately business combination expensed incurred charges primarily include direct thirdparty professional legal fees integrationrelated costs goodwill hp reviews goodwill impairment annually fourth quarter whenever events changes circumstances indicate carrying amount goodwill may recoverable hp elect perform qualitative assessment test reporting unit’s goodwill impairment hp directly perform quantitative impairment test based qualitative assessment hp determines fair value reporting unit likely ie likelihood 50 percent less carrying amount quantitative impairment test performed quantitative impairment test hp compares fair value reporting unit carrying amount fair values derived significantly income approach lesser extent market approach income approach hp estimates fair value reporting unit based present value estimated future cash flows hp bases cash flow projections management’s estimates revenue growth rates operating margins taking consideration industry market conditions hp bases discount rate weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit hp weights fair value derived market approach depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp estimates fair value reporting unit using income approach order assess reasonableness estimated fair value hp’s reporting units hp compares aggregate reporting unit fair value hp’s market capitalization overall basis calculates implied control premium excess sum reporting units’ fair value hp’s market capitalization overall basis hp evaluates control premium comparing observable control premiums recent comparable transactions implied control premium determined reasonable light recent transactions hp reevaluates reporting unit fair values may result adjustment discount rate andor assumptions reevaluation could result change estimated fair value certain reporting units fair value reporting unit exceeds carrying amount net assets assigned reporting unit goodwill impaired fair value reporting unit less carrying amount goodwill impaired excess reporting unit’s carrying value fair value recognized impairment loss debt marketable equity securities investments hp determines appropriate classification investments time purchase reevaluates classifications balance sheet date debt marketable equity securities generally considered availableforsale highly liquid investments maturities three months less date purchase classified cash equivalents marketable debt securities maturities twelve months less classified shortterm investments marketable debt securities maturities greater twelve months classified based availability use current operations marketable equity securities including mutual funds classified either shortterm longterm based nature security availability use current operations debt marketable equity securities reported fair value unrealized gains losses net applicable taxes accumulated comprehensive loss consolidated statement earnings consolidated balance sheets realized gains losses availableforsale securities calculated based specific identification method included hp inc subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued interest net consolidated statements earnings hp monitors investment portfolio potential impairment quarterly basis carrying amount investment debt securities exceeds fair value decline value determined otherthantemporary ie hp intend sell debt securities likely hp required sell debt securities prior anticipated recovery amortized cost basis hp records impairment charge interest net amount credit loss remaining amount recorded accumulated comprehensive loss consolidated balance sheets derivatives hp uses derivative instruments primarily forwards swaps treasury rate locks times options hedge certain foreign currency interest rate return certain investment exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative instruments speculative purposes see note 10 “financial instruments” full description hp’s derivative instrument activities related accounting policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records liability contingencies believes probable liability incurred amount loss reasonably estimated see note 14 “litigation contingencies” full description hp’s loss contingencies related accounting policies hp inc subsidiaries notes consolidated financial statements continued note 2 segment information hp leading global provider personal computing access devices imaging printing products related technologies solutions services hp sells individual consumers small mediumsized businesses “smbs” large enterprises including customers government health education sectors hp goes market extensive channel network direct sales hp’s operations organized three reportable segments personal systems printing corporate investments hp’s organizational structure based many factors chief operating decision maker “codm” uses evaluate view run business operations include limited customer base homogeneity products technology segments based organizational structure information reviewed hp’s codm evaluate segment results codm uses several metrics evaluate performance overall business including earnings operations uses results allocate resources segments summary description segment follows personal systems offers commercial consumer desktop notebook “pcs” workstations thin clients commercial mobility devices retail pointofsale “pos” systems displays related accessories software support services hp groups commercial notebooks commercial desktops commercial services commercial mobility devices commercial detachables convertibles workstations retail pos systems thin clients commercial pcs consumer notebooks consumer desktops consumer services consumer detachables consumer pcs describing performance markets described hp’s global business capabilities within personal systems •commercial pcs optimized use enterprise public sector includes education smb customers focus robust designs security serviceability connectivity reliability manageability networked cloudbased environments additionally hp offers range services solutions enterprise public sector smb customers help manage lifecycle pc mobility installed base •consumer pcs optimized consumer usage focusing gaming learning working remotely consuming multimedia entertainment managing personal life activities staying connected sharing information getting things done work including creating content staying informed secure personal systems groups global business capabilities following business units reporting business performance •notebooks consists consumer notebooks commercial notebooks mobile workstations commercial mobility devices • desktops includes consumer desktops commercial desktops thin clients retail pos systems • workstations consists desktop workstations accessories • consists consumer commercial services well personal systems capabilities printing provides consumer commercial printer hardware supplies services solutions printing also focused imaging solutions commercial industrial markets described hp’s global business capabilities within printing •office printing solutions delivers hp’s office printers supplies services solutions smbs large enterprises also includes oem hardware solutions samsungbranded supplies •home printing solutions delivers innovative printing products supplies services solutions home business micro business customers utilizing hp’s ink laser technologies also includes samsungbranded supplies •graphics solutions delivers largeformat commercial industrial solutions supplies print service providers packaging converters wide portfolio printers presses hp designjet hp latex hp indigo hp pagewide web presses •3d printing digital manufacturing offers portfolio additive manufacturing solutions supplies help customers succeed additive digital manufacturing journey hp offers complete solutions collaboration ecosystem partners printing groups global business capabilities following business units reporting business performance hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued •commercial hardware consists office printing solutions graphics solutions 3d printing digital manufacturing excluding supplies •consumer hardware consists home printing solutions excluding supplies •supplies comprises set highly innovative consumable products ranging ink laser cartridges media graphics supplies 3d printing digital manufacturing supplies recurring use consumer commercial hardware corporate investments includes hp labs certain business incubation investment projects accounting policies hp uses derive segment results substantially used hp preparing financial statements hp derives results business segments directly internal management reporting system hp allocate certain operating expenses manages corporate level segments unallocated amounts include certain corporate governance costs infrastructure investments stockbased compensation expense restructuring charges acquisitionrelated charges amortization intangible assets hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued segment operating results operations reconciliation hp consolidated results follows segment assets hp allocates assets business segments based segments primarily benefiting assets total assets segment reconciliation segment assets hp consolidated assets follows hp inc subsidiaries notes consolidated financial statements continued note 2 segment information continued major customers single customer represented 10 hp’s net revenue fiscal year presented geographic information net revenue country based upon sales location predominately represents customer location fiscal years 2020 2019 2018 united states country represented 10 hp net revenue net revenue country hp operates follows net property plant equipment country hp operates follows single country represented exceeds 10 hp’s total net property plant equipment fiscal year presented hp inc subsidiaries notes consolidated financial statements continued note 3 restructuring charges summary restructuring plans hp’s restructuring activities fiscal years 2020 2019 2018 summarized plan follows 1 primarily includes fiscal 2017 plan along legacy plans substantially complete hp expect material activity associated plans 2 includes reclassification liability related enhanced early retirement “eer” plan 44 million certain healthcare medical savings account benefits pension post retirement plans see note 4 “retirement postretirement benefit plans” information fiscal 2020 plan september 30 2019 hp’s board directors approved fiscal 2020 plan intended optimize simplify operating model cost structure hp expects implemented fiscal 2022 hp expects reduce global headcount approximately 7000 9000 employees combination employee exits voluntary eer hp estimates incur pretax charges approximately 10 billion relating labor nonlabor actions hp expects incur approximately 09 billion primarily labor costs related workforce reductions remaining costs relate nonlabor actions charges include nonrecurring costs including result separation information technology rationalization efforts proxy contest activities distinct ongoing operational costs primarily relate thirdparty legal professional services nonrecurring costs hp incurred 105 million 28 million 33 million charges fiscal year 2020 2019 2018 respectively hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant defined benefit plan hp inc pension plan “pension plan” frozen plan united states hp reduces benefit payable certain us employees pension plan service 1993 amounts due employee hp’s frozen defined contribution deferred profitsharing plan “dpsp” october 31 2020 2019 fair value plan assets dpsp 463 million 543 million respectively dpsp obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations pension plan dpsp remain entirely hp postseparation postretirement benefit plans hp sponsors retiree health welfare benefit plans significant united states hp inc retiree welfare benefits plan certain pre2003 retirees grandfathered participants continuous service hp since 2002 eligible receive partially subsidized medical coverage based years service retirement hp’s share premium cost capped subsidized medical coverage provided hp inc retiree welfare benefits plan hp currently leverages employer group waiver plan process provide hp inc retiree welfare benefits plan post65 prescription drug coverage medicare part thereby giving hp access federal subsidies help pay retiree benefits certain employees grandfathered partially subsidized medical coverage programs employees hired 2002 august 2008 eligible credits hp inc retiree welfare benefits plan credits offered september 2008 provided form matching credits employee contributions made voluntary employee beneficiary association upon attaining age 45 part early retirement programs retirement former employees may use credits reimbursement certain eligible medical expenses including premiums required coverage defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 108 million fiscal year 2020 107 million fiscal year 2019 110 million fiscal year 2018 us employees automatically enrolled hp inc 401k plan meet eligibility requirements unless decline participation employer matching contributions hp inc 401k plan 100 first 4 eligible compensation contributed employees employer match vested three years employee service generally employee must employed hp inc last day calendar year receive match hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued pension postretirement benefit expense components hp’s pension postretirement credit benefit cost recognized consolidated statements earnings follows components net periodic benefit costs service cost component included interest net consolidated statements earnings weightedaverage assumptions used calculate total periodic credit benefit cost follows funded status funded status defined benefit postretirement benefit plans follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued weightedaverage assumptions used calculate projected benefit obligations fiscal years ended october 31 2020 2019 follows net amounts noncurrent assets current noncurrent liabilities hp’s defined benefit postretirement benefit plans recognized hp’s consolidated balance sheet follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued following table summarizes pretax net actuarial loss gain prior service benefit recognized accumulated comprehensive loss defined benefit postretirement benefit plans following table summarizes hp’s pretax net actuarial loss gain prior service benefit expected amortized accumulated comprehensive loss recognized components net periodic benefit cost credit next fiscal year defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued fair value plan assets table sets forth fair value plan assets asset category within fair value hierarchy october 31 2020 refer note 9 “fair value” details fair value hierarchy certain investments measured fair value using net asset value “nav” per share practical expedient categorized fair value hierarchy fair value amounts presented table provide reconciliation fair value hierarchy total value plan assets hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued table sets forth fair value plan assets asset category within fair value hierarchy october 31 2019 1investments publicly traded equity securities valued using closing price measurement date reported stock exchange individual securities traded 2the fair value corporate government assetbacked debt securities based observable inputs comparable market transactions also included category debt issued national state local governments agencies 3department labor 10312 ie investment entity designation plan assets held two unrelated employee benefit plans includes limited partnerships venture capital partnerships certain common collective trusts interests 10312 entities valued using nav practical expedient 4includes publicly traded funds investment companies registered sec funds publicly traded nonus fundoffund arrangement nonus fundoffund arrangement custom portfolio valued nav consisting primarily fixed income common contractual funds 5includes cash equivalents shortterm marketable securities cash equivalents include money market funds valued based nav assets classified fair value hierarchy based lowest level input eg quoted prices observable inputs significant fair value measure entirety 6includes primarily reverse repurchase agreements unsettled transactions derivative instruments 7these investments include alternative investments primarily consist private equities hedge funds valuation alternative investments limited partnerships joint ventures may require significant management judgment alternative investments valuation based nav reported asset manager investment company adjusted cash flows necessary making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager •private equities include limited partnerships equity buyout venture capital real estate similar funds invest united states internationally foreign currencies hedged •hedge funds include limited partnerships invest long short primarily common stocks credit relative value eventdriven equity distressed debt macro strategies management hedge funds ability shift investments value growth strategies small large capitalization stocks bonds net long position net short position addition investments include common contractual fund investment arrangement hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued institutional investors pool assets units may acquired different subfunds focused equities fixed income alternative investments emerging markets subfund invested accordance fund’s investment objective units issued relation subfund subfunds publicly traded custodian strikes nav either twice month depending subfund assets valued using nav practical expedient investments also include common collective trusts 10312 investment entities defined note 3 investment funds defined note 4 plan asset allocations refer fair value hierarchy table actual assets allocations across benefit plans weightedaverage target asset allocations across benefit plans represented fair value tables follows investment policy hp’s investment strategy seek competitive rate return relative appropriate level risk depending funded status plan timing expected benefit payments majority plans’ investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans’ investment managers authorized utilize derivatives investment liability exposures hp may utilize derivatives affect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan pension postretirement reflects riskreturn profile hp believes appropriate relative plan’s liability structure return goals hp conducts periodic assetliability studies us plans model various potential asset allocations comparison plan’s forecasted liabilities liquidity needs develop policy glide path adjusts asset allocation funded status 2021 assetliability study planned reconfirm current policy glide path us pension plan due strong funded status us pension plan high level liability hedging pension assets material changes anticipated additional movement fixedincome investments 401h account us pension plan hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities private equity funds provide diversification higher expected return assets outside united states asset allocation decisions typically made independent board trustees specific plan united states investment objectives designed generate returns enable plan meet future obligations countries local regulations may restrict asset allocations typically leading higher percentage investment fixedincome securities would otherwise deployed hp reviews investment strategy appropriate offer assistance selection investment managers final decisions asset allocation investment managers made board trustees specific plan basis expected longterm rate return plan assets expected longterm rate return plan assets reflects expected returns major asset class plan invests weight asset class target mix expected asset returns reflect current yield government bonds risk premiums asset class expected real returns considers country’s specific inflation outlook hp’s investment policy employ primarily active investment managers seek outperform broader market expected returns adjusted reflect expected additional returns net fees hp inc subsidiaries notes consolidated financial statements continued note 4 retirement postretirement benefit plans continued retirement incentive program part fiscal 2020 plan hp announced voluntary eer program us employees october 2019 voluntary participation eer program limited employees least 50 years old 20 years service hp employees accepted eer program left hp dates ranging december 31 2019 september 30 2020 eer benefit cash lump sum payment calculated based years service hp time retirement ranging 13 52 weeks pay employees participating eer program offered opportunity continue health care coverage active employee contribution rates 36 months following retirement addition hp provided 12000 employer credits retirement medical savings account “rmsa” program relation continued health care coverage employer credits rmsa program hp recognized special termination benefit costs 44 million restructuring charges twelve months ended october 31 2020 lump sum program hp offered lump sum program third quarter fiscal year 2020 certain terminated vested participants hp inc pension plan “pension plan” could elect take onetime voluntary lump sum payment equal present value future benefits approximately 12000 participants elected lump sum option payments 22 billion made plan assets participants fourth quarter fiscal year 2020 noncash settlement expense 214 million arising accelerated recognition previously deferred actuarial losses recorded fourth quarter fiscal year 2020 future contributions funding policy fiscal year 2021 hp expects contribute approximately 77 million nonus pension plans 34 million cover benefit payments us nonqualified plan participants 5 million cover benefit claims hp’s postretirement benefit plans hp’s policy fund pension plans makes least minimum contribution required local government funding taxing authorities estimated future benefits payments october 31 2020 hp estimates future benefits payments retirement postretirement plans follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation hp’s stockbased compensation plans include incentive compensation plans employee stock purchase plan stockbased compensation expense related income tax benefits operations stockbased compensation expense resulting tax benefits operations follows cash received option exercises purchases hp inc 2011 employee stock purchase plan “2011 espp” 56 million fiscal year 2020 59 million fiscal year 2019 158 million fiscal year 2018 benefit realized tax deduction option exercises fiscal years 2020 2019 2018 2 million 3 million 23 million respectively stockbased incentive compensation plans hp’s stockbased incentive compensation plans include equity plans adopted 2004 2000 amended restated “principal equity plans” well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased awards employees meeting certain employment qualifications eligible receive stockbased awards aggregate number shares hp’s stock authorized issuance 2004 principal equity plan 5931 million grants may made 2000 principal equity plan outstanding awards plan remain outstanding according terms plan restricted stock awards nonvested stock awards may include grants restricted stock restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior lapse restrictions awards generally vest one three years date grant vesting period ownership restricted stock cannot transferred restricted stock dividend voting rights common stock considered issued outstanding upon grant dividends paid restricted stock nonforfeitable restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding upon grant however shares underlying restricted stock units included calculation diluted net eps restricted stock units forfeitable dividend equivalent rights equal dividend paid common stock hp expenses fair value restricted stock awards ratably period restrictions lapse majority restricted stock units issued hp contain service vesting conditions hp also grants performanceadjusted restricted stock units vest satisfaction service achievement certain performance goals including market conditions prior expiration awards stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal closing price hp’s stock option grant date majority stock options issued hp contain service vesting conditions starting fiscal year 2011 fiscal year 2016 hp granted performancecontingent stock options vest satisfaction service market conditions prior expiration awards rsu stock option grants provide accelerated vesting certain circumstances defined plans related grant agreements including termination connection change control restricted stock units hp uses closing stock price grant date estimate fair value servicebased restricted stock units hp estimates fair value restricted stock units subject performanceadjusted vesting conditions using combination closing stock price grant date monte carlo simulation model assumptions used measure fair value restricted stock units subject performanceadjusted vesting conditions monte carlo simulation model follows hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued 1the expected volatility estimated using historical volatility derived hp’s common stock 2the riskfree interest rate estimated based yield us treasury zerocoupon issues 3the expected performance period estimated based length remaining performance period grant date summary restricted stock units activity follows total grant date fair value restricted stock units vested fiscal years 2020 2019 2018 297 million 273 million 224 million respectively october 31 2020 total unrecognized pretax stockbased compensation expense related nonvested restricted stock units 266 million expected recognized remaining weightedaverage vesting period 14 years stock options hp utilizes blackscholesmerton option pricing formula estimate fair value stock options subject servicebased vesting conditions hp estimates fair value stock options subject performancecontingent vesting conditions using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value assumptions used measure fair value follows 1the weightedaverage fair value based stock options granted period 2expected volatility estimated based blended volatility 50 historical volatility 50 implied volatility traded options hps common stock 3the riskfree interest rate estimated based yield us treasury zerocoupon issues 4the expected dividend yield represents constant dividend yield applied duration expected term award hp inc subsidiaries notes consolidated financial statements continued note 5 stockbased compensation continued 5for awards subject servicebased vesting expected term estimated using simplified method performancecontingent awards expected term represents output lattice model summary stock options activity follows aggregate intrinsic value table represents total pretax intrinsic value option holders would realized option holders exercised options last trading day fiscal years 2020 2019 2018 aggregate intrinsic value difference hp’s closing stock price last trading day fiscal year exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal years 2020 2019 2018 12 million 20 million 109 million respectively total grant date fair value options vested fiscal years 2020 2019 2018 3 million 9 million 12 million respectively october 31 2020 total unrecognized pretax stockbased compensation expense related stock options 7 million expected recognized weightedaverage vesting period 15 years employee stock purchase plan hp sponsors 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hp’s common stock pursuant terms 2011 espp employees purchase stock 2011 espp price equal 95 hp’s closing stock price purchase date stockbased compensation expense recorded connection purchases criteria noncompensatory plan met aggregate number shares hp’s stock authorized issuance 2011 espp 100 million 2021 espp comes effect may 1 2021 upon expiry 2011 espp 2021 espp terms similar current espp aggregate number shares hp’s stock authorized issuance 2021 espp 50 million shares reserved shares available future grant shares reserved future issuance stockbased incentive compensation plans 2011 espp follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings provision taxes domestic foreign components earnings taxes follows provision benefit taxes earnings follows result us tax reform hp revised estimated annual effective tax rate reflect change us federal statutory tax rate 35 transitional rate 233 fiscal year 2018 2019 2020 us federal statutory tax rate 21 differences us federal statutory income tax rate hp’s effective tax rate follows jurisdictions favorable tax rates significant effective tax rate impact periods presented include puerto rico singapore china malaysia hp elected treat global minimum tax inclusions period costs hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued fiscal year 2020 hp recorded 244 million net income tax benefits related discrete items provision taxes amount includes tax benefits related audit settlements 124 million various jurisdictions 82 million related restructuring benefits additionally hp recorded benefits 20 million related proxy contest costs 17 million net tax benefits fiscal year 2020 excess tax benefits associated stock options restricted stock units performanceadjusted restricted stock units immaterial fiscal year 2019 hp recorded 13 billion net income tax benefits related discrete items provision taxes amount includes tax benefits related audit settlements 10 billion 75 million due ability utilize tax attributes 57 million restructuring benefits net valuation allowance releases 94 million hp also recorded benefits 78 million related us tax reform result new guidance issued us internal revenue service “irs” benefits partially offset uncertain tax position charges 51 million fiscal year 2019 addition discrete items mentioned hp recorded excess tax benefits 20 million associated stock options restricted stock units performanceadjusted restricted stock units fiscal year 2018 hp recorded 28 billion net income tax benefits related discrete items provision taxes include impacts tcja hp yet completed analysis full impact tcja however october 31 2018 hp recorded provisional tax benefit 760 million related 56 billion net benefit decrease deferred tax liability unremitted foreign earnings partially offset 33 billion net expense deemed repatriation tax payable installments eight years 12 billion net expense remeasurement deferred assets liabilities new us statutory tax rate 317 million valuation allowance net expense related deferred tax assets expected realized lower rate hp also recorded tax benefits related audit settlements 15 billion valuation allowance releases 601 million pertaining change ability utilize certain foreign us deferred tax assets due change geographic earnings mix benefits partially offset net tax charges 34 million fiscal year 2018 addition discrete items mentioned hp recorded excess tax benefits 42 million associated stock options restricted stock units performanceadjusted restricted stock units result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2029 gross income tax benefits attributable actions investments estimated 344 million 024 diluted eps fiscal year 2020 386 million 025 diluted net eps fiscal year 2019 578 million 035 diluted net eps fiscal year 2018 uncertain tax positions reconciliation unrecognized tax benefits follows october 31 2020 amount unrecognized tax benefits 820 million 657 million would affect hp’s effective tax rate realized october 31 2019 amount unrecognized tax benefits 929 million 803 million would affect hp’s effective tax rate realized amount unrecognized tax benefits decreased 109 million primarily related resolution various audits hp recognizes interest income favorable settlements interest expense penalties accrued unrecognized tax benefits provision taxes consolidated hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued statements earnings october 31 2020 2019 2018 hp accrued 34 million 56 million 160 million respectively interest penalties hp engages continuous discussions negotiations taxing authorities regarding tax matters various jurisdictions hp expects complete resolution certain tax years various tax authorities within next 12 months hp believes reasonably possible existing gross unrecognized tax benefits may reduced 107 million within next 12 months affecting hp’s effective tax rate realized hp subject income tax united states approximately 60 countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits federal state foreign tax authorities irs conducting audit hp’s 2018 2019 income tax returns respect major state foreign tax jurisdictions hp longer subject tax authority examinations years prior 2002 material tax deficiencies assessed major state foreign tax jurisdictions related ongoing audits october 31 2020 us tax court ruled may 2012 hp related certain tax attributes claimed hp tax years 1999 2003 hp appealed us tax court determination filing formal notice appeal ninth circuit court appeals case argued ninth circuit november 2016 ninth circuit court appeals issued opinion november 2017 affirming tax court determinations fiscal year 2018 hp decided appeal hp believes provided adequate reserves tax deficiencies reductions tax benefits could result federal state foreign tax audits hp regularly assesses likely outcomes audits order determine appropriateness hp’s tax provision hp adjusts uncertain tax positions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular audit however income tax audits inherently unpredictable assurance hp accurately predict outcome audits amounts ultimately paid resolution audit could materially different amounts previously included provision taxes therefore resolution one uncertainties particular period could material impact net income cash flows hp provided us federal income foreign withholding taxes 57 billion undistributed earnings nonus operations october 31 2020 hp intends reinvest earnings indefinitely outside united states determination amount unrecognized deferred tax liability related earnings practicable tcja taxed hp’s historic earnings profits nonus subsidiaries hp remit taxed reinvested earnings deferred us federal withholding taxes provided excess cash accumulated hp determines advantageous business operations tax cash management reasons deferred income taxes significant components deferred tax assets deferred tax liabilities follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued deferred tax assets liabilities included consolidated balance sheets follows october 31 2020 hp recorded deferred tax assets net operating loss “nol” carryforwards follows hp inc subsidiaries notes consolidated financial statements continued note 6 taxes earnings continued october 31 2020 hp recorded deferred tax assets various tax credit carryforwards follows deferred tax asset valuation allowance deferred tax asset valuation allowance changes follows gross deferred tax assets october 31 2020 2019 2018 reduced valuation allowances 80 billion 79 billion 79 billion respectively fiscal year 2020 deferred tax asset valuation allowance increased 46 million primarily associated foreign net operating losses us deferred tax assets anticipated realized lower effective rate federal statutory tax rate due certain future us international tax reform implications fiscal year 2019 deferred tax asset valuation allowance increased 24 million primarily associated recognition income tax consequences intraentity transfers inventory increase partially offset impact tax rate changes foreign jurisdictions state valuation allowance releases fiscal year 2018 deferred tax asset valuation allowance decreased 901 million primarily associated foreign net operating losses us deferred tax assets anticipated realized lower effective rate federal statutory tax rate due certain future us international tax reform implications note 7 supplementary financial information accounts receivable net hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued allowance doubtful accounts related accounts receivable changes follows hp thirdparty arrangements consisting revolving shortterm financing provide liquidity certain partners facilitate working capital requirements financing arrangements certain circumstances may contain partial recourse result transfer hp’s receivables risk thirdparty transfers qualify true sales applicable accounting guidance receivables derecognized consolidated balance sheets upon transfer hp receives payment receivables thirdparty within mutually agreed upon time period arrangements involving element recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets recourse obligations october 31 2020 2019 material costs associated sales trade receivables fiscal year 2020 2019 2018 material following summary activity arrangements 1 amounts outstanding third parties reported accounts receivable consolidated balance sheets inventory hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued current assets 1see note 9 “fair value” note 10 “financial instruments” detailed information property plant equipment net depreciation expense 673 million 623 million 448 million fiscal years 2020 2019 2018 respectively noncurrent assets 1see note 6 “taxes earnings” detailed information 2see note 1 “summary significant accounting policies” note 17 “leases” detailed information 3see note 8 “goodwill intangible assets” detailed information 4includes marketable equity securities mutual funds classified availableforsale investments 58 million 56 million october 31 2020 2019 respectively see note 10 “financial instruments” detailed information hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued current liabilities 1see note 1 “summary significant accounting policies” note 17 “leases” detailed information noncurrent liabilities 1see note 1 “summary significant accounting policies” note 17 “leases” detailed information 2see note 6 “taxes earnings” detailed information interest net hp inc subsidiaries notes consolidated financial statements continued note 7 supplementary financial information continued 1fiscal year ended october 31 2019 2018 includes adjustment 764 million 676 million respectively indemnification receivables primarily related resolution various income tax audits settlements fiscal year ended october 31 2019 also includes adjustment 417 million pursuant termination tma hewlett packard enterprise net revenue region value remaining performance obligations october 31 2020 estimated value transaction price allocated remaining performance obligations 41 billion hp expects recognize approximately 18 billion unearned amount next 12 months 23 billion thereafter hp elected practical expedients accordingly disclose aggregate amount transaction price allocated remaining performance obligations •the contract original expected duration one year less •the revenue performance obligation recognized time asinvoiced basis amount corresponds directly value customer •the portion transaction price variable nature allocated entirely wholly unsatisfied performance obligation remaining performance obligations subject change may affected various factors termination contracts contract modifications adjustment currency costs obtaining contracts fulfillment cost october 31 2020 deferred contract fulfillment acquisition costs balances 65 million 34 million respectively included current assets noncurrent assets consolidated balance sheet fiscal year ended october 31 2020 company amortized 98 million costs october 31 2019 deferred contract fulfillment acquisition costs balances 47 million 30 million respectively included current assets noncurrent assets consolidated balance sheet twelve months ended october 31 2019 company amortized 108 million costs contract liabilities october 31 2020 2019 hp’s contract liabilities balances 22 billion 21 billion respectively included current liabilities noncurrent liabilities consolidated balance sheet increase contract liabilities balance fiscal year 2020 primarily driven sales fixedprice support maintenance services partially offset 11 billion revenue recognized included opening contract liabilities balance october 31 2019 october 31 2019 2018 hp’s contract liabilities balances 21 billion 19 billion respectively included current liabilities noncurrent liabilities consolidated balance sheet increase contract liabilities balance fiscal year 2019 primarily driven sales fixedprice support maintenance services partially offset 09 billion revenue recognized included opening contract liabilities balance october 31 2018 hp inc subsidiaries notes consolidated financial statements continued note 8 goodwill intangible assets goodwill allocated hp’s reportable segments changes carrying amount goodwill follows 1goodwill net accumulated impairment losses 08 billion related corporate investments goodwill tested impairment reporting unit level october 31 2020 reporting units consistent reportable segments identified note 2 “segment information” goodwill impairments fiscal years 2020 2019 2018 personal systems negative carrying amount net assets october 31 2020 2019 primarily result favorable cash conversion cycle intangible assets hp’s acquired intangible assets composed october 31 2020 estimated future amortization expense related intangible assets follows hp inc subsidiaries notes consolidated financial statements continued note 9 fair value fair value defined price would received sell asset paid transfer liability exit price orderly transaction market participants measurement date fair value hierarchy hp uses valuation techniques based upon observable unobservable inputs observable inputs developed using market data publicly available information reflect assumptions market participants would use unobservable inputs developed using best information available assumptions market participants would use assets liabilities classified fair value hierarchy based lowest level input significant fair value measurement level 1quoted prices unadjusted active markets identical assets liabilities level 2quoted prices similar assets liabilities active markets quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability marketcorroborated inputs level 3unobservable inputs asset liability fair value hierarchy gives highest priority observable inputs lowest priority unobservable inputs following table presents hp’s assets liabilities measured fair value recurring basis 1 government debt includes instruments us treasury notes us agency securities nonus government bonds money market funds invested government debt traded active markets included level 1 hp inc subsidiaries notes consolidated financial statements continued note 9 fair value continued valuation techniques cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents hp values cash equivalents equity investments using quoted market prices alternative pricing sources including net asset value models utilizing market observable inputs fair value debt investments based quoted market prices modeldriven valuations using inputs primarily derived corroborated observable market data certain instances valuation models utilize assumptions cannot corroborated observable market data derivative instruments time hp uses forward contracts interest rate total return swaps treasury rate locks times option contracts hedge certain foreign currency interest rate return certain investment exposures hp uses industry standard valuation models measure fair value applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves hp counterparty credit risk foreign exchange rates forward spot prices currencies interest rates see note 10 “financial instruments” discussion hp’s use derivative instruments fair value disclosures short longterm debt hp estimates fair value debt primarily using expected present value technique based observable market inputs using interest rates currently available companies similar credit standing similar terms remaining maturities considering credit risk portion hp’s debt hedged reflected consolidated balance sheets amount equal debt’s carrying amount fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates fair value hp’s short longterm debt 67 billion october 31 2020 compared carrying amount 62 billion date fair value hp’s short longterm debt 54 billion compared carrying value 51 billion october 31 2019 measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy financial instruments balance hp’s financial instruments primarily accounts receivable accounts payable financial liabilities included current liabilities consolidated balance sheets carrying amounts approximate fair value due short maturities measured fair value consolidated balance sheets financial instruments would classified level 2 level 3 fair value hierarchy nonmarketable equity investments nonfinancial assets hp’s nonmarketable equity investments measured cost less impairment adjusted observable price changes hp’s nonfinancial assets intangible assets goodwill property plant equipment recorded fair value period impairment charge recognized measured fair value consolidated balance sheets would generally classified within level 3 fair value hierarchy hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments cash equivalents availableforsale investments 1hp classifies marketable debt securities availableforsale investments within current assets consolidated balance sheets including maturity dates beyond one year based highly liquid nature availability use current operations highly liquid investments original maturities three months less date acquisition considered cash equivalents october 31 2020 2019 carrying amount cash equivalents approximated fair value due short period time maturity interest income related cash equivalents debt securities approximately 40 million fiscal year 2020 80 million fiscal year 2019 116 million fiscal year 2018 estimated fair value availableforsale investments may representative values realized future contractual maturities investments availableforsale debt securities follows nonmarketable equity investments privately held companies included noncurrent assets consolidated balance sheets amounted 44 million 46 million october 31 2020 2019 respectively derivative instruments hp uses derivatives offset business exposure foreign currency interest rate risk expected future cash flows certain existing assets liabilities part risk management strategy hp uses derivative instruments primarily forward contracts interest rate swaps total return swaps treasury rate locks times option contracts hedge certain foreign currency interest rate return certain investment exposures hp may designate derivative contracts fair value hedges cash flow hedges classifies cash flows activities correspond underlying hedged items additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivative instruments fair value consolidated balance sheets hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued result use derivative instruments hp exposed risk counterparties fail meet contractual obligations master netting agreements mitigate credit exposure counterparties permitting hp net amounts due hp counterparty amounts due hp counterparty certain conditions limit credit risk hp collateral security agreements allow hp’s custodian hold collateral require hp post collateral counterparties aggregate derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties hp’s counterparty’s credit rating falls specified credit rating either party right request full collateralization derivatives’ net liability position fair value derivatives credit contingent features net liability position 90 million 45 million october 31 2020 2019 respectively fully collateralized within two business days hp’s derivative contracts counterparty terminate outstanding trades following covered change control event affecting hp results surviving entity rated specified credit rating credit contingent provision affect hp’s financial position cash flows october 31 2020 2019 fair value hedges hp enters fair value hedges interest rate swaps reduce exposure debt portfolio changes fair value resulting changes benchmark interest rates hp’s future interest rate payments derivative instruments designated qualify fair value hedges hp recognizes change fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change fiscal year 2020 hp terminated interest rate swaps notional amount 05 billion dedesignated fair value hedges certain fixed rate debt securities extinguished hp also entered 06 billion notional amount interest rate swaps designated fair value hedges convert portion newly issued 115 billion fixedrate debt floating cash flow hedges hp uses forward contracts treasury rate locks times option contracts designated cash flow hedges protect foreign currency exchange interest rate risks inherent forecasted net revenue cost revenue operating expenses debt issuance hp’s foreign currency cash flow hedges mature predominantly within twelve months however hedges related longterm procurement arrangements extend several years derivative instruments designated qualify cash flow hedges hp initially records changes fair value derivative instrument accumulated comprehensive loss separate component stockholders’ deficit consolidated balance sheets subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports changes fair value derivative instrument financial statement line item changes fair value hedged item march 2020 hp entered series treasury rate lock agreements notional amounts totaling 750 million hedge exposure variability future cash flows resulting changes interest rate related anticipated issuance longterm debt agreements designated cash flow hedges settled upon issuance senior notes june 2020 resulting immaterial loss recognized comprehensive income loss reclassified interest net life related debt derivatives designated hedging instruments consist primarily forward contracts used hedge foreign currencydenominated balance sheet exposures hp uses total return swaps hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair value derivative instrument well offsetting change fair value hedged item interest net consolidated statements earnings period change hedge effectiveness interest rate swaps designated fair value hedges hp measures hedge effectiveness offsetting change fair value hedged item change fair value derivative foreign currency options forward contracts designated cash flow hedges hp measures hedge effectiveness comparing cumulative change fair value hedge contract cumulative change fair value hedged item based forward rates october 31 2020 2019 portion hedging instruments’ gain loss excluded assessment effectiveness fair value cash flow hedges hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued fair value derivative instruments consolidated balance sheets gross notional fair value derivative instruments consolidated balance sheets follows offsetting derivative instruments hp recognizes derivative instruments gross basis consolidated balance sheets hp offset fair value derivative instruments fair value cash collateral posted collateral security agreements october 31 2020 2019 information related potential effect hp’s master netting agreements collateral security agreements follows 1represents cash collateral posted counterparties respective reporting date hp’s asset position net derivative amounts could offset generally two business days prior respective reporting date hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued 2represents collateral posted hp reuse counterparty cash collateral respective reporting date hp’s liability position net derivative amounts could offset generally two business days prior respective reporting date effect derivative instruments consolidated statements earnings pretax effect derivative instruments related hedged items fair value hedging relationship follows pretax effect derivative instruments cash flow hedging relationships included accumulated comprehensive loss follows pretax effect derivative instruments cash flow hedging relationships included earnings follows october 31 2020 hp expects reclassify estimated accumulated comprehensive loss approximately 57 million net taxes earnings within next twelve months associated cash flow hedges along earnings effects related forecasted transactions amounts ultimately reclassified earnings could different amounts previously included accumulated comprehensive loss based change market rate therefore could different impact earnings hp inc subsidiaries notes consolidated financial statements continued note 10 financial instruments continued pretax effect derivative instruments designated hedging instruments recognized interest net consolidated statements earnings fiscal years 2020 2019 2018 follows hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings notes payable shortterm borrowings longterm debt 1hp may redeem fixedrate us dollar global notes time accordance terms thereof us dollar global notes senior unsecured debt june 2020 hp completed public offering 30 billion aggregate principal amount senior unsecured notes consisting 115 billion 22 notes due june 2025 10 billion 30 notes due june 2027 850 million 34 notes due june 2030 hp incurred 26 million towards issuance costs hp pay interest semiannually notes june 17 december 17 beginning december 17 2020 hp entered treasury rate lock agreements notional amounts totaling 750 million hedge exposure variability future cash flows resulting changes interest rates related forecasted issuance longterm debt agreements settled upon issuance senior notes june 2020 net proceeds offering used fund approximately 07 billion 09 billion cash tender offer “tender offer” redemption respectively certain existing notes described net proceeds offering excess amounts used repurchase notes used general corporate purposes disclosed note 10 “financial instruments” hp uses interest rate swaps mitigate exposure debt portfolio changes fair value resulting changes benchmark interest rates interest rates shown table longterm debt adjusted reflect impact interest rate swaps hp inc subsidiaries notes consolidated financial statements continued note 11 borrowings continued october 31 2020 aggregate future maturities debt face value excluding unamortized debt issuance cost 37 million discounts debt issuance 9 million less fair value adjustment related hedged debt 2 million including financing obligations follows extinguishment debt june 2020 hp commenced completed tender offer purchase approximately 07 billion aggregate principal amount outstanding us dollar 3750 global notes due december 12020 4300 global notes due june 1 2021 4375 global notes due september 15 2021 4650 global notes due december 9 2021 extinguishment debt resulted net loss 23 million recorded interest net consolidated statements earnings july 22 2020 hp redeemed remaining aggregate principal amounts 05 billion outstanding us dollar 3750 global notes due december 1 2020 04 billion outstanding us dollar 4300 global notes due june 1 2021 extinguishment debt resulted net loss 17 million recorded interest net consolidated statements earnings part transactions hp terminated settled interest rate swaps notional 05 billion dedesignated fair value hedges commercial paper october 31 2020 hp maintained two commercial paper programs hp’s us program provides issuance us dollardenominated commercial paper maximum aggregate principal amount 60 billion hp’s euro commercial paper program provides issuance commercial paper outside united states denominated us dollars euros british pounds maximum aggregate principal amount 60 billion equivalent alternative currencies combined aggregate principal amount commercial paper outstanding programs one time cannot exceed 60 billion authorized hp’s board directors credit facilities october 31 2020 hp maintained 40 billion senior unsecured committed revolving credit facility support issuance commercial paper general corporate purposes commitments revolving credit facility available march 30 2023 commitment fees interest rates terms borrowing credit facilities vary based hp’s external credit ratings may 29 2020 entered 364day revolving credit facility providing senior unsecured revolving credit facility aggregate lending commitments 10 billion commitments 364day revolving credit facility available may 28 2021 funds borrowed revolving credit facility may used general corporate purposes october 31 2020 hp compliance financial covenants credit agreements governing revolving credit facilities available borrowing resources october 31 2020 hp available borrowing resources 725 million uncommitted lines credit addition senior unsecured committed revolving credit facilities hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit share repurchase program hp’s share repurchase program authorizes open market private repurchase transactions fiscal year 2020 hp executed share repurchases 168 million shares settled total shares 31 billion fiscal year 2019 hp executed share repurchases 118 million shares settled total shares 24 billion fiscal year 2018 hp executed share repurchases 111 million shares settled total shares 26 billion share repurchases executed fiscal years 2020 2019 2018 included 23 million shares 09 million shares 10 million shares settled november 2020 november 2019 november 2018 respectively shares repurchased fiscal years 2020 2019 2018 open market repurchase transactions february 22 2020 hp’s board directors increased hp’s share repurchase authorization 150 billion total october 31 2020 hp approximately 127 billion remaining share repurchase authorizations approved hp’s board directors shareholder rights plan february 20 2020 hp’s board directors adopted shareholder rights plan declared dividend one preferred share purchase right outstanding share hp’s common stock shareholders record march 2 2020 dividend distribution made march 2 2020 rights set expire february 20 2021 unless terminated earlier hp’s board directors board directors terminated shareholder rights plan effective june 25 2020 time termination rights distributed holders hp’s common stock shareholder rights plan expired taxes related comprehensive loss income hp inc subsidiaries notes consolidated financial statements continued note 12 stockholders’ deficit continued changes reclassifications related comprehensive loss income net taxes 1these components included computation net pension postretirement benefit credit charges note 4 “retirement postretirement benefit plans” components accumulated comprehensive loss net taxes october 31 2020 changes fiscal year 2020 follows hp inc subsidiaries notes consolidated financial statements continued note 13 earnings per share hp calculates basic net eps using net earnings weightedaverage number shares outstanding reporting period diluted net eps includes dilutive effect restricted stock units stock options performancebased awards shares purchased 2011 employee stock purchase plan reconciliation number shares used basic diluted net eps calculations follows 1hp excludes calculation diluted net eps stock options restricted stock units assumed proceeds exceed average market price effect would antidilutive assumed proceeds stock option include sum exercise price average unrecognized compensation cost assumed proceeds restricted stock unit represent unrecognized compensation cost hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting ip commercial securities employment employee benefits environmental matters arise ordinary course business hp accrues liability management believes probable liability incurred amount loss reasonably estimated hp believes recorded adequate provisions matters october 31 2020 reasonably possible material loss incurred excess amounts recognized hp’s financial statements hp reviews matters least quarterly adjusts accruals reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case pursuant separation distribution agreement hp shares responsibility hewlett packard enterprise certain matters indicated hewlett packard enterprise agreed indemnify hp whole part respect certain matters based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hp’s potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period resolution one contingencies litigation proceedings investigations copyright levies proceedings ongoing concluded involving hp certain european countries including litigation belgium countries seeking impose modify levies upon equipment multifunction devices “mfds” pcs alleging devices enable production private copies copyrighted materials levies generally based upon number products sold perproduct amounts levies vary european countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes european countries phased levies expected limit scope levy schemes applicability digital hardware environment particularly respect sales business users hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders reprobel scrl “reprobel” collecting society administering remuneration reprography belgian copyright holders requested extrajudicial means hp amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel brussels court first instance belgium seeking declaratory judgment copyright levies payable sales mfds belgium alternatively payments already made hp sufficient comply obligations brussels court appeal “court appeal” stayed proceedings referred several questions court justice european union “cjeu” november 12 2015 cjeu published judgment providing national legislation belgian one issue main proceedings incompatible eu law multiple legal points argued hp returned proceedings referring court may 12 2017 court appeal held 1 reprographic copyright levies due notwithstanding lack conformity belgian system eu law certain aspects 2 applicable levies calculated based objective speed mfd established expert appointed court appeal hp appealed decision belgian supreme court january 18 2018 belgian supreme court rejected hp’s appeal september 24 2020 matter remitted court appeal expert give opinion objective speed amount compensation due based industry opposition extension levies digital products hp’s assessments merits various proceedings hp’s estimates number units impacted amounts levies hp accrued amounts believes adequate address ongoing disputes hewlettpackard company v oracle corporation june 15 2011 hp filed suit oracle corporation “oracle” california superior court santa clara county connection oracle’s march 2011 announcement discontinuing software support hp’s itaniumbased line missioncritical servers hp asserted among things oracle’s actions breached contract signed parties part settlement litigation relating oracle’s hiring mark hurd matter eventually progressed trial bifurcated two phases hp prevailed first phase trial court ruled contract issue required oracle continue offer software products hp’s itaniumbased servers long hp decided sell servers second phase trial postponed oracle’s appeal trial court’s denial oracle’s “antislapp” motion oracle argued hp’s hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued damages claim infringed oracle’s first amendment rights august 27 2015 california court appeals rejected oracle’s appeal matter remanded trial court second phase trial began may 23 2016 submitted jury june 29 2016 june 30 2016 jury returned verdict favor hp awarding hp approximately 30 billion damages included approximately 17 billion past lost profits 13 billion future lost profits october 20 2016 court entered judgment hp amount interest accruing judgment paid oracle’s motion new trial denied december 19 2016 oracle filed notice appeal trial court’s judgment january 17 2017 february 2 2017 hp filed notice crossappeal challenging trial court’s denial prejudgment interest case fully briefed awaiting court appeals schedule oral argument hp expects appeals process could take several years complete litigation unpredictable assurance hp recover damages award damages amount awarded jury’s verdict amount ultimately awarded would recorded period received adjustment recorded financial statements relation potential award pursuant terms separation distribution agreement hp hewlett packard enterprise share equally recovery oracle hewlett packard enterprise reimbursed costs incurred prosecution action prior separation forsyth et al v hp inc hewlett packard enterprise purported class collective action filed august 18 2016 united states district court northern district california hp hewlett packard enterprise alleging defendants violated federal age discrimination employment act “adea” california fair employment housing act california public policy california business professions code terminating older workers replacing younger workers operative complaint fourth amended complaint filed july 9 2020 thirtyfive named optin plaintiffs remain complaint plaintiffs seek represent 1 putative nationwide adea collective comprised individuals 40 years age older employment terminated pursuant wfr plan december 9 2014 april 8 2015 depending state law 2 putative rule 23 class california law comprised individuals 40 years age older employment terminated california pursuant wfr plan august 18 2012 excluded putative collective class employees signed waiver general release agreement termination b signed agreement arbitrate claims similar purported collective class proposed hewlett packard enterprise time periods start november 1 2015 plaintiffs seek monetary damages form back front pay benefits liquidated damages adea punitive damages state law claims award attorneys’ fees relief august 24 2020 defendants filed motion dismiss strike allegations operative complaint court denied october 15 2020 defendants filed answers october 29 2020 india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence “dri” issued show cause notices hewlettpackard india sales private limited “hp india” subsidiary hp seven hp india employees one former hp india employee alleging hp india underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp india deposited approximately 16 million dri agreed post provisional bond exchange dri’s agreement seize hp india products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order productsrelated show cause notice affirming certain duties penalties hp india named individuals approximately 386 million hp india already deposited 9 million december 11 2012 hp india voluntarily deposited additional 10 million connection productsrelated show cause notice differential duty demand subject interest april 20 2012 commissioner issued order partsrelated show cause notice affirming certain duties penalties hp india certain named individuals approximately 17 million hp india already deposited 7 million order hp india deposited additional 3 million connection partsrelated show cause notice avoid certain penalties hp india filed appeals commissioner’s orders customs excise service tax appellate tribunal “customs tribunal” along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal january 24 2013 customs tribunal ordered hp india deposit additional 24 million products order hp india deposited march 2013 customs tribunal order additional deposit made parts order december 2013 hp india filed applications customs tribunal seeking early hearing appeals well extension stay deposit hp india individuals already granted final disposition appeals hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued february 7 2014 application extension stay deposit granted customs tribunal disposal appeals october 27 2014 customs tribunal commenced hearings crossappeals commissioner’s orders customs tribunal rejected hp india’s request remand matter commissioner procedural grounds hearings scheduled reconvene april 6 2015 november 3 2015 april 11 2016 canceled request customs tribunal hearing merits appeal scheduled january 15 2019 cancelled pursuant separation distribution agreement hewlett packard enterprise agreed indemnify hp part based extent liability arises products spare parts hewlett packard enterprise’s businesses neodron patent litigation united states may 21 2019 neodron ltd “neodron” filed patent infringement lawsuit hewlett packard enterprise us district court western district texas day neodron filed companion complaint us international trade commission “itc” pursuant section 337 tariff act 1930 seven sets respondents including hewlett packard enterprise may 23 june 14 2019 neodron filed amended complaints itc western district texas respectively replace hewlett packard enterprise hp complaints alleged certain touchcontrolled devices infringe four patents owned neodron june 19 2019 itc instituted investigation itc proceeding neodron sought order enjoining hp importing selling importation selling importation certain touchcontrolled notebook computers tablets june 28 2019 neodron filed second lawsuit western district texas asserting four additional patents hp touchcontrolled devices neodron amended complaint second lawsuit assert total eight patents hp touchcontrolled devices neodron sought unspecified damages permanent injunction among remedies germany october 29 2019 neodron served hp claim patent infringement munich state court germany patent asserted german case related patent asserted itc initial hearing held july 29 2020 german court found infringement valid patent court may issued injunction part remedy settlement litigation july 31 2020 hp neodron entered agreement settle pending litigation worldwide basis pending legal actions one another dismissed slingshot printing llc litigation june 11 2019 slingshot printing llc “slingshot” filed three complaints us district court western district texas alleging hp infringes infringed sixteen patents september 20 2019 slingshot filed fourth complaint amended three earlier complaints alleging hp infringes infringed thirtytwo patents december 12 2019 slingshot voluntarily dismissed allegations one patent related patent january 23 2020 slingshot filed fifth complaint reasserting dismissed patent well related patent february 13 2020 slingshot voluntarily dismissed allegations another patent asserted third complaint march 25 2020 slingshot voluntarily dismissed allegations additional patent also asserted third complaint slingshot currently asserting total 31 patents accused products include inkjet printers cartridges printheads complaints seek monetary damages philips patent litigation september 17 2020 koninklijke philips nv philips north america llc collectively “philips” filed complaint hp patent infringement federal court district delaware september 18 2020 philips filed companion complaint us international trade commission “itc” pursuant section 337 tariff act 1930 hp 8 sets respondents district court complaint itc complaint allege certain digital videocapable devices components thereof infringe four philips owned patents october 16 2020 itc instituted investigation early stages itc’s final decision due february 22 2022 itc proceeding philips seeks order enjoining respondents importing selling importation certain digital videocapable devices components thereof including certain pcs display devices components thereof district court action philips seeks unspecified damages injunction hp among remedies caltech patent litigation november 11 2020 california institute technology “caltech” filed complaint hp patent infringement federal court western district texas complaint alleges infringement three caltech’s patents us patent nos 7116710 7421032 7916781 accused products hp commercial consumer pcs comply ieee 80211n 80211ac andor 80211ax standards caltech seeks unspecified damages relief hp inc securities litigation electrical workers pension fund local 103 ibew v hp inc et al february 19 2020 electrical workers pension fund local 103 ibew filed putative class action complaint hp dion weisler catherine lesjak steven fieler us district court northern district california may 20 hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued 2020 court appointed state rhode island office general treasurer behalf employees’ retirement system rhode island iron workers local 580 joint funds lead plaintiffs july 20 2020 lead plaintiffs filed amended complaint additionally names defendants enrique lores christoph schell amended complaint alleges among things february 23 2017 october 3 2019 hp named officers violated sections 10b 20a exchange act making false misleading statements hp’s printing supplies business including hp’s use fourbox model predict demand supplies alleges dion weisler enrique lores violated sections 10b 20a exchange act allegedly selling shares hp common stock period possession material nonpublic adverse information hp’s print business plaintiffs seek compensatory damages relief october 2 2020 hp named officers filed motion dismiss complaint failure state claim upon relief granted motion due fully briefed early 2021 york county behalf county york retirement fund v hp inc et al november 5 2020 york county behalf county york retirement fund filed putative class action complaint hp dion weisler catherine lesjak federal court northern district california complaint alleges among things november 6 2015 june 21 2016 hp named former officers violated sections 10b 20a exchange act concealing material information making false statements hp’s printing supplies business including information hp’s channel inventory management sales practices plaintiff seeks compensatory damages relief legal proceedings authentication supplies civil litigation government investigations pending united states italy israel netherlands involving supplies authentication protocols used certain hp printers protocols often referred dynamic security core allegations proceedings claim misleading inadequate consumer notifications permissions pertaining use dynamic security impact firmware updates potential inability cartridges clone chips circuitry work hp printers dynamic security 123inkt foundation litigation netherlands november 23 2016 foundation known stichting 123inkthuismerk klanten “foundation” filed complaint district court amsterdam hp nederland bv hp inc arising use dynamic security certain officejet printers digital revolution bv aka 123inkt established foundation pursue interests approximately 960 customers transferred claims complaint alleges 1 violation right ownership 2 destruction damage property 3 computer vandalism 4 unlawful act 5 noncompliance 6 unfair commercial practices 7 misleading commercial practices 8 misleading advertising complaint seeks injunctive relief prohibit use dynamic security damages attorneys’ fees december 27 2017 district court dismissed case awarded fees hp january 25 2018 foundation filed summons amsterdam court appeal december 17 2019 court appeal set aside judgment district court adopted new decision declaring hp provided inadequate partially incorrect information foundation members around september 13 2016 awarded damages amount later determined denied claims including injunctive relief holding use dynamic security inherently impermissible foundation lacks legal interest pursue action march 19 2020 foundation filed cassation writ summons supreme court netherlands hoge raad der nederlanden appealing decision court appeal may 29 2020 hp filed statement defense incidental appeal cassation supreme court appealing decision court appeal october 30 2020 parties filed opening briefs supreme court gensin v hp inc israel october 25 2017 purported consumer class action captioned gensin v hp inc filed district court jerusalem hp arising use dynamic security certain officejet printers petition motion certification class action alleges 1 tortious wrongdoing violation computers law 57551995 2 breach contracts law 57311970 3 breach consumer protection law 57411981 4 negligence 5 improper enrichment named petitioner initially sought represent nationwide classes comprised anyone “owns hp printer blocked disrupted interfered hp use ink cartridges manufactured hp” “purchased ink cartridges manufactured hp use blocked printers” plaintiff seeks class relief injunctive relief damages attorneys’ fees november 16 2017 second purported consumer class action filed hp central district court captioned dror v hp inc also arising use dynamic security certain officejet printers petition motion allege similar causes action behalf similar nationwide classes dror case consolidated gensin case jerusalem district court june 24 2018 dismissed dror case designated gensin lead matter march 9 2020 petitioner moved modify proposed nationwide class comprised “all persons hp printer whose printer blocked rendered unusable hp ink cartridge made hp” “all persons purchased ink cartridges made hp use blocked printers” july 2 2020 hp filed response amended petition hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued parziale v hp inc united states august 27 2019 purported consumer class action filed hp federal court northern district california arising use dynamic security certain officejet printers complaint alleges two causes action florida consumer protection statutes 1 violation florida deceptive unfair trade practices act fsa §§ 501201 et seq 2 violation florida misleading advertisement law fsa §§ 81741 et seq named plaintiff seeks represent nationwide class “all united states citizens applicable statute limitations present hp printer modified reject third party ink cartridges refilled hp ink cartridges” november 13 2019 plaintiff filed amended complaint adding three causes action case 1 violation computer fraud abuse act 18 usc § 1030 et seq 2 trespass chattels 3 tortious interference business relations plaintiff seeks class relief injunctive relief damages including punitive damages attorneys’ fees december 30 2019 hp moved dismiss plaintiff’s amended complaint april 24 2020 court granted part denied part hp’s motion dismiss court dismissed plaintiff’s causes action florida consumer protection statutes well tortious interference business relations claim four five claims computer fraud abuse act court denied hp’s motion dismiss remaining claims request injunctive relief granted plaintiff leave file amended complaint june 5 2020 plaintiff filed second amended complaint behalf nationwide class florida subclass alleging violation florida deceptive unfair trade practices act violation computer fraud abuse act trespass chattels plaintiff sought class relief injunctive relief damages including punitive damages attorneys’ fees september 29 2020 court granted hp’s motion dismiss dismissing case full prejudice plaintiff filed notice appeal opening brief due early 2021 consumer protection investigation italy september 26 2019 italian competition authority autorità garante della concorrenza e del mercato “agcm” served notice initiation proceedings hp concerning investigation alleged aggressive practices involving undue influence consumers alleged misleading actions omissions regarding restriction prevention use thirdparty ink cartridges hp printers accompanied request information hp submitted reply agcm’s request information november 15 2019 addressed subsequent requests information may 22 2020 agcm gave notice intended expand investigation certain alleged warranty practices regarding use thirdparty cartridges june 26 2020 hp submitted response warranty allegations december 7 2020 agcm notified hp agcm’s final decision finding hp engaged two unfair commercial practices follows information hp provided consumers limitations use certain thirdparty cartridges hp printers allegedly misleading pursuant articles 20 21 22 italian consumer code b alleged use data deny warranty coverage certain alleged data collection practices aggressive pursuant articles 20 24 25 italian consumer code final decision orders hp end allegedly unfair commercial practices ii fines hp €5 million alleged unfair practice total €10 million iii requires hp file compliance report within 60 days iv orders hp publicly publish corrective statement within 120 days v orders hp amend packaging printers within 120 days fines payable within 30 days hp 60 days appeal intends appeal digital revolution bv v hp nederland bv et al netherlands march 30 2020 digital revolution bv aka 123inkt served complaint filed amsterdam district court arising use dynamic security certain hp printers complaint alleges several causes action 1 abuse dominant position 2 misleading advertising 3 unfair misleading commercial practice 4 misleading comparative advertising complaint seeks injunctive relief including prohibition dynamic security disclosure cartridge authentication protocols damages attorneys’ fees parties’ initial appearance front court took place july 8 2020 september 9 2020 hp filed defense counterclaim unfair commercial practices misleading unlawful comparative advertising digital revolution bv sec investigation 2017 company received subpoena sec requesting documents regarding hp’s printing supplies business time period june 2016 primary focus apj region hp fully cooperated sec connection investigation september 30 2020 hp settled sec entered administrative resolution included findings sec hp violated sections 17a2 17a3 securities act 1933 section 13a securities exchange act 1934 rules thereunder failing disclose certain known trends uncertainties regarding supplies sales practices impact margin supplies channel inventory provided incomplete disclosures regarding supplies channel inventory sec filings related earnings calls november 2015 june 2016 sec order imposed civil penalty 6 million hp neither admitted denied sec’s findings hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice “doj” sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hp’s acquisition autonomy january 19 2015 uk serious fraud office notified hp closing investigation decided cede jurisdiction investigation us authorities november 14 2016 doj announced federal grand jury indicted sushovan hussain former cfo autonomy mr hussain charged conspiracy commit wire fraud securities fraud multiple counts wire fraud indictment alleged mr hussain engaged scheme defraud purchasers sellers securities autonomy hp true performance autonomy’s business financial condition prospects growth jury trial commenced february 26 2018 april 30 2018 jury found mr hussain guilty charges august 26 2020 us court appeals ninth circuit affirmed judgment conviction mr hussain november 15 2016 sec announced stouffer egan former ceo autonomy’s usbased operations settled charges relating participation accounting scheme meet internal sales targets analyst revenue expectations november 29 2018 doj announced federal grand jury indicted michael lynch former ceo autonomy stephen chamberlain former vp finance autonomy dr lynch mr chamberlain charged conspiracy commit wire fraud multiple counts wire fraud hp continuing cooperate ongoing enforcement actions autonomy corporation limited v michael lynch sushovan hussain april 17 2015 four former hp subsidiaries became subsidiaries hewlett packard enterprise time separation autonomy corporation limited hewlett packard vision bv autonomy systems limited autonomy inc initiated civil proceedings uk high court justice two members autonomy’s former management michael lynch sushovan hussain particulars claim seek damages excess 5 billion messrs lynch hussain breach fiduciary duties causing autonomy group companies engage improper transactions accounting practices october 1 2015 messrs lynch hussain filed defenses mr lynch also filed counterclaim autonomy corporation limited seeking 160 million damages among things alleged misstatements regarding lynch hewlett packard enterprise subsidiary claimants filed replies defenses asserted counterclaim march 11 2016 trial began march 25 2019 completed january 2020 parties awaiting ruling court environmental hp’s business subject various federal state local foreign laws regulations could result costs sanctions adversely affect business results operations example hp subject laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hp’s products recycling treatment disposal products including batteries particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products climate change laws regulations product repairability reuse takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hp’s potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims cleanup costs amount timing costs comply environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act “cercla” known “superfund” state laws similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies separation distribution agreement hp hewlett packard enterprise includes provisions provide allocation environmental liabilities including certain remediation obligations responsibilities arising chemical materials composition respective products safe use energy consumption obligations product take back legislation addresses collection recycling treatment disposal products environmental matters hp generally responsible environmental liabilities related properties assets including products allocated hp separation distribution agreement ancillary agreements hp inc subsidiaries notes consolidated financial statements continued note 14 litigation contingencies continued agreements hp indemnify hewlett packard enterprise liabilities specified ongoing remediation projects subject certain limitations hewlett packard enterprise payment obligation specified portion cost remediation projects addition hp share hewlett packard enterprise environmental liabilities set forth separation distribution agreement hp indemnified whole part hewlett packard enterprise liabilities arising assets assigned hewlett packard enterprise certain environmental matters detailed separation distribution agreement note 15 guarantees indemnifications warranties guarantees ordinary course business hp may issue performance guarantees certain clients customers parties pursuant hp guaranteed performance obligations third parties guarantees may backed standby letters credit surety bonds general hp would obligated perform term guarantee event specified triggering event occurs defined guarantee hp believes likelihood perform material guarantee remote crossindemnifications hewlett packard enterprise separation distribution agreement hp agreed indemnify hewlett packard enterprise subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hp part separation hewlett packard enterprise similarly agreed indemnify hp subsidiaries respective directors officers employees liabilities relating arising resulting among matters liabilities allocated hewlett packard enterprise part separation hp expects hewlett packard enterprise fully perform terms separation distribution agreement information crossindemnifications hewlett packard enterprise litigation matters see note 14 “litigation contingencies” connection separation hp entered tax matters agreement “tma” hewlett packard enterprise effective november 1 2015 tma provided hp hewlett packard enterprise share certain preseparation income tax liabilities tma terminated fourth quarter fiscal year 2019 indemnifications ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance hp also provides indemnifications certain vendors customers claims intellectual property infringement made third parties arising vendors’ customers’ use hp’s software products services certain matters indemnifications may subject maximum loss clauses historically payments made related indemnifications immaterial hp records tax indemnification receivables various third parties certain tax liabilities hp jointly severally liable indemnified third parties existing legal agreements hp records tax indemnification payable various third parties agreements management believes probable liability incurred amount reasonably estimated actual amount third parties pay may obligated pay hp could vary depending outcome certain unresolved tax matters may resolved several years warranties hp accrues estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however contractual warranty terms repair costs product call rates average cost per call current period product shipments ongoing product failure rates well specific product class failures outside hp’s baseline experience affect estimated warranty obligation hp’s aggregate product warranty liabilities changes follows hp inc subsidiaries notes consolidated financial statements continued note 15 guarantees indemnifications warranties continued note 16 commitments unconditional purchase obligations october 31 2020 hp unconditional purchase obligations 499 million unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations primarily related inventory service support unconditional purchase obligations exclude agreements cancelable without penalty october 31 2020 unconditional purchase obligations follows hp inc subsidiaries notes consolidated financial statements continued note 17 leases hp determines lease inception whether arrangement contains lease significant portion operating lease portfolio includes real estate leases additionally hp identified embedded operating leases within certain outsourced supply chain contracts leasing arrangements typically range terms 1 13 years varying renewal termination options substantially hp’s leases considered operating leases finance leases shortterm leases sublease income material october 31 2020 fiscal year ended october 31 2020 lease terms include options extend terminate lease reasonably certain hp exercise options hp generally considers economic life rou assets comparable useful life similar owned assets hp’s leases generally provide residual guarantee operating leases included noncurrent assets current liabilities noncurrent liabilities finance leases included property plant equipment net notes payable shortterm borrowings longterm debt consolidated balance sheets leases provide implicit interest rate hp uses incremental borrowing rate based information available commencement date lease determining present value lease payments incremental borrowing rate determined based rate interest hp would pay borrow amount equal lease payments collateralized basis similar term hp uses unsecured borrowing rate riskadjusts rate approximate collateralized rate hp elected practical expedient combine lease nonlease components single lease element real estate leases certain outsourced supply chain contracts calculating rou assets lease liabilities hp chooses combine lease nonlease components hp allocates contract consideration lease nonlease components based relative standalone prices hp reviews impairment rou assets consistent approach applied longlived assets components lease expense follows lease expenses including variable lease costs primarily included cost revenue selling general administrative expenses consolidated statements earnings based use facilities variable lease expense relates primarily leased real estate utilized office space outsourced warehousing costs primarily include adjustments inflation payments dependent rate index usage asset common area maintenance charges costs included lease liability recognized period incurred following table presents supplemental information relating cash flows arising lease transactions cash payments made variable lease costs shortterm leases included measurement operating lease liabilities excluded amounts 1 includes impact new leases well remeasurements modifications existing leases hp inc subsidiaries notes consolidated financial statements continued note 17 leases continued weightedaverage information associated measurement remaining operating lease liabilities follows following maturity analysis presents expected undiscounted cash outflows operating leases annual basis next five years following table included annual report form 10k fiscal year ended october 31 2019 depicts gross minimum rental commitments noncancelable leases real estate personal property leases sublease income commitments operating lease commitments october 31 2019 1 amounts represent operating lease obligations net total sublease income 130 million material operating leases hp entered yet commence october 31 2020 hp inc subsidiaries notes consolidated financial statements continued note 18 acquisitions fiscal year 2019 november 1 2018 hp completed acquisition apogee group acquisition furthers hp’s plan disrupt a3 copier market builds printing strategy enhance a3 a4 product portfolio build differentiated solutions tools expand mps invest direct indirect gotomarket capabilities apogee augments hp’s services portfolio contractual office printing mps solutions increasingly important smbs hp reports financial results business printing segment table presents purchase price allocation hp inc subsidiaries quarterly summary unaudited millions except per share amounts 1 net eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year hence sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2010 2009 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2010 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2010 2009 consolidated results operations cash flows three years period ended october 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements fiscal year 2010 hewlettpackard company subsidiaries changed method accounting business combinations adoption financial accounting standards board fasb accounting standards codification asc 805 business combinations method accounting noncontrolling interests adoption amendments fasb asc 810 consolidation effective november 1 2009 fiscal year 2009 hewlettpackard company subsidiaries changed method accounting revenue recognition adoption amendments fasb asc resulting accounting standards update 200913 multipledeliverable revenue arrangements accounting standards update 200914 certain revenue arrangements include software elements adopted effective november 1 2008 method accounting measurement date provisions defined benefit postretirement plans accordance guidance provided fasb statement 158 employers accounting defined benefit pension postretirement plansan amendment fasb 87 88 106 132r codified primarily fasb asc topic 715 compensationretirement benefits also audited accordance standards public company accounting oversight board united states hewlettpackard companys internal control financial reporting october 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 15 2010 expressed unqualified opinion thereon ernst young llp san jose california december 15 2010 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2010 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2010 2009 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2010 report dated december 15 2010 expressed unqualified opinion thereon ernst young llp san jose california december 15 2010 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2010 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment hps management determined hps internal control financial reporting effective october 31 2010 effectiveness hps internal control financial reporting october 31 2010 audited ernst young llp hps independent registered public accounting firm stated report appears page 71 annual report form 10k léo apotheker léo apotheker president chief executive officer december 15 2010 catherine lesjak catherine lesjak executive vice president chief financial officer december 15 2010 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets 1reflects adoption accounting standard related presentation noncontrolling interests consolidated financial statements accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions reclassifications segment reorganization hp made certain organizational realignments order optimize operating structure reclassifications prior year financial information made conform current year presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share see note 19 discussion hps segment reorganization use estimates preparation financial statements accordance us generally accepted accounting principles gaap requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition net revenue derived primarily sale products services following revenue recognition policies define manner hp accounts sales transactions hp recognizes revenue persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time sale channel partners economic substance apart hp completed obligations related sale hps current revenue recognition policies applied fiscal 2010 fiscal 2009 provide sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence vsoe available third party evidence tpe vsoe available estimated selling price esp neither vsoe tpe available multiple element arrangements morethanincidental software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using guidance recognizing software revenue amended hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp limits amount revenue recognition delivered elements amount contingent future delivery products services future performance obligations subject customerspecified return refund privileges hp evaluates deliverable arrangement determine whether represent separate units accounting deliverable constitutes separate unit accounting standalone value customernegotiated refund return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially hps control delivered element constitutes separate unit accounting instances aforementioned criteria met deliverable combined undelivered elements allocation arrangement consideration revenue recognition determined combined unit single unit allocation consideration determined arrangement inception basis units relative selling price hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles fiscal 2008 pursuant previous guidance revenue arrangements multiple deliverables prior adoption accounting standards update asu 200913 multiple deliverable revenue arrangements sales arrangement multiple elements hp allocated revenue element based relative fair value software based vsoe fair value absence fair value delivered element hp first allocated revenue fair value undelivered elements residual revenue delivered elements fair value undelivered element could determined hp deferred revenue delivered elements undelivered elements delivered fair value determinable remaining undelivered elements revenue delivered item recognized separable undelivered item hp also deferred cost delivered item hp limited amount revenue recognition delivered elements amount contingent future delivery products services future performance obligations subject customerspecified return refund privileges purposes income statement classification products services revenue hp could determine fair value elements arrangement transaction accounted single unit accounting hp allocated revenue products services based rational consistent methodology utilized external internal pricing inputs derive hps best estimate fair value elements arrangement instances revenue derived sales thirdparty vendor services revenue recorded gross hp principal transaction net costs hp acting agent customer vendor several factors considered determine whether hp agent principal notably whether hp primary obligor customer established pricing inventory credit risks hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp reports revenue net required taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority products hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue software accordance specific guidance recognizing software revenue applicable hp recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria met termbased software license revenue recognized subscription basis term license entitlement hp uses residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied revenue generated maintenance unspecified upgrades updates whenandifavailable basis recognized period items delivered services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract hp recognizes revenue certain design build design development andor construction software andor systems projects using percentageofcompletion method hp uses cost method measurement towards completion determined percentage cost incurred date total estimated costs project hp uses completed contract method reasonable reliable cost estimates project cannot made outsourcing services revenue generally recognized service provided amount earned contingent upon future event service provided evenly contract term service billings uneven revenue recognized straightline basis contract term hp recognizes revenue operating leases straightline basis service revenue rental period hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp recognizes costs associated outsourcing contracts incurred unless costs relate transition phase outsourcing contract case hp defers subsequently amortizes setup costs contractual services period deferred contract costs amortized straightline basis remaining original term unless billing patterns indicate accelerated method appropriate based actual projected contract financial performance indicators recoverability deferred contract costs associated particular contract analyzed periodic basis using undiscounted estimated cash flows whole contract remaining contract term undiscounted cash flows insufficient recover longlived assets deferred contract costs deferred contract costs written based discounted cash flow model cash flow deficiency remains reducing balance deferred contract costs zero remaining longlived assets related contract evaluated impairment hp recognizes losses consulting outsourcing arrangements period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term deferred revenue related deferred contract costs deferred revenue represents amounts received advance product support contracts software customer support contracts outsourcing startup services work consulting integration projects product sales leasing income product support contracts include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments hp defers service amounts time hp bills customer hp generally recognizes amounts ratably support contract life hp delivers services hp also defers subsequently amortizes certain costs related startup activities enable performance customers longterm services contract deferred contract costs including startup unbilled costs generally amortized straightline basis contract term unless specific customer contract terms conditions indicate accelerated method appropriate shipping handling hp includes costs related shipping handling cost sales periods presented advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 10 billion fiscal 2010 07 billion fiscal 2009 10 billion fiscal 2008 hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value hp recognizes compensation costs net estimated forfeiture rate recognizes compensation cost shares expected vest straightline basis requisite service period award generally vesting term sharebased payment awards hp estimated forfeiture rate based historical experience fiscal grant years majority vesting terms satisfied foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect new reporting period net revenue cost sales expenses related previously reported periods remeasured historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive income loss taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents original maturity investment ninety days less cash equivalents consist primarily highly liquid investments time deposits held major banks commercial paper october 31 2010 2009 carrying value cash equivalents approximates fair value due short period time maturity investments hps investments consist principally time deposits money market funds commercial paper corporate debt securities equity securities publiclytraded privatelyheld companies hp classifies investments debt securities equity investments public companies availableforsale securities carries fair value hp determines fair values investments public companies using quoted market prices records charge interest net change fair values determined otherthantemporary change hp carries equity investments privatelyheld companies cost fair value hp recognizes otherthantemporary impairment charge hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp monitors investment portfolio impairment periodic basis carrying value investment debt securities exceeds fair value decline value determined otherthantemporary decline hp intend sell debt securities likely hp required sell debt securities prior recovery amortized cost basis hp records impairment charge interest net amount credit loss balance comprehensive income loss concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers aggregated accounts deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances collectively concentrated primarily north america europe represented approximately 18 gross accounts receivable october 31 2010 22 october 31 2009 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances ensure receivable balance overstated due uncollectibility allowance doubtful accounts maintained required us gaap past due delinquency status receivable based contractual payment terms receivable need write receivable balance depends age size determination collectability receivable hp generally experienced longer accounts receivable collection cycles emerging markets particular asia pacific latin america compared markets united states europe event accounts receivable collection cycles emerging markets significantly deteriorate one hps larger resellers enterprise customers fails hps operating results could adversely affected concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins allowance doubtful accounts hp establishes allowance doubtful accounts ensure trade financing receivables overstated due uncollectability hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position circumstances related specific customer change hp would adjust estimates recoverability receivables inventory hp values inventory lower cost market cost computed firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolescence impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation computed using straightline accelerated methods estimated useful lives assets estimated useful lives 5 40 years buildings improvements 3 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value estimated useful lives assets used solely support customer services contract generally exceed term customer contract hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized internal use software costs using straightline method estimated useful lives software generally three five years software development costs incurred acquire develop software resale may capitalized subsequent software product establishing technological feasibility capitalized software development costs amortized using greater straightline amortization method ratio current gross revenues product bear total current anticipated future gross revenues product estimated useful lives capitalized software resale generally three years less software development costs incurred subsequent product establishing technological feasibility usually significant instances costs expensed incurred hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued business combinations hp adopted new accounting standard related business combinations hp included results operations businesses acquired fiscal 2010 hps consolidated results respective dates acquisition hp allocates purchase price acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd based estimated fair values excess purchase price fair values recorded goodwill iprd initially capitalized fair value intangible asset indefinite life assessed impairment thereafter iprd project complete reclassified amortizable purchased intangible asset amortized estimated useful life iprd project abandoned hp record charge value related intangible asset hps consolidated statement earnings period abandoned acquisitionrelated expenses restructuring costs recognized separately business combination expensed incurred goodwill purchased intangible assets goodwill purchased intangible assets indefinite useful lives amortized tested impairment least annually hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value general hps reporting units consistent reportable segments identified note 19 however certain businesses within corporate investments segment reporting unit one step segment level hp determines fair value reporting units based weighting income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference hp estimates fair value indefinitelived purchased intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years longlived asset impairment hp evaluates property plant equipment purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable hp assesses recoverability assets based undiscounted future cash flow recognizes impairment loss estimated undiscounted future cash flow expected hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values fair value financial instruments hp measures certain financial assets liabilities fair value based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants financial instruments primarily comprised time deposits money market funds commercial paper corporate debt securities equity securities investments common stock common stock equivalents derivatives see note 9 discussion fair value financial instruments derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 10 full description hps derivative financial instrument activities related accounting policies retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans addition hp assumed additional retirement postretirement plans connection acquisition electronic data systems corporation eds august 2008 hp generally amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date hp plans october 31 fiscal 2010 fiscal 2009 see note 10 full description plans accounting funding policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records provision liability believes probable liability incurred amount reasonably estimated significant judgment required determine probability estimated amount hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel updated information litigation inherently unpredictable subject significant uncertainties beyond hps control hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued accounting pronouncements december 2007 fasb issued new accounting standard related noncontrolling interests standard establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interests changes parents ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated standard also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners january 2010 fasb issued accounting standards update 201002 consolidation accounting reporting decreases ownership subsidiarya scope clarification update clarifies scope decrease ownership provisions also requires expanded disclosures hp adopted standards first quarter fiscal 2010 retrospective application presentation disclosure requirements noncontrolling interests 247 million october 31 2009 reclassified liabilities stockholders equity consolidated condensed balance sheet october 31 2009 elimination income attributable noncontrolling interests recorded interest net material fiscal years 2010 2009 2008 disclosed consolidated statements stockholders equity note 2 stockbased compensation hps stockbased compensation plans include incentive compensation plans employee stock purchase plan espp stockbased compensation expense related income tax benefits total stockbased compensation expense income taxes fiscal 2010 2009 2008 668 million 635 million 606 million respectively resulting income tax benefit fiscal 2010 2009 2008 216 million 199 million 178 million respectively cash received option exercises purchases espp 26 billion fiscal 2010 18 billion fiscal 2009 2008 actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2010 2009 2008 414 million 252 million 412 million respectively incentive compensation plans hps incentive compensation plans include principal equity plans adopted 2004 amended 2010 2000 1995 1990 principal equity plans well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include performancebased restricted units prus stock options restricted stock awards employees meeting certain employment qualifications eligible receive stockbased awards fiscal 2008 hp implemented program provides issuance prus representing hypothetical shares hp common stock pru awards may granted eligible employees including hps principal executive officer principal financial officer executive officers pru award reflects target number shares target shares may issued award recipient hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued adjusting performance market conditions actual number shares recipient receives determined end threeyear performance period based results achieved versus company performance goals based hps annual cash flow operations percentage revenue total shareholder return tsr relative sp 500 threeyear performance period depending results achieved threeyear performance period actual number shares grant recipient receives end period may range 0 200 target shares granted based calculations described cash flow performance goals established beginning year end year portion target shares may credited award recipients name depending achievement cash flow performance goal year number shares credited varies 0 performance minimum level 150 performance maximum level performance minimum level maximum level proportionate percentage 30 150 applied based relative performance minimum maximum levels following expiration threeyear performance period number shares credited award recipient performance period adjusted tsr modifier tsr modifier varies 0 minimum level met resulting payout pru award 133 performance maximum level performance minimum level maximum level proportionate tsr modifier 66 133 applied based relative performance minimum maximum levels number shares received pru award recipient equals number shares credited award recipient performance period multiplied tsr modifier recipients pru awards generally must remain employed hp continuous basis end applicable threeyear performance period order receive portion shares subject award target shares subject pru awards dividend equivalent rights voting rights common stock earned issued following end applicable performance period expense awards net estimated forfeitures recorded requisite service period based number target shares expected earned achievement cash flow goals performance period stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest four years date grant exercise price stock option equal fair market value hps common stock option grant date determined reported sale prices hps common stock market closes date contractual term options granted since fiscal 2003 generally eight years contractual term options granted prior fiscal 2003 generally ten years prior march 2010 hp could choose certain cases establish discounted exercise price less 75 fair market value grant date hp granted discounted options since fiscal 2003 principal equity plans hp granted certain employees cashsettled awards restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units cashsettled awards restricted stock awards independent option grants generally subject forfeiture employment terminates prior hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued release restrictions awards generally vest one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding however shares underlying restricted stock units included calculation diluted earnings per share eps hp expenses fair market value restricted stock awards determined date grant ratably period restrictions lapse performancebased restricted units hp estimates fair value target pru share using monte carlo simulation model tsr modifier contains market condition following weightedaverage assumptions used determine weightedaverage fair values pru awards fiscal years ended october 31 1reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2008 second year threeyear performance period applicable prus granted fiscal 2009 first year threeyear performance period applicable prus granted fiscal 2010 estimated fair value target share third year prus granted fiscal 2009 second third years prus granted fiscal 2010 determined measurement date applicable prus date annual cash flow goals approved prus expense amortized remainder applicable threeyear performance period 2reflects weightedaverage fair value second year threeyear performance period applicable prus granted fiscal 2008 first year threeyear performance period applicable prus granted fiscal 2009 3reflects weightedaverage fair value first year threeyear performance period applicable prus granted fiscal 2008 4hp uses historic volatility pru awards implied volatility cannot used simulating multivariate prices companies sp 500 hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued nonvested prus october 31 2010 2009 changes fiscal 2010 2009 follows 1vested shares issued award recipients november 2010 2excludes target shares third year prus granted fiscal 2009 second third years prus granted fiscal 2010 measurement date yet established measurement date related fair value excluded prus established annual cash flow goals approved 3excludes target shares third year prus granted fiscal 2008 second third years prus granted fiscal 2009 measurement date yet established measurement date related fair value excluded prus established annual cash flow goals approved october 31 2010 222 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expects recognize remaining weightedaverage vesting period 12 years october 31 2009 193 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expected recognize remaining weightedaverage vesting period 15 years stock options hp utilized blackscholes option pricing model value stock options granted principal equity plans hp examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis hp identified three employee populations apply blackscholes model table presents weightedaverage expected life months combined three identified employee populations expected life computation based historical exercise patterns postvesting termination behavior within three populations identified riskfree interest rate periods within contractual life award based us treasury yield curve effect time grant hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued weightedaverage fair value stock options estimated using blackscholes option pricing model following weightedaverage assumptions 1the fair value calculation based stock options granted period option activity october 31 fiscal year follows fiscal 2010 stock options purchase approximately 10 million shares weightedaverage exercise price 19 per share assumed acquisitions aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options october 31 2010 2009 aggregate intrinsic value difference hps closing stock price last trading day fiscal 2010 fiscal 2009 exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal 2010 2009 2008 13 billion 08 billion 11 billion respectively total grant date fair value options vested expensed fiscal 2010 2009 2008 93 million 172 million 264 million respectively net taxes hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued information options outstanding october 31 2010 follows october 31 2010 280 million unrecognized pretax stockbased compensation expense related stock options hp expects recognize weightedaverage vesting period 16 years october 31 2009 188 million unrecognized pretax stockbased compensation expense related stock options hp expected recognize remaining weightedaverage vesting period 11 years restricted stock awards nonvested restricted stock awards october 31 2010 2009 changes fiscal 2010 2009 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued details restricted stock awards granted assumed acquisitions follows fiscal 2010 approximately 3 million restricted stock units weightedaverage grant date fair value 48 per share assumed acquisitions details nonvested restricted stock awards fiscal year end follows october 31 2010 152 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expects recognize remaining weightedaverage vesting period 15 years october 31 2009 117 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expected recognize remaining weightedaverage vesting period 16 years employee stock purchase plan hp sponsors hewlettpackard company 2000 employee stock purchase plan espp also known share ownership plan pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock espp expired november 2010 purchases made april 30 2009 employees purchased stock pursuant espp semiannually price equal 85 fair market value purchase date hp recognized expense based 15 discount fair market value purchases effective may 1 2009 hp modified espp eliminate 15 discount applicable purchases made espp hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued espp activity october 31 fiscal year follows shares reserved shares available future grant shares reserved future issuance espp incentive compensation plans follows 1includes 30 million 24 million shares expired november 2010 november 2009 respectively 2in november 2009 hp retired assumed compaq eds plans purposes granting new awards shares reserved future awards plans returned hps pool authorized shares available issuance hp plans hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 net earnings per share hp calculates basic earnings per share using net earnings weightedaverage number shares outstanding reporting period diluted eps includes dilutive effect outstanding stock options prus restricted stock units restricted stock convertible debt reconciliation numerators denominators basic diluted eps calculations follows following fiscal years ended october 31 1net earnings available participating securities significant fiscal years 2010 2009 2008 hp considers restricted stock provides holder nonforfeitable right receive dividends participating security hp excludes options exercise prices greater average market price calculation diluted eps effect would antidilutive fiscal years 2010 2009 2008 hp excluded calculation diluted eps options purchase 5 million shares 85 million shares 54 million shares respectively hp also excluded calculation diluted eps options purchase additional 2 million shares 2 million shares 28 million shares fiscal years 2010 2009 2008 respectively whose combined exercise price unamortized fair value excess tax benefits greater periods average market price hps common stock effect would antidilutive october november 1997 hp issued us dollar zerocoupon subordinated convertible notes due 2017 lyons outstanding principal amount redeemed march 2008 lyons convertible option holders time prior maturity unless previously redeemed otherwise purchased purposes calculating diluted earnings per share interest expense net tax associated lyons added back net earnings shares issuable upon conversion lyons included weightedaverage shares used compute diluted earnings per share periods lyons outstanding hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables hp revolving trade receivables based facilities permitting sell certain trade receivables third parties nonrecourse basis aggregate maximum capacity programs 524 million october 31 2010 hp sold 1753 million trade receivables fiscal 2010 october 31 2010 hp 175 million available programs inventory current assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued property plant equipment depreciation expense approximately 33 billion fiscal 2010 32 billion fiscal 2009 24 billion fiscal 2008 subsequent event november 16 2010 hp sold land buildings approximately 415 million realizing gain approximately 280 million sale part companys multiyear program consolidate real estate locations worldwide reduce real estate costs longterm financing receivables assets accrued liabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued liabilities note 5 supplemental cash flow information supplemental cash flow information consolidated statements cash flows follows following fiscal years ended october 31 note 6 acquisitions fiscal 2010 fiscal 2010 hp completed eleven acquisitions purchase price allocation acquisitions set forth table reflects various preliminary fair value estimates analyses including preliminary work performed thirdparty valuation specialists subject change within measurement period valuations finalized primary areas preliminary purchase price allocations yet finalized relate fair values certain tangible assets liabilities acquired valuation intangible assets acquired certain legal matters income nonincome based taxes residual goodwill expect continue obtain information assist us determining fair value net assets acquired acquisition date measurement period measurement period adjustments hp determines material applied retrospectively period acquisition hps consolidated financial statements depending nature adjustments periods subsequent period acquisition could also affected pro forma results operations acquisitions presented material hps consolidated results operations either individually aggregate goodwill represents excess purchase price net tangible intangible assets acquired deductible tax purposes hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued following table presents aggregate purchase price allocation including items still preliminary allocations hps acquisitions fiscal 2010 largest acquisitions completed fiscal 2010 follows acquisition 3com corporation 3com april 12 2010 hp completed acquisition 3com global enterprise provider networking switching routing security solutions price 790 per share cash hp reports financial results 3com business corporate investments segment aggregate purchase price 33 billion consisted cash paid outstanding common stock vested inthemoney stock awards estimated fair value earned unvested stock awards assumed hp connection acquisition hp recorded approximately 13 billion goodwill amortizable purchased intangible assets 987 million iprd assets 106 million hp amortizing purchased intangible assets straightline basis estimated weightedaverage life 51 years acquisition palm inc palm july 1 2010 hp completed acquisition palm provider smartphones powered palm webos mobile operating system hp reports financial results palm business corporate investments segment aggregate purchase price 18 billion included cash paid common stock vestedinthemoney stock awards estimated fair value earned unvested stock awards assumed well certain debt repaid acquisition date connection acquisition hp recorded approximately 879 million goodwill amortizable purchased intangible assets 344 million iprd assets 80 million hp amortizing purchased intangible assets straightline basis estimated weightedaverage life 62 years acquisition 3par inc 3par september 27 2010 hp completed acquisition 3par provider utility storage hp reports financial results 3par business enterprise storage servers ess segment aggregate purchase price 23 billion included cash paid common stock vestedinthemoney stock awards estimated fair value earned unvested stock awards assumed acquisition date connection acquisition hp recorded approximately 16 billion goodwill amortizable purchased intangible assets 569 million iprd assets 101 million hp amortizing purchased intangible assets straightline basis estimated weightedaverage life 60 years hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued acquisition arcsight inc arcsight october 22 2010 hp completed acquisition arcsight security compliance management company hp reports financial results arcsight business hp software segment aggregate purchase price 17 billion included cash paid common stock vestedinthemoney stock awards estimated fair value earned unvested stock awards assumed acquisition date connection acquisition hp recorded approximately 12 billion goodwill amortizable purchased intangible assets 393 million iprd assets 41 million hp amortizing purchased intangible assets straightline basis estimated weightedaverage life 68 years acquisitions prior years fiscal 2009 hp completed two acquisitions total consideration acquisitions 390 million includes direct transaction costs assumption certain liabilities connection transactions largest two acquisitions acquisition lefthand networks inc leading provider storage virtualization solutions integrated ess purchase price 347 million fiscal 2009 hp recorded 315 million goodwill 105 million purchased intangibles 7 million iprd related transactions fiscal 2008 hp completed nine acquisitions minority interest purchase total consideration 146 billion largest acquisition eds purchase price 130 billion purchase price comprised 127 billion cash paid outstanding common stock 328 million fair value stock options restricted stock units assumed 36 million direct transaction costs total purchase price 104 billion allocated goodwill 46 billion allocated amortizable intangible assets acquired 20 billion allocated net tangible liabilities assumed connection acquisition hp also expensed 30 million iprd charges hp included results eds consolidated results operations starting august 26 2008 closing date acquisition pro forma results eds acquisition following table presents unaudited pro forma results year ended october 31 2008 unaudited pro forma financial information year ended october 31 2008 combines results operations hp eds though companies combined beginning fiscal 2008 pro forma financial information presented informational purposes indicative results operations would achieved acquisition related borrowings taken place beginning fiscal 2008 unaudited pro forma results presented include amortization charges acquired intangible assets eliminations intercompany transactions restructuring charges iprd charges adjustments incremental stockbased compensation expense related unearned portion eds stock options restricted stock units assumed adjustments hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued depreciation expense property plant equipment adjustments interest expense related tax effects note 7 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2010 2009 changes carrying amount goodwill fiscal year ended october 31 2010 2009 follows fiscal 2010 hp recorded approximately 52 billion goodwill related acquisitions based preliminary purchase price allocations addition hp recorded goodwill adjustments primarily related increase deferred tax liability outside basis differences eds foreign subsidiaries acquisition hp also recorded increase goodwill result currency translation related 3coms subsidiary whose functional currency us dollar increases goodwill partially offset tax adjustments primarily related tax deductible stockbased awards certain acquisitions acquisition date preceded effective date new accounting standard business combinations fiscal 2009 hp recorded adjustments approximately 306 million estimated fair values edss intangible assets net liabilities acquired resulting increase edss goodwill allocated services segment changes estimated fair values relate primarily restructuring liabilities fixed assets net deferred tax liabilities intangible assets addition hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued goodwill increased approximately 255 million result currency translation related certain edss foreign subsidiaries whose functional currency us dollar increases goodwill partially offset tax adjustments various previous acquisitions based results annual impairment tests hp determined impairment goodwill existed august 1 2010 august 1 2009 however future goodwill impairment tests could result charge earnings hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed fiscal 2010 hp recorded approximately 27 billion purchased intangible assets iprd related acquisitions based preliminary purchase price allocations fiscal 2009 hp recorded increase 83 million purchased intangibles result currency translation related certain edss foreign subsidiaries whose functional currency us dollar hp also recorded increase 21 million estimated fair value edss intangible assets acquired based results annual impairment tests hp determined impairment indefinitelived compaq trade name existed august 1 2010 august 1 2009 however future impairment tests could result charge earnings hp continue evaluate compaq trade name annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may indicator potential impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weightedaverage useful lives 8 years developed core technology patents product trademarks weightedaverage useful lives 5 years hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued estimated future amortization expense related finitelived purchased intangible assets october 31 2010 follows note 8 restructuring charges hp records restructuring charges associated management approved restructuring plans either reorganize one hps business segments remove duplicative headcount infrastructure associated one business acquisitions restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation cost restructuring charges recorded based upon planned employee termination dates site closure consolidation plans timing associated cash payments dependent upon type restructuring charge extend multiyear period hp records shortterm portion restructuring liability accrued restructuring longterm portion liabilities consolidated balance sheets fiscal 2010 acquisitions july 1 2010 hp completed acquisition palm connection acquisition hps management approved initiated plan restructure operations palm including severance palm employees contract cancellation costs items total expected cost plan 46 million fiscal 2010 hp recorded restructuring charges approximately 46 million restructuring charges anticipated subject changes palm integration plan majority costs expected paid second quarter fiscal 2011 april 12 2010 hp completed acquisition 3com connection acquisition hps management approved initiated plan restructure operation 3com including severance costs vacate duplicative facilities total expected cost plan 42 million fiscal 2010 hp recorded restructuring charges approximately 18 million hp expects record majority cost restructuring plan second quarter fiscal 2011 based upon timing planned terminations facility closure dates costs expected paid fiscal 2016 fiscal 2010 es restructuring plan june 1 2010 hps management announced plan restructure enterprise services business includes infrastructure technology outsourcing business process outsourcing application services business units multiyear restructuring program includes plans consolidate commercial data centers tools applications total expected cost plan hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued recorded restructuring charges approximately 10 billion including severance costs eliminate approximately 9000 positions infrastructure charges fiscal 2010 restructuring charge 650 million recorded primarily related severance costs hp expects record majority remaining severance costs second quarter fiscal 2011 majority infrastructure charges fiscal 2012 timing charges based upon planned termination dates site closure consolidation plans majority associated cash payments expected paid fourth quarter fiscal 2012 october 31 2010 approximately 2100 positions eliminated fiscal 2009 restructuring plan may 2009 hps management approved initiated restructuring plan structurally change improve effectiveness imaging printing group ipg personal systems group psg enterprise storage servers ess businesses total expected cost plan 292 million severancerelated costs associated planned elimination approximately 5000 positions october 31 2010 approximately 4200 positions eliminated hp expects remaining positions eliminated majority restructuring costs paid first quarter fiscal 2011 fiscal 2008 hpeds restructuring plan connection acquisition eds august 26 2008 hps management approved initiated restructuring plan combine align hps services businesses eliminate duplicative overhead functions consolidate vacate duplicative facilities restructuring plan expected implemented four years acquisition date total expected cost 34 billion restructuring plan includes severance cost eliminate approximately 25000 positions october 31 2010 vast majority positions eliminated associated severance costs paid infrastructure charges restructuring plan include facility closure consolidation costs associated early termination certain contractual obligations hp expects record majority costs fiscal 2011 based upon execution site closure consolidation plans associated cash payments expected paid fiscal 2016 approximately 15 billion expected costs associated preacquisition eds reflected purchase price eds costs subject change based actual costs incurred remaining costs primarily associated hp recorded restructuring charge hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued summary restructuring plans adjustments accrued restructuring expenses related hps restructuring plans described twelve months ended october 31 2010 follows fiscal 2010 hp completed payouts restructuring liabilities associated previous restructuring actions recorded restructuring charge fiscal 2010 6 million associated actions october 31 2009 hp 51 million restructuring liabilities associated actions october 31 2010 october 31 2009 hp included longterm portion restructuring liability 297 million 356 million respectively liabilities shortterm portion accrued restructuring accompanying consolidated balance sheets note 9 fair value hp adopted provisions related fair value nonfinancial assets nonfinancial liabilities first quarter fiscal 2010 following major categories nonfinancial items consolidated balance sheet property plant equipment goodwill purchased intangible assets accrued restructuring asset retirement obligations within accrued liabilities provisions accounting standard related measuring fair value related disclosures applied nonfinancial assets nonfinancial liabilities whenever required measured fair value accounting business combination evaluating andor determining impairment accordance certain accounting pronouncements except assets liabilities acquired business combinations discussed note 6 hp measure material nonfinancial assets nonfinancial liabilities fair value nonrecurring basis fiscal 2010 except provisions noted accounting standard relating fair value measurements disclosures became effective hp beginning fiscal 2009 standard establishes new framework measuring fair value expands related disclosures framework requires fair value determined based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued valuation techniques used hp based upon observable unobservable inputs observable market inputs reflect market data obtained independent sources unobservable inputs reflect hps assumptions market participant assumptions based best information available observable inputs preferred source values two types inputs create following fair value hierarchy level 1quoted prices unadjusted identical instruments active markets level 2quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market corroborated observable market data substantially full term assets liabilities level 3prices valuations require management inputs significant fair value measurement unobservable following section describes valuation methodologies hp uses measure financial assets liabilities fair value cash equivalents investments hp holds time deposits money market funds commercial paper debt securities primarily consisting corporate foreign government notes bonds common stock equivalents applicable hp uses quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value hp uses quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available hp uses internally developed valuation models whose inputs include bid prices thirdparty valuations utilizing underlying assets assumptions derivative instruments discussed note 10 hp mainly holds nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures active market quotes available hp uses industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases hp uses management judgment develop assumptions used determine fair value hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued following table presents hps assets liabilities measured fair value recurring basis following table presents changes level 3 instruments fiscal years 2010 2009 measured fair value recurring basis majority level 3 balances consist hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued investment securities classified availableforsale changes fair value recorded comprehensive income oci 1included interest net accompanying consolidated statements earnings 1included interest net accompanying consolidated statements earnings hp measures certain assets including cost equity method investments fair value nonrecurring basis assets recognized fair value deemed otherthantemporarily impaired fiscal years 2010 2009 hp recorded impairment charge 5 million 22 million respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments cash equivalents availableforsale investments cash equivalents availableforsale investments fair value october 31 2010 october 31 2009 follows cash equivalents consist investments time deposits commercial paper money market funds original maturities ninety days less interest income related cash equivalents approximately 111 million fiscal 2010 119 million fiscal 2009 401 million fiscal 2008 time deposits primarily issued institutions outside us october 31 2010 october 31 2009 availableforsale securities consist shortterm investments mature within twelve months less longterm investments maturities longer twelve months investments include primarily time deposits fixedinterest securities institutional bonds hp estimates fair values investments based quoted market prices pricing models using current market rates estimated fair values may representative actual values realized future gross unrealized loss october 31 2010 due primarily declines fair value certain debt securities included 28 million continuous loss position twelve months gross unrealized loss october 31 2009 due primarily declines fair value certain debt securities included 20 million continuous loss hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued position twelve months hp intend sell debt securities likely hp required sell debt securities prior recovery amortized cost hp determined declines value certain investments otherthantemporary declines accordingly hp recorded impairments relating credit losses approximately 12 million fiscal 2010 24 million fiscal 2009 27 million fiscal 2008 hp includes impairments interest net consolidated statements earnings depending market conditions hp may record additional impairments respect investment portfolio future contractual maturities shortterm longterm investments availableforsale debt securities october 31 2010 follows proceeds sales maturities availableforsale securities 200 million 171 million fiscal years 2010 2009 respectively 8 million gross realized gains total investments fiscal 2010 realized gains losses total investments fiscal 2009 specific identification method used account gains losses availableforsale securities summary carrying values balance sheet classification shortterm longterm investments debt equity securities october 31 2010 october 31 2009 follows equity securities privately held companies include cost basis equity method investments include marketable trading securities held generate returns hp expects hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued offset changes certain liabilities related deferred compensation arrangements hp includes gains losses changes fair value securities offset losses gains related liabilities interest net hps consolidated statements earnings net losses associated securities 7 million 14 million fiscal years 2010 2009 respectively derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts option contracts interest rate swaps total return swaps hedge certain foreign currency interest rate lesser extent equity exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp leveraged derivatives use derivative contracts speculative purposes hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivatives gross basis consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs operating activities consolidated statements cash flows result use derivative instruments hp exposed risk counterparties derivative contracts fail meet contractual obligations mitigate counterparty credit risk hp policy entering contracts carefully selected major financial institutions based upon credit ratings factors hp maintains dollar term limits correspond institutions credit rating hps established policies procedures mitigating credit risk principal transactions shortterm cash include reviewing establishing limits credit exposure continually assessing creditworthiness counterparties master agreements counterparties include master netting arrangements mitigation credit exposure counterparties arrangements permit hp net amounts due hp counterparty amounts due hp counterparty reduces maximum loss credit risk event counterparty default certain hps derivative instruments contain creditriskrelated contingent features provision whereby hp counterparties derivative instruments could request collateralization derivative instruments net liability positions hps counterparties credit rating falls certain thresholds october 31 2010 october 31 2009 hp required post collateral hp derivative instruments creditriskrelated contingent features significant net liability position fair value hedges hp enters fair value hedges reduce exposure debt portfolio interest rate risk hp issues longterm debt us dollars based market conditions time financing hp uses hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued interest rate swaps mitigate market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial investing fixedrate instruments hp may enter interest rate swaps convert fixed interest returns variable interest returns would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period cash flow hedges hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales operating expense intercompany lease loan denominated currencies us dollar hps foreign currency cash flow hedges mature generally within six twelve months however certain leasing revenuerelated forward contracts intercompany lease loan forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portion gain loss derivative instrument accumulated comprehensive income loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item fiscal years 2010 2009 2008 hp discontinue cash flow hedge probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity derivatives designated hedging instruments consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures hp also uses total return swaps lesser extent interest rate swaps based equity fixed income indices hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair values earnings period change hp recognizes gain loss foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities hp recognizes gain loss total return swaps interest rate swaps interest net period gain loss change market value executive deferred compensation plan liability hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt change fair value derivative foreign currency options forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings october 31 2010 october 31 2009 portion hedging instruments gain loss excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years 2010 2009 2008 fair value derivative instruments consolidated balance sheets discussed note 9 hp estimates fair values derivatives primarily based pricing models using current market rates records derivatives balance sheet fair value gross notional fair value derivative financial instruments consolidated balance sheets recorded follows 1represents face amounts contracts outstanding october 31 2010 october 31 2009 respectively 2represents offsetting swaps acquired previous business combination designated hedging instruments hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued effect derivative instruments consolidated statements earnings beforetax effect derivative instrument related hedged item fair value hedging relationship fiscal years ended october 31 2010 october 31 2009 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued beforetax effect derivative instruments cash flow net investment hedging relationships fiscal years 2010 2009 follows 1amount gain recognized income derivative represents 9 million gain related amount excluded assessment hedge effectiveness fiscal 2010 1amount gain recognized income derivative represents 7 million gain related amount excluded assessment hedge effectiveness fiscal 2009 hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued hp expects reclassify estimated net accumulated comprehensive loss 200 million net taxes earnings next twelve months along earnings effects related forecasted transactions association cash flow hedges beforetax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal years 2010 2009 follows financial instruments balance hps financial instruments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps short longterm debt approximately 225 billion october 31 2010 compared carrying value 223 billion date estimated fair value hps short longterm debt approximately 160 billion october 31 2009 compared carrying value 158 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 11 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting placement hps thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 october 31 2010 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 equipment leased customers operating leases 35 billion october 31 2010 30 billion october 31 2009 included machinery equipment accumulated depreciation equipment lease 10 billion october 31 2010 09 billion october 31 2009 october 31 2010 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 note 12 guarantees indemnifications ordinary course business hp may provide certain clients subsidiary performance guarantees andor financial performance guarantees may backed standby letters credit surety bonds general hp would liable amounts guarantees event nonperformance hp hps subsidiaries permits termination related contract client likelihood hp believes remote hp believes company compliance performance obligations material service contracts performance guarantee hp certain service contracts supported client financing securitization arrangements specific circumstances involving nonperformance resulting service contract termination failure comply terms financing arrangement hp would required acquire certain assets hp considers possibility failure comply remote asset amounts involved immaterial hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 guarantees continued ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates repair rates post sales support costs differ estimates revisions estimated warranty liability would required changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 note 13 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued notes payable banks lines credit includes deposits associated hps bankingrelated activities approximately 348 million 326 million october 31 2010 2009 respectively longterm debt longterm debt follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued disclosed note 9 consolidated financial statements hp uses interest rate swaps mitigate market risk exposures connection certain fixed interest global notes achieve primarily us dollar liborbased floating interest expense table reflect interest rate swap impact interest rate hp may redeem global notes set forth table time redemption prices described prospectus supplements relating thereto global notes senior unsecured debt may 2009 hp filed shelf registration statement 2009 shelf registration statement sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants 2009 shelf registration statement replaced registration statements filed march 2002 may 2006 may 2008 hps board directors approved increase capacity hps us commercial paper program 100 billion 160 billion hps subsidiaries authorized issue additional 10 billion commercial paper 500 million capacity currently available used hewlettpackard international bank plc whollyowned subsidiary hp euro commercial papercertificate deposit programme hp 30 billion fiveyear credit facility expiring may 2012 february 2009 hp entered 35 billion 364day credit facility february credit facility expired february 2010 time hp entered new 35 billion 364day credit facility maintaining total amount available credit facilities 65 billion commitment fees interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities senior unsecured committed borrowing arrangements primarily support issuance us commercial paper hps ability us commercial paper outstanding balance exceeds 65 billion hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued supported credit facilities subject number factors including liquidity conditions business performance included including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2010 carrying value assets approximated carrying value borrowings 130 million october 31 2010 hp capacity issue unspecified amount additional debt securities common stock preferred stock depositary shares warrants 2009 shelf registration statement date hp also approximately 138 billion available borrowing resources including 121 billion commercial paper programs approximately 15 billion relating uncommitted lines credit aggregate future maturities longterm debt face value excluding fair value adjustment related hedged debt 669 million premium debt issuance 45 million discount debt issuance 17 million follows october 31 2010 interest expense borrowings approximately 417 million fiscal 2010 597 million fiscal 2009 467 million fiscal 2008 subsequent event december 2 2010 hp issued 2 billion us dollar global notes 2009 shelf registration statement global notes consisted fixed rate notes market rates maturities five ten years date issuance hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings domestic foreign components earnings follows following fiscal years ended october 31 provision benefit taxes earnings follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 breakdown current longterm deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 october 31 2010 hp 28 billion 41 billion 298 billion federal state foreign net operating loss carryforwards respectively amounts included respective totals begin expire fiscal 2011 hp also capital loss carryforward approximately 275 million expire fiscal 2015 hp provided valuation allowance 145 million deferred tax assets related federal state net operating losses 106 million deferred tax assets related capital loss carryforwards 80 billion deferred tax assets related foreign net operating loss carryforwards hp expect realize hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued october 31 2010 hp recorded deferred tax assets various tax credit carryforwards 733 million amount includes 74 million us foreign tax credit carryforwards begin expire fiscal 2011 hp recorded valuation allowance 47 million hp alternative minimum tax credit carryforwards 11 million expire us research development credit carryforwards 293 million begin expire fiscal 2024 hp also tax credit carryforwards 356 million various states foreign countries hp provided valuation allowance 176 million reduce related deferred tax asset credits begin expire fiscal 2011 gross deferred tax assets october 31 2010 2009 reduced valuation allowances 88 billion 87 billion respectively valuation allowance increased 77 million fiscal 2010 consisting 106 million associated federal capital loss carryovers net 29 million decrease associated various net operating losses tax credits gross deferred tax assets october 31 2009 2008 reduced valuation allowances 87 billion 18 billion respectively valuation allowance increased 69 billion fiscal 2009 valuation allowance increase consisted 70 billion associated foreign net operating loss carryovers arising fiscal 2009 pursuant internal restructuring transactions reduced 100 million valuation allowance decreases associated state foreign net operating losses net excess tax benefits resulting exercise employee stock options employee stock programs recorded increase stockholders equity approximately 300 million fiscal 2010 163 million fiscal 2009 316 million fiscal 2008 differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 fiscal 2010 hp recorded 26 million net income tax benefits related items unique year amounts included adjustments prior year foreign income tax accruals credits settlement tax audit matters valuation allowance adjustments miscellaneous discrete items fiscal 2009 hp recorded 547 million net income tax benefits related items unique year recorded amounts included 383 million income tax benefits attributable net deferred tax assets foreign net operating loss carryovers arising pursuant internal restructuring transactions also included net tax benefit 154 million adjustment estimated fiscal 2008 tax accruals upon filing 2008 income tax returns 60 million income tax benefit hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued valuation allowance reversals state foreign net operating losses miscellaneous items resulted net tax charge 50 million fiscal 2008 hp recorded 251 million net income tax expense related items unique year recorded amounts consisted tax charge 205 million associated postacquisition eds integration 44 million adjustment estimated fiscal 2007 tax accruals upon filing 2007 us federal income tax return net tax charges 2 million attributable items october 2008 emergency economic stabilization act 2008 signed law included retroactive two year extension research development tax credit january 1 2008 december 31 2009 retroactive income tax benefit 45 million recorded hps financial statements fourth quarter fiscal 2008 result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2024 gross income tax benefits attributable tax status subsidiaries estimated 966 million 041 per share fiscal year 2010 853 million 035 per share fiscal year 2009 900 million 035 per share fiscal year 2008 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued total amount gross unrecognized tax benefits 21 billion october 31 2010 reconciliation unrecognized tax benefits follows 680 million 950 million 10 billion hps unrecognized tax benefits october 31 2008 2009 2010 respectively would affect hps effective tax rate realized hp recognizes interest income favorable settlements income tax receivables interest expense penalties accrued unrecognized tax benefits within income tax expense october 31 2010 hp accrued net 181 million payable interest penalties fiscal 2010 hp recognized net interest expense net tax net deficiencies 66 million hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution irs audit cycle within next 12 months however reasonably possible certain federal foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 442 million within next 12 months hp subject income tax united states approximately 80 foreign countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits state foreign tax authorities hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agents reports rar fiscal 2001 2002 2006 tax years irs began audit hps 2007 income tax returns 2009 began audit hps 2008 income tax returns 2010 respect major foreign state tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp believes adequate accruals provided open tax years july 30 2009 hp received notice deficiency irs fiscal 2004 2005 tax years notice deficiency asserted hp owes additional tax 92 million penalties 5 million addition proposed deficiency fiscal 2004 2005 irss adjustments years sustained would reduce tax benefits net operating loss tax credit carryforwards subsequent years approximately 563 million hp plans contest certain adjustments proposed notice deficiency hp believes provided adequate reserves tax deficiencies reductions tax benefits could result irs actions tax years eds 2002 audited irs proposed adjustments resolved irs currently auditing edss tax years 2005 2006 2007 short period ended august 26 2008 december 5 2008 eds received rar exam years 2003 2004 proposing tax deficiency 82 million deficiency includes 12 million effect carrybacks 2000 2001 hp appealing certain issues believes adequate reserves provided years january 30 2008 hp received notice deficiency irs fiscal 2003 tax year notice deficiency asserted hp owes additional tax 21 million time hp received rar irs fiscal 2002 tax year proposed change hps tax liability year addition proposed deficiency fiscal 2003 irss adjustments years sustained would reduce tax refund claims hp filed net operating loss carrybacks earlier fiscal years reduce tax benefits tax credit carryforwards subsequent years approximately 249 million amount reflects certain transfer pricing adjustments settled fiscal 2008 hp plans contest certain remaining adjustments proposed notice deficiency rar towards end hp filed petition united states tax court april 29 2008 hp believes provided adequate reserves tax deficiencies reductions refund claims could result irs actions june 28 2007 hp received notice deficiency irs fiscal 1999 2000 tax years notice deficiency asserted hp owes additional tax 13 million two years time hp received rar irs fiscal 2001 tax year proposed change hps tax liability year addition proposed deficiencies fiscal 1999 2000 irss adjustments sustained would reduce tax refund claims hp filed foreign tax hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued credit net operating loss carrybacks earlier fiscal years reduce tax benefits carryforwards subsequent years approximately 80 million hp plans contest certain adjustments proposed notice deficiency rar towards end hp filed petition united states tax court september 25 2007 hp believes provided adequate reserves tax deficiencies reductions refund claims could result irs actions hp provided us federal income foreign withholding taxes 219 billion undistributed earnings nonus operations october 31 2010 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated determines advantageous business operations tax cash management reasons note 15 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends declared 032 per common share fiscal 2010 2009 2008 stock repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2010 hp executed share repurchases 241 million shares repurchases 240 million shares settled 110 billion included 3 million shares repurchased transactions executed fiscal 2009 settled fiscal 2010 hp approximately 4 million shares repurchased fourth quarter fiscal 2010 settled next fiscal year fiscal 2009 hp completed share repurchases approximately 120 million shares repurchases approximately 132 million shares settled 51 billion included approximately 14 million shares repurchased transactions executed fiscal 2008 settled fiscal 2009 fiscal 2008 hp completed share repurchases approximately 230 million shares repurchases approximately 216 million shares settled 96 billion included approximately 1 million shares repurchased transactions executed fiscal 2007 settled fiscal 2008 foregoing shares repurchased settled fiscal 2010 fiscal 2009 fiscal 2008 open market repurchase transactions fiscal 2010 hps board directors authorized additional 180 billion future share repurchases fiscal 2009 additional authorization future share repurchases hps board directors fiscal 2008 hps board directors authorized additional 160 billion future share repurchases october 31 2010 hp remaining authorization approximately 109 billion future share repurchases hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 stockholders equity continued comprehensive income changes components comprehensive income net taxes follows following fiscal years ended october 31 components accumulated comprehensive loss net taxes follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans acquisition eds august 26 2008 eds became whollyowned subsidiary hp eds sponsors qualified nonqualified defined benefit pension plans covering substantially employees majority eds defined benefit pension plans noncontributory plans employees become fully vested upon attaining two five years service benefits based many factors differ country significant years service earnings projected unit credit cost method used actuarial purposes plan assets plan obligations associated eds defined benefit pension plans included acquisition date october 31 2008 global basis eds plan assets totaled 78 billion plan obligations totaled 101 billion august 26 2008 us portion global assets obligations totaled 41 billion 50 billion respectively defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan traditional defined benefit pension plan based pay years service hp company cash account pension plan cash account pension plan benefits accrued pursuant cash accumulation account formula based upon percentage pay plus interest frozen effective january 1 2008 cash account pension plan retirement plan merged 2005 certain funding investment purposes merged plan referred hp pension plan following acquisition eds hp announced modifying eds us qualified nonqualified plans employees accruing benefits programs effective january 1 2009 eds employees us ceased accruing pension benefits final pension benefit eds employees retire date calculated based pay service december 31 2008 effective october 30 2009 eds us qualified pension plan also merged hp pension plan eds us qualified pension plan like cash account pension plan retirement plan remains separate subplan within hp pension plan purposes determining benefit amounts result merger impact separate benefit structures plans hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations fair value plan assets projected hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued benefit obligations us defined benefit plans combined dpsp follows following fiscal years ended october 31 postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may become eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required coverage hp retiree medical program february 2007 hp limited future eligibility pre2003 hp retiree medical program employees within five years satisfying programs retirement criteria june 30 2007 employees meeting modified program criteria may become eligible participation hp retiree medical program november 2008 hp announced changing limits future costsharing pre2003 program whereby future cost increases paid participating retirees starting 2011 june 2008 hp modified rmsa plan provide generally employees employed hp july 31 2008 would eligible receive employer credits september 2008 hp modified rmsa plan provide employees would receive employer credits form matching contributions hp currently collects retiree drug subsidy us federal government relating retiree prescription drug benefits provides collecting retiree drug subsidy one several alternatives medicare part employers financing benefits march 2010 hp decided contract prescription drug plan leveraging employer group waiver plan process provide group benefits medicare part alternative collecting retiree drug subsidy change retiree prescription drug financing strategy take effect 2013 due health care reform legislation enacted march 2010 expected give hp access greater us federal subsidies time help pay retiree benefits aside impact health care hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued reform legislation expected affect cost hps retiree welfare programs subsidy offered hp fixed fiscal year 2010 hp also announced elimination companypaid retiree life insurance effective january 1 2011 defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 535 million fiscal 2010 568 million fiscal 2009 548 million fiscal 2008 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation similar hp eds offered participation defined contribution plans us nonus employees including eds 401k plan fiscal 2008 hp matched employee contributions hp 401k plan cash contributions maximum 6 eligible compensation us employees hired prior august 1 2008 us employees hired august 1 2008 hp matched employee contributions maximum 4 eligible compensation employer match eds 401k plan 25 employee contribution based maximum contribution 6 employees salary effective january 1 2009 us employees participating eds 401k plan became eligible 4 matching contribution eligible compensation similar hp 401k plan contributions invested direction employee various funds although eds 401k plan offer hp stock fund effective april 1 2009 hp matching contributions hp 401k plan eds 401k plan changed quarterly discretionary performancebased match maximum 4 eligible compensation us employees determined fiscal quarter based business results hp matching contributions may vary 0 100 maximum 4 match based factors quarterly earnings market share growth performance relative market economic conditions hps matching contributions quarters fiscal 2010 100 maximum 4 match effective november 2010 quarterly employer matching contributions hp 401k plan eds 401k plan longer discretionary equal 100 employees contributions maximum 4 eligible compensation effective january 31 2004 hp designated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 7 million 8 million 9 million dividends hp common shares held hp stock fund fiscal 2010 2009 2008 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 22 million shares hp common stock october 31 2010 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued pension postretirement benefit expense hps net pension postretirement benefit cost gain recognized consolidated statements earnings follows following fiscal years ended october 31 fiscal 2010 hp recognized aggregate pension curtailment gains settlement losses totaling 6 million 7 million respectively resulting workforce rebalancing initiatives several nonus countries united kingdom workforce rebalancing initiatives triggered pension termination benefits totaling 29 million united states settlement loss 7 million recognized payout activity related nonqualified plans curtailment gain 13 million recognized elimination life insurance benefits weightedaverage assumptions used calculate net benefit cost follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued medical cost related assumptions used calculate net postretirement benefit cost following fiscal years ended october 31 follows 1in connection plan changes announced november 2008 employer subsidy us retiree medical plans frozen fiscal 2010 therefore trend rates 2010 beyond longer relevant liability calculation since excess cost paid retirees hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets october 31 2010 october 31 2009 follows following table summarizes pretax net experience loss gain prior service benefit recognized accumulated comprehensive income loss companys defined benefit postretirement benefit plans october 31 2010 following table summarizes experience loss prior service benefit amortized accumulated comprehensive income recognized components net periodic benefit cost credit next fiscal year weightedaverage assumptions used calculate benefit obligation disclosed 2010 2009 fiscal close follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows fair value considerations table sets forth fair value plan assets october 31 2010 asset category using threelevel hierarchy fairvalue inputs described note 9 1includes debt issued national state local governments agencies 2includes limited partnerships venture capital partnerships 3includes cash equivalents shortterm marketable securities 4includes international insured contracts unsettled transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued changes fair value measurements level 3 investments year ended october 31 2010 follows plan asset valuations following description valuation methodologies used pension plan assets measured fair value changes methodologies used reporting period investments securities valued closing price reported stock exchange individual securities traded corporate government assetbacked debt securities fair value based upon observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based upon observable quoted prices underlying assets alternative investments limited partnerships joint ventures private equities determined general partner general partners designee quarter periodic basis valuation assets requires judgment due absence quoted market prices assets therefore classified level 3 cash equivalents includes money market accounts valued based net asset value shares assets valued based upon level input eg quoted prices observable inputs level 1 unobservable inputs significant fair value measurement assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued plan asset allocations weightedaverage target actual asset allocations across hp eds plans respective measurement dates follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk depending funded status plan majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment liability exposures hp utilizes derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds provide diversification higher expected returns outside united states asset allocation decisions typically made independent board trustees us investment objectives designed generate returns enable plan meet future obligations countries local regulations require adjustments asset allocation typically leading higher percentage fixed income would otherwise deployed hps investment subsidiary acts consulting governance role reviewing investment strategy providing recommended list investment managers country plan final decisions asset allocation investment managers made local trustees basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued expected asset class returns reflect current yield us government bonds risk premiums asset class hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees hp closed acquisition eds august 26 2008 effective immediately close fiscal 2009 hp merged assets hp eds us pension plans expected return plan assets used calculating net benefit costs 80 fiscal 2011 reflects result recent asset allocation study commensurate investment strategy merged us pension plan approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation future contributions funding policy fiscal 2011 hp expects contribute approximately 747 million pension plans approximately 30 million cover benefit payments us nonqualified plan participants hp expects pay approximately 40 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2010 1the estimated future benefits payable postretirement plans reflected net expected medicare part subsidy hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense approximately 1062 million fiscal 2010 1112 million fiscal 2009 935 million fiscal 2008 sublease rental income approximately 46 million fiscal 2010 53 million fiscal 2009 37 million fiscal 2008 october 31 2010 october 31 2009 property capital lease comprised primarily equipment furniture approximately 688 million 723 million respectively included property plant equipment accompanying consolidated balance sheets accumulated depreciation property capital lease approximately 482 million 406 million respectively october 31 2010 october 31 2009 related depreciation included depreciation expense future annual minimum lease payments sublease rental income commitments capital lease commitments october 31 2010 follows october 31 2010 hp unconditional purchase obligations approximately 26 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally inventory items future unconditional purchase obligations october 31 2010 follows note 18 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business hp records provision liability management believes probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless possible cash flows results operations could materially affected particular period unfavorable resolution one contingencies diversion managements attention creation significant expenses litigation proceedings investigations copyright levies described proceedings ongoing concluded involving hp certain european union eu member countries including litigation germany belgium seeking impose modify levies upon equipment multifunction devices mfds personal computers pcs printers alleging devices enable producing private copies copyrighted materials levies generally based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted legal proceedings hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 stuttgart court appeals may 11 2005 stuttgart court appeals issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law court issued written decision january 25 2008 vg wort subsequently filed application german federal supreme court section 321a german code civil procedure contending court consider arguments may 9 2008 german federal supreme court denied vg worts application vg wort appealed decision filing claim german federal constitutional court challenging ruling printers subject levies september 21 2010 constitutional court published decision holding german federal supreme court erred referring questions interpretation german copyright law court justice european union therefore revoked german federal supreme court decision remitted matter german federal supreme court set hearing date march 24 2011 september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich civil court munich germany seeking levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fsc december 23 2004 munich civil court held pcs subject levy fsc must pay €12 plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 munich court appeals december 15 2005 munich court appeals affirmed munich civil court decision fsc filed appeal german federal supreme court february 2006 october 2 2008 german hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law vg wort filed claim german federal constitutional court challenging ruling fsc bitkom responded vg worts claim parties awaiting decision court whether accept decide claim judicial review reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested hp extrajudicial means amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based copying speed operated normal print mode set default device schedule court proceedings determined decision court expected september 2012 based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain skold et al v intel corporation hewlettpackard company lawsuit hp joined june 14 2004 pending state court santa clara county california lawsuit alleges hp along intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel plaintiffs seek unspecified damages restitution attorneys fees costs certification nationwide class february 27 2009 court denied prejudice plaintiffs motion nationwide class certification third time plaintiffs appealed courts decision inkjet printer litigation described hp involved several lawsuits claiming breach express implied warranty unjust enrichment deceptive advertising unfair business practices plaintiffs alleged among things hp employed smart chip certain inkjet printing products order register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contended consumers received false ink depletion warnings smart chip limits ability consumers use cartridge full capacity choose competitive products •a consolidated lawsuit captioned hp inkjet printer litigation pending united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees january 4 2008 court heard plaintiffs motions class certification add class representative hps motion summary judgment july 25 2008 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued court denied three motions march 30 2009 plaintiffs filed renewed motion class certification hearing plaintiffs motion class certification scheduled april 9 2010 postponed •a lawsuit captioned blennis v hp filed january 17 2007 united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees class certification hearing scheduled may 21 2010 taken calendar •a lawsuit captioned rich v hp filed hp may 22 2006 united states district court northern district california suit alleges hp designed color inkjet printers unnecessarily use color ink addition black ink printing black white images text plaintiffs seeking certify nationwide injunctive class californiaonly damages class certification hearing scheduled may 7 2010 taken calendar •four class actions hp subsidiary hewlettpackard canada co pending canada one commenced british columbia february 2006 two commenced quebec april 2006 may 2006 respectively one commenced ontario june 2006 plaintiffs seeking class certification restitution declaratory relief injunctive relief unspecified statutory compensatory punitive damages march 2010 one quebec cases voluntarily dismissed plaintiff august 25 2010 hp plaintiffs hp inkjet printer litigation blennis v hp rich v hp entered agreement settle lawsuits behalf proposed classes agreement subject approval court becomes final terms proposed settlement lawsuits consolidated eligible class members right obtain ecredits exceed 5 million aggregate use purchasing printers printer supplies hps website part proposed settlement hp also agreed provide class members additional information regarding hp inkjet printer functionality change content certain software user guide messaging provided users regarding life inkjet printer cartridges addition class counsel class representatives paid attorneys fees expenses stipends amount yet approved court october 1 2010 court granted preliminary approval proposed settlement court scheduled fairness hearing january 28 2011 determine whether grant final approval proposed settlement baggett v hp consumer class action filed hp june 6 2007 united states district court central district california alleging hp employs technology laserjet color printers whereby printing process shuts prematurely thus preventing customers using toner allegedly left cartridge plaintiffs also allege hp fails disclose consumers unable utilize toner remaining cartridge printer shuts complaint seeks certification nationwide class purchasers hp laserjet color printers seeks unspecified damages restitution disgorgement injunctive relief attorneys fees costs september 29 2009 court granted hps motion summary judgment named plaintiff denied plaintiffs motion class certification moot november 3 2009 court entered judgment named plaintiff november 17 2009 plaintiff filed appeal courts summary judgment ruling united states court appeals ninth circuit august 25 2010 hp plaintiff entered agreement hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued settle lawsuit behalf proposed class agreement subject approval court becomes final terms proposed settlement eligible class members right obtain ecredits exceed 5 million aggregate use purchasing printers printer supplies hps website addition class counsel class representative paid attorneys fees expenses stipends amount yet approved court october 13 2010 court granted preliminary approval proposed settlement court scheduled fairness hearing january 31 2011 determine whether grant final approval proposed settlement fair labor standards act litigation hp involved several lawsuits plaintiffs seeking unpaid overtime compensation damages based allegations various employees eds hp misclassified exempt employees fair labor standards act andor violation california labor code state laws matters include following •cunningham et al v electronic data systems corporation purported collective action filed may 10 2006 us district court southern district new york claiming current former eds employees involved installing andor maintaining computer software hardware misclassified exempt employees another purported collective action steavens et al v electronic data systems corporation filed october 23 2007 also pending court alleging similar facts steavens case consolidated pretrial purposes cunningham case december 14 2010 court granted conditional certification class consolidated cunningham steavens matter •heffelfinger et al v electronic data systems corporation class action filed november 2006 california superior court claiming certain eds information technology workers california misclassified exempt employees case subsequently transferred us district court central district california january 7 2008 certified class information technology workers california june 6 2008 court granted defendants motion summary judgment plaintiffs subsequently filed appeal us court appeals ninth circuit pending two purported class actions originally filed california superior court karlbom et al v electronic data systems corporation filed march 16 2009 george et al v electronic data systems corporation filed april 2 2009 allege similar facts karlbom case pending san diego county superior court temporarily stayed based pending motions steavens consolidated matter george case pending us district court southern district new york consolidated pretrial purposes cunningham steavens cases india directorate revenue intelligence proceedings described hewlettpackard india sales private ltd hpi subsidiary hp certain current former hp employees received show cause notices india directorate revenue intelligence dri alleging underpayment certain customs duties •on april 30 may 10 2010 dri issued show cause notices hpi seven current hp employees one former hp employee alleging hp underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties june 2 2010 dri issued additional show hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued cause notice hpi three current hpi employees alleging hp failed pay customs duties appropriate value recovery cds containing microsoft operating systems seeking recover approximately 53 million plus penalties hp deposited total approximately 167 million dri agreed post provisional bond exchange dris agreement seize hp products spare parts interrupt transaction business hp india •on june 17 2010 dri issued show cause notices hpi two current hpi employees regarding noninclusion value software contained products imported third party original design manufacturers total amount alleged unpaid customs duties relating software including interest proposed demanded notices approximately 130000 amount hpi deposited dri also seeking impose penalties •on october 1 2010 connection existing dri investigation commenced sap ag dri issued show cause notice hpi alleging underpayment customs duties related importation certain sap software amount alleged duty differential approximately 38000 amount deposited dri also seeking impose interest penalties hp intends contest show cause notices judicial process hp responded process responding show cause notices russia gpo related investigations german public prosecutors office german ppo conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard ise gmbh germany former subsidiary hp chief public prosecutors office russian federation €35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network us department justice sec also conducting investigation russia gpo deal potential violations foreign corrupt practices act fcpa person entity could subject fines civil penalties 500000 per violation equitable remedies including disgorgement injunctive relief addition criminal penalties could range greater 2 million per violation twice gross pecuniary gain loss violation addition information russia gpo deal us enforcement authorities requested information related certain transactions including transactions russia serbia commonwealth independent states cis subregion dating back 2000 ii information related two former hp executives seconded russia whether hp personnel russia germany austria serbia netherlands cis involved kickbacks improper payments channel partners state owned private entities hp cooperating investigating agencies addition described hp involved stockholder derivative litigation arising russia gpo deal related investigations matters commenced current former hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued members hp board directors plaintiffs seeking recover certain compensation paid hp defendants damages •henrietta klein v mark v hurd et al lawsuit filed september 24 2010 california superior court alleging individual defendants wasted corporate assets breached fiduciary duties failing implement oversee hps compliance fcpa •saginaw police fire pension fund v marc l andreessen et al lawsuit filed october 19 2010 united states district court northern district california alleging among things defendants breached fiduciary duties unjustly enriched consciously disregarding hps alleged violations fcpa leak investigation proceedings described hp subject various governmental inquiries concerning processes employed investigation leaks hp confidential information members media concluded may 2006 •in august 2006 hp informally contacted attorney general state california requesting information concerning processes employed leak investigation december 7 2006 hp announced entered agreement california attorney general resolve civil claims arising leak investigation including claim made california attorney general santa clara county superior court action filed december 7 2006 hp committed unfair business practices california law connection leak investigation result agreement includes injunction california attorney general pursue civil claims hp current former directors officers employees terms agreement hp paid total 145 million agreed implement maintain five years series measures designed ensure hps corporate investigations conducted accordance california law companys high ethical standards 145 million 135 million used create privacy piracy fund assist california prosecutors investigating prosecuting consumer privacy information piracy violations 650000 used pay statutory damages 350000 reimbursed california attorney generals office investigation costs finding liability hp part settlement •beginning september 2006 hp received requests committee energy commerce us house representatives committee records information concerning leak investigation securities transactions hp officers directors including august 25 2006 securities transaction mark hurd hps former chairman chief executive officer related matters hp responded requests addition mr hurd voluntarily gave testimony committee regarding leak investigation september 28 2006 •in september 2006 hp informally contacted us attorney northern district california requesting similar information concerning processes employed leak investigation hp responded request hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued •beginning september 2006 hp received requests division enforcement securities exchange commission records information interviews current former hp directors officers relating leak investigation resignation thomas j perkins hps board directors hps may 22 2006 september 6 2006 filings sec form 8k stock repurchases hp securities transactions officers directors occurred may 1 october 1 2006 hps policies practices approval securities transactions may 2007 hp consented entry order sec ordering hp cease desist committing causing violations public reporting requirements securities exchange act 1934 amended hp advised staff division enforcement staff completed investigation intend recommend sec enforcement action brought connection matters •in september 2006 hp received request us federal communications commission records information relating processes employed leak investigation hp responded request addition four stockholder derivative lawsuits filed california purportedly behalf hp stockholders seeking recover damages alleged breach fiduciary duty require hp improve corporate governance internal control procedures result activities leak investigation staehr v dunn et al filed santa clara county superior court september 18 2006 worsham v dunn et al filed santa clara county superior court september 14 2006 tansey v dunn et al filed santa clara county superior court september 20 2006 hall v dunn et al filed santa clara county superior court september 25 2006 october 19 2006 santa clara county superior court consolidated four california cases caption hewlettpackard company derivative litigation consolidated complaint filed november 19 2006 also seeks recover damages connection sales hp stock alleged made certain current former hp officers directors possession material nonpublic information two additional stockholder derivative lawsuits pifko v babbio et al filed september 19 2006 gross v babbio et al filed november 21 2006 filed chancery court county new castle delaware seek recover damages alleged breaches fiduciary duty obtain order instructing defendants refrain breaches fiduciary duty implement corrective measures prevent future occurrences alleged breaches fiduciary duty january 24 2007 delaware court consolidated two cases caption hewlettpackard company derivative litigation subsequently stayed proceedings parties reached tentative settlement hp board directors appointed special litigation committee consisting independent board members authorized investigate review evaluate facts circumstances asserted derivative matters determine hp proceed matters december 14 2007 hp plaintiffs california delaware derivative actions entered agreement settle lawsuits terms settlement hp agreed continue certain corporate governance changes december 31 2012 pay plaintiffs attorneys fees california court granted final approval settlement march 11 2008 subsequently granted plaintiffs counsels fee application dismissed action june 12 2008 delaware court granted final approval settlement plaintiffs application attorneys fees also dismissed action neither dismissal california delaware derivative action thereafter appealed cases concluded hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued environmental hp subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites materials used products recycling treatment disposal products including batteries particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp products also subject product takeback legislation increasing number jurisdictions hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims clean costs amount timing costs environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies note 19 segment information description segments hp leading global provider products technologies software solutions services individual consumers small mediumsized businesses large enterprises including customers government health education sectors hps offerings span multivendor customer services including infrastructure technology business process outsourcing technology support maintenance application development support services consulting integration services enterprise information technology infrastructure including enterprise storage server technology networking products solutions information management software optimizes business technology investments personal computing access devices imaging printingrelated products services hp operations organized seven business segments financial reporting purposes services enterprise storage servers ess hp software personal systems group psg imaging printing group ipg hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology business segments based organizational structure information reviewed hps management evaluate business segment results services ess hp software reported collectively broader hp enterprise business order provide supplementary view hps business aggregated financial data hp enterprise business presented herein hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued hp reclassified segment operating results fiscal 2009 fiscal 2008 conform certain fiscal 2010 organizational realignments none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows hp enterprise business segments within hp enterprise business described detail •services provides consulting outsourcing technology services across infrastructure applications business process domains services divided four main business units infrastructure technology outsourcing technology services applications services business process outsourcing infrastructure technology outsourcing delivers comprehensive services encompass data center workplace desktop network communications security compliance business continuity hp also offers set managed services providing crosssection broader infrastructure services smaller discrete engagements technology services include consulting support services mission critical services converged infrastructure services networking services data center transformation services infrastructure services well warranty support across hps product lines applications services help clients revitalize manage applications assets flexible projectbased consulting services longerterm outsourcing contracts full life cycle services encompass application development testing modernization system integration maintenance management business process outsourcing solutions include broad array enterprise shared services customer relationship management services financial process management services administrative services •enterprise storage servers provides storage server products various server offerings range entrylevel servers highend scalable servers including superdome servers industry standard servers include primarily entrylevel midrange proliant servers run primarily windows linux novell operating systems leverage intel corporation intel advanced micro devices amd processors business spans range product lines including pedestaltower servers densityoptimized rack servers hps bladesystem family server blades business critical systems include hp integrity servers based intel itaniumbased processor run hpux microsoft windows openvms operating systems well faulttolerant hp integrity nonstop solutions business critical systems portfolio server solutions includes scaleup x86 proliant servers bladesystem architecturebased integrity blade servers superdome 2 server solution hps storageworks offerings include entrylevel midrange highend arrays storage area networks sans network attached storage nas storage management software virtualization technologies well storeonce data deduplication solutions tape drives tape libraries optical archival storage •hp software provides enterprise software services enterprise management products services marketed hps business technology optimization bto portfolio help customers manage infrastructure services operations applications business processes automate data center operations processes solutions delivered form traditional software licenses cases via softwareasaservice saas distribution model software includes information management business intelligence hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued communications media solutions information management products services automate retention management search segregation information across enterprise business intelligence solutions enable businesses standardize consistent data management schemes connect share data across enterprise apply analytics communications media solutions enable service providers media companies network equipment providers create deliver manage consumer enterprise communications services hps business segments included hp enterprise business described •personal systems group provides commercial pcs consumer pcs workstations handheld computing devices calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise small mediumsized business smb customers connectivity manageability networked environments commercial pcs include hp compaq hp pro hp elite lines business desktops notebooks well one touchsmart omni pcs hp mininote pc hp blade pcs retail pos systems hp thin clients consumer pcs targeted home user include hp pavilion compaq presario series multi media consumer desktops notebooks well hp pavilion elite desktops hp envy premium notebooks touchsmart pcs one pc hp compaq mini notebooks media smart home server hps z series desktop workstations hp elitebook mobile workstations provide advanced graphics computing large modeling capabilities certified applications wide range industries running windows linux operating systems psg provides series hp ipaq pocket pc handheld computing devices run windows mobile software products range basic pdas advanced devices voice data capability •imaging printing group provides consumer commercial printer hardware printing supplies printing media scanning devices ipg also focused imaging solutions commercial markets solutions range managed print services solutions addressing new growth opportunities commercial printing capturing highvalue pages areas industrial applications outdoor signage graphic arts business inkjet web solutions delivers hps consumer smb inkjet solutions hardware supplies media develops hps retail web businesses includes single function allinone inkjet printers targeted toward consumers smbs well retail publishing solutions snapfish logoworks laserjet enterprise solutions delivers products services enterprise segment includes laserjet printers supplies multifunction printers scanners enterprise software solutions exstream software web jetadmin managed enterprise solutions include managed print services products solutions delivered enterprise customers partnering thirdparty software providers offer workflow solutions enterprise environment graphics solutions include large format printing designjet scitex large format supplies webpress supplies indigo printing specialty printing systems inkjet highspeed production solutions printer supplies include laserjet toner inkjet printer cartridges printingrelated media •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial life cycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments includes hp labs network infrastructure products mobile devices associated palm acquisition certain business incubation projects revenue segment attributable sale certain network infrastructure products span data center edge network sold procurve 3com tippingpoint brands segment also includes certain video collaboration products sold brand halo palm smartphones targeted consumer segment include pixi pre models running webos operating system segment also derives revenue licensing specific hp technology third parties segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include primarily restructuring charges associated adjustments related restructuring actions amortization purchased intangible assets stockbased compensation expense related hpgranted employee stock options prus restricted stock awards employee stock purchase plan certain acquisitionrelated charges purchased iprd well certain corporate governance costs selected operating results information business segment follows following fiscal years ended october 31 1includes results eds acquired august 26 2008 date acquisition 2includes results 3com palm acquisitions completed april 2010 july 2010 respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hp allocates assets business segments based primary segments benefiting assets total assets allocated corporate investments increased 870 fiscal 2010 mostly due 3com palm acquisitions described fiscal 2010 segment asset information stated based fiscal 2010 organizational structure total assets segment well hp enterprise business reconciliation segment assets hp consolidated total assets follows october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location years ended october 31 2010 2009 2008 united states country represented 10 hps total consolidated net revenue hp reports revenue net sales taxes use taxes valueadded taxes directly imposed governmental authorities hps revenue producing transactions customers october 31 2010 united states held 10 hps total consolidated net assets october 31 2009 2008 belgium united states comprised 10 hps total consolidated net assets single country united states 10 hps total consolidated net property plant equipment period presented hps longlived assets goodwill purchased intangible assets composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 1includes results eds acquired august 26 2008 date acquisition 2includes results 3com palm acquisitions completed april 2010 july 2010 respectively 3certain fiscal 2010 organizational reclassifications reflected retroactively provide improved visibility comparability fiscal 2009 fiscal 2008 reclassifications resulted transfer revenue among business units within services segment impact previously reported segment financial results hewlettpackard company subsidiaries quarterly summary unaudited millions except per share amounts 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data consolidated financial statements company together report thereon price waterhouse llp independent accountants unaudited quarterly summary set forth pages 30 34 3852 54 companys 1996 annual report shareholders pages excluding order data statement management responsibility incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company together report thereon pricewaterhousecoopers llp independent accountants unaudited quarterly summary set forth pages 4462 64 companys 1998 annual report stockholders pages excluding order data statement management responsibility incorporated herein reference item 9item 8 financial statements supplementary data report independent accountants board directors stockholders hewlettpackard company opinion consolidated financial statements listed accompanying index present fairly material respects financial position hewlettpackard company subsidiaries october 31 1999 1998 results operations cash flows three years period ended october 31 1999 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp san jose california november 23 1999 hewlettpackard company subsidiaries consolidated statement earnings accompanying notes integral part financial statements hewlettpackard company subsidiaries consolidated balance sheet accompanying notes integral part financial statements hewlettpackard company subsidiaries consolidated statement cash flows accompanying notes integral part financial statements hewlettpackard company subsidiaries consolidated statement stockholders equity accompanying notes integral part financial statements hewlettpackard company subsidiaries notes consolidated financial statements summary significant accounting policies principles consolidation consolidated financial statements include accounts hp whollyowned controlled majorityowned subsidiaries significant intercompany accounts transactions eliminated certain reclassifications made prior year amounts conform 1999 presentation use estimates preparation financial statements accordance generally accepted accounting principles requires management make estimates assumptions affect amounts reported hps financial statements accompanying notes actual results could differ estimates revenue recognition revenue product sales generally recognized time product shipped provisions established price protection programs estimated product returns upon shipment hp also provides estimated cost may incurred product warranties postsales support service revenue recognized contractual period services rendered accepted customer advertising costs expensed incurred amounted 1182 million 1999 1121 million 1998 1033 million 1997 taxes earnings income tax expense based pretax financial accounting income deferred tax assets liabilities recognized principally expected tax consequences temporary differences tax bases assets liabilities reported amounts net earnings per share hps basic earnings per share eps calculated based net earnings available common stockholders weightedaverage number shares outstanding reported period diluted hewlettpackard company subsidiaries notes consolidated financial statements continued eps includes additional dilution potential common stock issuable upon exercise stock options conversion debt cash equivalents shortterm investments hp classifies investments cash equivalents maturity investment three months less purchase date shortterm investments principally consist time deposits temporary moneymarket instruments cash equivalents shortterm investments stated cost approximates market value inventory valued standard cost approximates actual cost computed firstin firstout basis excess market value property plant equipment property plant equipment stated cost additions improvements major renewals capitalized maintenance repairs minor renewals expensed incurred depreciation provided hewlettpackard company subsidiaries notes consolidated financial statements continued using accelerated methods principally 15 40 years buildings improvements 3 10 years machinery equipment depreciation leasehold improvements provided using straightline method life lease asset whichever shorter longterm investments hps longterm investments primarily consist debt securities heldtomaturity foreign currency translation hp uses us dollar functional currency foreign currency assets liabilities remeasured us dollars endofperiod exchange rates except inventory property plant equipment assets deferred revenues remeasured historical exchange rates revenue expenses remeasured average exchange rates effect period except expenses related balance sheet amounts remeasured historical exchange rates gains losses foreign currency remeasurement included net earnings effect foreign currency exchange rate fluctuations cash equivalents denominated foreign currencies material comprehensive income hp material components comprehensive income accordingly net income approximates comprehensive income periods presented recent pronouncements june 1998 financial accounting standards board issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities statement establishes accounting reporting standards derivative instruments requires recognition derivatives assets liabilities statement financial position measurement instruments fair value statement amended effective fiscal years beginning june 15 2000 hp adopt standard later first quarter fiscal year 2001 process determining impact adoption consolidated financial statements discontinued operations march 2 1999 hp announced intention launch new company subsequently named agilent technologies inc agilent technologies distribution agilent technologies common stock hps stockholders form taxfree spinoff agilent technologies composed hps measurement organization includes test measurement semiconductor products chemical analysis healthcare solutions businesses effective july 31 1999 hps management board directors completed plan disposition agilent technologies hps consolidated financial statements periods present agilent technologies discontinued business segment accordance accounting principles board opinion 30 net revenue net earnings agilent technologies operations july 31 1999 measurement date discontinued operations accounting summarized period august 1 1999 spinoff net earnings agilent technologies expected exceed hewlettpackard company subsidiaries notes consolidated financial statements continued estimated costs effect spinoff excess net earnings costs recognized net earnings realized exceed total estimated costs spinoff net assets discontinued operations follows october 31 november 1 1999 hp provided initial funding approximately 11 billion agilent technologies november 23 1999 agilent technologies closed initial public offering approximately 16 common stock distributed net proceeds 21 billion hp pro forma effects transactions increases cash approximately 10 billion net assets discontinued operations approximately 05 billion additional paidin capital approximately 15 billion hp plans distribute remaining 84 interest agilent technologies hps stockholders july 31 2000 distribution date financial instruments offbalancesheet foreign exchange risk hp enters foreign exchange contracts primarily forwards purchased options hedge exposure changes foreign currency exchange rates contracts designated inception related foreign currency exposures hedged include committed anticipated sales subsidiaries assets liabilities denominated currencies us dollar achieve hedge accounting contracts must reduce foreign currency exchange rate risk otherwise inherent amount duration hedged exposures comply established company risk management policies hedging contracts generally mature within six months hedging salesrelated exposure foreign exchange contract expirations set occur month hedged shipments occur allowing realized gains losses contracts recognized net revenue periods related revenues recognized hedging hewlettpackard company subsidiaries notes consolidated financial statements continued balance sheet exposure realized gains losses foreign exchange contracts recognized income expense period realized gains losses remeasurement foreign currency denominated assets liabilities occur gains losses related foreign exchange contracts included cash flows operating activities consolidated statement cash flows notional amount foreign exchange contracts outstanding 137 billion october 31 1999 121 billion october 31 1998 contracts related exposures approximately 33 foreign currencies notional amount represents future cash flows contracts purchase sell foreign currencies unrealized gains hedging contracts deferred hps hedge accounting policies amounted 113 million october 31 1999 unrealized losses totaled 113 million october 31 1998 unrealized gains 63 million unrealized losses 292 million unamortized premiums realized gains deferred currency options material concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash investments accounts receivable financing receivables certain financial instruments hp maintains cash equivalents short longterm investments certain financial instruments various financial institutions financial institutions located many different geographical regions company policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments hp sells significant portion products thirdparty resellers result maintains individually significant receivable balances major distributors financial condition operations distributors deteriorate substantially hps operating results could adversely affected ten largest distributor receivable balances collectively represented 27 percent total accounts receivable october 31 1999 29 percent october 31 1998 credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations thirdparty resellers customers financial condition requires collateral letters credit bank guarantees certain circumstances fair value financial instruments certain hps financial instruments including cash equivalents shortterm investments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities longterm floating rate notes longterm equity investments time deposits also carried amounts approximate fair value estimated fair value fixed rate longterm debt primarily based quoted market prices well borrowing rates currently available hp bank loans similar terms maturities fair value adjusted unrealized gains losses related interest rate swap agreements approximates carrying amount longterm debt estimated fair value foreign exchange contracts based primarily quoted market prices similar instruments adjusted necessary maturity differences estimated fair value foreign exchange contracts amounted less 1 million october 31 1999 229 million october 31 1998 hewlettpackard company subsidiaries notes consolidated financial statements continued estimated fair values may representative actual values financial instruments could realized year end realized future financing receivables investment operating leases financing receivables represent salestype directfinancing leases installment sales resulting marketing hps complementary thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets components net financing receivables included financing receivables longterm investments assets follows october 31 contractual maturities hps gross financing receivables october 31 1999 2135 million 2000 1182 million 2001 700 million 2002 139 million 2003 126 million 2004 54 million thereafter actual cash collections may differ primarily due customer early buyouts refinancings hp also leases products customers operating leases equipment operating leases 1282 million october 31 1999 1184 million october 31 1998 included machinery equipment accumulated depreciation equipment operating leases 607 million october 31 1999 538 million october 31 1998 minimum future rentals noncancelable operating leases original terms one year longer 489 million 2000 244 million 2001 85 million 2002 28 million 2003 10 million 2004 4 million thereafter inventory hewlettpackard company subsidiaries notes consolidated financial statements continued property plant equipment supplemental cash flow information acquisitions hp acquired several companies last three years significant financial position results operations 1997 one acquisition accounted using poolingofinterests method however prior period consolidated financial statements restated retroactive effect material acquisitions accounted using purchase method purchase method results operations acquired companies included prospectively date acquisition cost allocated acquirees tangible identifiable intangible assets liabilities based upon fair market values date acquisition residual goodwill process research development writeoffs significant hp amortizes goodwill straightline basis estimated economic life generally two five years net book value goodwill associated acquisitions 189 million october 31 1999 76 million october 31 1998 hewlettpackard company subsidiaries notes consolidated financial statements continued taxes earnings provision income taxes earnings continuing operations composed following years ended october 31 significant components deferred tax assets required valuation allowance deferred tax liabilities included balance sheet follows october 31 current portion deferred tax asset 1906 million october 31 1999 1831 october 31 1998 amounts included current assets tax benefits 289 million 1999 157 million 1998 150 million 1997 associated exercise employee stock options allocated stockholders equity differences us federal statutory income tax rate hps effective tax rate follows years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued domestic foreign components earnings continuing operations taxes follows years ended october 31 hp provided us federal income foreign withholding taxes 9 billion nonus subsidiaries undistributed earnings october 31 1999 earnings intended reinvested indefinitely earnings distributed foreign tax credits may become available current law reduce eliminate resulting us income tax liability excess cash accumulated hps nonus subsidiaries advantageous tax foreign exchange reasons subsidiary earnings remitted result certain employment actions capital investments undertaken hp income manufacturing activities certain countries subject reduced tax rates cases wholly exempt taxes years 2013 income tax benefits attributable tax status subsidiaries estimated 690 million 1999 435 million 1998 226 million 1997 internal revenue service irs examined hps income tax returns years 1993 1995 completed examination years 1992 irs commenced examination returns years 1996 1998 hp believes adequate accruals provided years borrowings notes payable shortterm borrowings related average interest rates follows years ended october 31 october 31 1999 hp committed borrowing facility place unused borrowing capacity totaling 10 billion hewlettpackard company subsidiaries notes consolidated financial statements continued longterm debt related maturities interest rates follows october 31 hp issues longterm debt either us dollars foreign currencies based market conditions time financing interest rate foreign currency swaps used modify market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense neutralize exposure changes foreign currency exchange rates swap transactions generally involve exchange fixed floating interest payment obligations underlying debt denominated foreign currency exchange foreign currency principal interest obligations us dollardenominated amounts notional amounts maturities swaps generally match underlying debt unrealized gains losses currency swaps hedging foreign currency debt recognized assets liabilities material october 1997 hp issued 18 billion face value zerocoupon subordinated convertible notes proceeds 968 million november 1997 issued additional 200 million face value notes proceeds 108 million notes due 2017 convertible holders rate 543 shares hps common stock 1000 face value notes payable either cash common stock hps option notes may redeemed hp october 14 2000 book value payable either cash common stock hps option addition notes redeemable holders option october 14 2000 case hp intends redeem common stock notes subordinated existing future senior indebtedness hp aggregate future maturities face value longterm debt outstanding october 31 1999 468 million 2000 197 million 2001 92 million 2002 7 million 2003 193 million 2004 2000 million thereafter hp occasionally repurchases debt prior maturity based assessment current market conditions financing alternatives stockholders equity reincorporation effective may 20 1998 hp changed state incorporation california delaware connection change par value hps stock decreased 100 001 per share resulting transfer 1032 million common stock additional paidin capital impact hps financial condition results operations result reincorporation hewlettpackard company subsidiaries notes consolidated financial statements continued employee stock purchase plan eligible company employees may generally contribute 10 percent base compensation quarterly purchase shares hps common stock employee stock purchase plan employee contributions purchase shares partially matched shares contributed hp generally vest two years october 31 1999 approximately 112000 employees including persons became employees agilent technologies eligible participate approximately 69000 employees participants plan hp contributed employees companies 1811000 matching shares weightedaverage price 78 1999 2173000 shares weightedaverage price 63 1998 2327000 shares weightedaverage price 54 1997 distribution date unvested shares hp stock held agilent technologies employees forfeited agilent technologies intends replace forfeited hp shares agilent technologies stock equivalent value compensation expense recognized plan including expense relating persons became agilent technologies employees 143 million 1999 100 million 1998 96 million 1997 portion expenses related continuing operations 99 million 1999 67 million 1998 64 million 1997 incentive compensation plans hp four principal stock option plans adopted 1979 1985 1990 1995 plans permit options granted qualify incentive stock options internal revenue code exercise price stock option generally equal fair market value hps common stock date option granted term generally ten years 1990 1995 incentive stock plans compensation committee may choose certain cases establish discounted exercise price less 75 percent fair market value grant date hp granted 1377000 shares discounted options 1999 1050000 shares 1998 780000 shares 1997 stock compensation expense related discounted options material years options generally vest rate 25 percent per year period four years date grant except discounted options generally may exercised third fifth anniversary option grant date time options become 100 percent vested following table summarizes option activity years ended october 31 1999 1998 1997 hewlettpackard company subsidiaries notes consolidated financial statements continued following table summarizes information options outstanding october 31 1999 shares available option restricted stock grants 27018000 october 31 1999 47070000 october 31 1998 approximately 66000 employees considered eligible receive stock options fiscal year 1999 approximately 48000 employees holding options one option plans october 31 1999 1985 incentive compensation plan 1990 1995 incentive stock plans certain key employees may granted cash restricted stock awards cash restricted stock awards independent option grants subject restrictions considered appropriate hps compensation committee majority shares restricted stock outstanding october 31 1999 subject forfeiture employment terminates prior three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding cost awards determined fair market value shares date grant expensed ratably period restrictions lapse expense material 1999 1998 1997 hp 5027000 shares restricted stock outstanding october 31 1999 4380000 shares outstanding october 31 1998 information presented regarding incentive compensation plans includes activity related agilent technologies employees existing terms stock option plans substantially stock options held agilent technologies employees converted agilent technologies stock options distribution date become fully vested exercised expire three months distribution date shares restricted hp stock held agilent technologies employees forfeited distribution date replaced shares agilent technologies stock equivalent value october 31 1999 agilent technologies employees held approximately 855000 shares restricted hp stock options acquire approximately 15011000 shares hp stock pro forma information hp applies intrinsicvaluebased method prescribed accounting principles board opinion 25 accounting stock issued employees accounting employee stock options accordingly compensation expense recognized options granted discounted exercise price resulting compensation expense recognized ratably associated service period generally option vesting term hp determined pro forma net earnings per share information required sfas 123 accounting stockbased compensation hp accounted employee stock options hewlettpackard company subsidiaries notes consolidated financial statements continued sfas 123s fair value method fair value options estimated using blackscholes option pricing model following weightedaverage assumptions purposes pro forma disclosures estimated fair value options amortized expense 4year average vesting period options hps pro forma net earnings continuing operations 2996 million 1999 2646 million 1998 2484 million 1997 pro forma diluted net earning per share continuing operations 285 1999 247 1998 235 1997 pro forma amounts include amortized fair values attributable options granted october 31 1995 shares reserved hp 97624000 shares common stock reserved future issuance employee stock plans october 31 1999 116168000 shares reserved october 31 1998 stock repurchase programs hp repurchases shares common stock systematic program manage dilution created shares issued employee stock plans separate incremental plan authorizing purchases open market private transactions 1999 31042000 shares repurchased plans aggregate price 2643 million 1998 43023000 shares repurchased 2424 million 1997 13207000 shares purchased 724 million 1999 hps board directors authorized additional 20 billion future repurchases two programs aggregate october 31 1999 hp authorization remaining future repurchases two programs approximately 14 billion november 1999 board directors authorized additional 20 billion future repurchases plans resulting remaining authorized repurchases totaling 34 billion retirement plans retiree medical benefits general distribution date agilent technologies establish separate defined benefit pension deferred profitsharing retiree medical 401k plans current former employees allocable share defined benefit plan assets transferred hp pension trust country newly established agilent technologies pension trust addition allocable share us retiree medical plan trust transferred newly established agilent technologies retiree medical plan trust subject local law anticipated share assets allocated agilent technologies proportion projected benefit obligation agilent technologies employees total projected benefit obligation hp deferred profit sharing plan assets attributable agilent technologies also transferred agilent technologies included consolidated balance sheet estimates october 31 1999 1998 assets pension obligations retained hp actual amounts transferred measured distribution hewlettpackard company subsidiaries notes consolidated financial statements continued date using methodology likely different estimates amounts presented note relate hps continuing operations pension deferred profitsharing plans substantially hps employees covered various pension deferred profitsharing retirement plans worldwide pension deferred profitsharing costs 301 million 1999 226 million 1998 205 million 1997 us employees meet certain minimum eligibility criteria provided retirement benefits hewlettpackard company retirement plan retirement plan defined benefits based upon employees highest average pay rate length service eligible service october 31 1993 benefit payable retirement plan reduced amounts due employee hps frozen defined contribution deferred profitsharing plan dps since closed new participants combined status retirement plan dps related continuing operations follows october 31 employees outside us generally receive retirement benefits various defined benefit defined contribution plans based upon factors years service employee compensation levels eligibility generally determined accordance local statutory requirements retiree medical plan addition providing pension benefits hp sponsors medical plan provides defined benefits us retired employees substantially hps current us employees could become eligible benefits existing benefit obligation relates primarily employees participating plan retirees may choose managedcare indemnity options contributions dependent options chosen length service 401k plan us employees may participate tax saving capital accumulation plan taxcap established supplemental retirement program beginning february 1 1998 enrollment taxcap automatic employees meet eligibility requirements unless decline participation taxcap program hp matches contributions employees maximum 4 employees annual compensation portion matching contribution may made form hp common stock extent employee elects hp stock investment option plan maximum combined contribution employee stock purchase plan taxcap 25 employees annual base compensation subject certain regulatory plan limitations hps expense related taxcap 98 million 1999 87 million 1998 74 million 1997 hewlettpackard company subsidiaries notes consolidated financial statements continued net periodic cost hps net pension retiree medical costs composed following years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued funded status funded status defined benefit retiree medical plans follows october 31 amortized 15 years us plan periods ranging 10 22 years nonus plans hewlettpackard company subsidiaries notes consolidated financial statements continued defined benefit plans benefit obligations exceeding fair value plan assets follows october 31 plan assets consist primarily listed stocks bonds hps practice fund plans extent contributions taxdeductible assumptions used measure benefit obligations compute expected longterm return assets hps defined benefit retiree medical plans follows years ended october 31 measurement purposes 1999 rate increase medical costs assumed decrease gradually 2007 remain level thereafter assumed health care trend rates could significant effect amounts reported health care plans one percentage point increase assumed health care cost trend rates would increased total service interest cost components reported 1999 11 million would increased postretirement benefit obligation reported 1999 73 million one percentage point decrease assumed health care cost trend rates would decreased total service interest cost components reported 1999 8 million would decreased postretirement obligation reported 1999 55 million commitments hp leases certain real personal property noncancelable operating leases future minimum lease payments october 31 1999 187 million 2000 152 million 2001 123 million 2002 79 million 2003 62 million 2004 236 million thereafter certain leases require hp pay hewlettpackard company subsidiaries notes consolidated financial statements continued property taxes insurance routine maintenance include escalation clauses rent expense 352 million 1999 354 million 1998 296 million 1997 contingencies factors could affect future results contingencies hp involved lawsuits claims investigations proceedings including patent commercial environmental matters arise ordinary course business matters pending hp expects material relation business financial condition results operations factors could affect future results substantial portion hps revenues year generated development manufacture rapid release market high technology products newly introduced year extremely competitive industry hp operates product development manufacturing marketing complex uncertain processes requiring hp accurately predict emerging technological trends customers changing needs additionally hps production strategy relies suppliers ability deliver quality components products time meet critical manufacturing distribution schedules sales strategy relies ability thirdparty distributors sell hp products accommodate changing consumer preferences light dependencies failure successfully manage significant product introduction transition existing products new products failure suppliers deliver needed failure resellers remain customers channel partners could severe nearterm impact hps revenue growth results operations hp sells significant portion products thirdparty resellers result maintains individually significant receivable balances major distributors financial condition operations distributors deteriorate substantially hps operating results could adversely affected future results could also affected problems encounter respect intellectual property international sales operations spinoff agilent technologies acquisition strategic alliance joint venture divestiture activities segment information description segments hp leading global provider computing imaging solutions services business home hp focused capitalizing opportunities internet proliferation electronic services hp organizes operations four major businesses imaging printing systems computing systems services measurement systems comprises reportable segment segments determined primarily management views evaluates hps businesses factors management uses identify hps separate businesses include customer base homogeneity products technology delivery channels measurement systems business named agilent technologies reported discontinued operation discussion see discontinued operations note consolidated financial statements description types products services provided continuing reportable segment follows imaging printing systems provides laser inkjet printers monochrome color mopiers scanners allinone devices personal color copiers faxes digital senders wide hewlettpackard company subsidiaries notes consolidated financial statements continued largeformat printers print servers networkmanagement software networking solutions digital photography products imaging printing supplies imaging software solutions related professional consulting services computing systems provides broad range computing systems enterprise commercial consumer markets products solutions range missioncritical systems software personal computers business home major product lines include unixregistered trademark pc servers desktop mobile personal computers workstations software solutions storage solutions services provides consulting education design installation services ongoing support maintenance proactive services like missioncritical support outsourcing utilitycomputing capabilities financing capabilities include leasing automatic technologyrefreshment services solution financing venture financing hps immaterial operating segments aggregated form category segment revenue profit accounting policies used derive reportable segment results generally described summary significant accounting policies note consolidated financial statements intersegment net revenue earnings operations include transactions segments intended reflect arms length transfer best price available comparable external customers significant portion segments expenses arise shared services infrastructure hp historically provided segments order realize economies scale use resources efficiently expenses include costs centralized research development legal accounting employee benefits real estate insurance services information technology services treasury corporate infrastructure costs allocations determined bases hp considers reasonable reflection utilization services provided benefits received segments costs specifically identified segment amounts could vary allocated cost segment assets items asset totals disclosed segment represent assets directly managed segment allocation certain assets held corporate level assets directly managed segment primarily include accounts receivable inventory property plant equipment certain assets directly managed services segment also composed short longterm financing receivables corporateheld assets allocated segments include inventory property plant equipment certain assets corporateheld assets allocated segments include cash equivalents shortterm investments longterm investments debt securities deferred tax assets current longterm assets managed corporate level property plant equipment included segments total assets reflects allocations segments allocations corporateheld assets however depreciation amortization expense disclosed segment reflect similar allocations addition capital expenditures disclosed segment include allocations corporate level capital expenditures segment data results reportable segments derived directly hps management reporting system described results based hps method internal reporting necessarily hewlettpackard company subsidiaries notes consolidated financial statements continued conformity generally accepted accounting principles management measures performance segment based several metrics including earnings operations results used part evaluate performance allocate resources segments table presents segment information years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued following reconciliation segment information hp consolidated totals years ended october 31 financing interest income leasing hp complementary thirdparty products included services segments net revenue reported interest income net hps consolidated statement earnings addition financing business calculates share corporate level debt related interest expense imputed interest expense included services segments cost sales reported interest expense hps consolidated statement earnings corporate unallocated costs relate primarily corporate infrastructure employee related benefit program costs allocated segments benefit program costs recorded segments predetermined rate adjusted corporate level reflect actual costs corporate level adjustment allocated segments corporate assets relate primarily deferred tax assets equity investments certain current longterm assets managed corporate level major customers single customer represented 10 hps total net revenue period presented hewlettpackard company subsidiaries notes consolidated financial statements continued geographic information net revenue net property plant equipment classified major geographic areas hp operates follows single country outside united states represented 10 hps total net revenue net property plant equipment period presented hps longlived assets composed principally property plant equipment net hewlettpackard company subsidiaries quarterly summary unaudited note hps consolidated financial statements notes periods present agilent technologies businesses discontinued operation see discussion notes consolidated financial statements item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2011 2010 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2011 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2011 2010 consolidated results operations cash flows three years period ended october 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements fiscal year 2010 hewlettpackard company subsidiaries changed method accounting business combinations adoption financial accounting standards board fasb accounting standards codification asc 805 business combinations effective november 1 2009 also audited accordance standards public company accounting oversight board united states hewlettpackard companys internal control financial reporting october 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 14 2011 expressed unqualified opinion thereon ernst young llp san jose california december 14 2011 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2011 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2011 2010 related consolidated statements earnings stockholders equity cash flows three years period ended october 31 2011 report dated december 14 2011 expressed unqualified opinion thereon ernst young llp san jose california december 14 2011 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2011 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment hps management determined hps internal control financial reporting effective october 31 2011 effectiveness hps internal control financial reporting october 31 2011 audited ernst young llp hps independent registered public accounting firm stated report appears page 73 annual report form 10k margaret c whitman margaret c whitman president chief executive officer december 14 2011 catherine lesjak catherine lesjak executive vice president chief financial officer december 14 2011 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions reclassifications segment reorganization connection organizational realignments implemented first quarter fiscal 2011 certain costs previously reported cost sales reclassified selling general administrative expenses better align costs functional areas benefit expenditures hp made certain segment business unit realignments order optimize operating structure reclassifications prior year financial information made conform current year presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share see note 19 discussion hps segment reorganization use estimates preparation financial statements accordance us generally accepted accounting principles gaap requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition net revenue derived primarily sale products services following revenue recognition policies define manner hp accounts sales transactions hp recognizes revenue persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time sale channel partners economic substance apart hp completed obligations related sale hps revenue recognition policies provide sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence vsoe available third party evidence tpe vsoe available estimated selling price esp neither vsoe tpe available multiple element arrangements morethanincidental software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued allocated software deliverable using guidance recognizing software revenue amended hp limits amount revenue recognition delivered elements amount contingent future delivery products services future performance obligations subject customerspecified return refund privileges hp evaluates deliverable arrangement determine whether represent separate units accounting deliverable constitutes separate unit accounting standalone value customernegotiated refund return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially hps control delivered element constitutes separate unit accounting instances aforementioned criteria met deliverable combined undelivered elements allocation arrangement consideration revenue recognition determined combined unit single unit allocation consideration determined arrangement inception basis units relative selling price hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles instances revenue derived sales thirdparty vendor services revenue recorded gross basis hp principal transaction net costs hp acting agent customer vendor several factors considered determine whether hp principal agent notably whether hp primary obligor customer established pricing inventory credit risks hp reports revenue net required taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority products hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued software accordance specific guidance recognizing software revenue applicable hp recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria met termbased software license revenue recognized subscription basis term license entitlement hp uses residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied revenue generated maintenance unspecified upgrades updates whenandifavailable basis recognized period items delivered hp recognizes revenue software hosting softwareasaservice saas arrangements service delivered generally straightline basis contractual period performance software hosting arrangements software licenses sold associated software revenue recognized according whether perpetual licenses term licenses sold subject guidance saas arrangements software licenses sold entire arrangement recognized subscription basis term arrangement services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract hp recognizes revenue certain design build design development andor construction software andor systems projects using percentageofcompletion method hp uses costtocost method measurement towards completion determined percentage cost incurred date total estimated costs project hp uses completed contract method reasonable reliable cost estimates project cannot made outsourcing services revenue generally recognized service provided amount earned contingent upon future event service provided evenly contract term service billings uneven revenue recognized straightline basis contract term hp recognizes revenue operating leases straightline basis service revenue rental period hp recognizes costs associated outsourcing contracts incurred unless costs relate startup phase outsourcing contract generally standalone value case hp defers subsequently amortizes setup costs contractual services period deferred contract costs amortized straightline basis remaining original term unless accelerated method deemed appropriate based actual projected contract financial performance indicators recoverability deferred contract costs associated particular contract analyzed periodic basis using undiscounted estimated cash flows whole contract remaining contract term undiscounted cash flows insufficient recover longlived assets deferred contract costs deferred contract costs written based discounted cash flow model cash flow deficiency remains reducing balance hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued deferred contract costs zero remaining longlived assets related contract evaluated impairment hp recognizes losses consulting outsourcing arrangements period contractual loss becomes probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term deferred revenue related deferred contract costs deferred revenue represents amounts received advance product support contracts software customer support contracts outsourcing startup services work consulting integration projects product sales leasing income product support contracts include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments hp defers service amounts time hp bills customer hp generally recognizes amounts ratably support contract life hp delivers services hp also defers subsequently amortizes certain costs related startup activities enable performance customers longterm services contract deferred contract costs including startup unbilled costs generally amortized straightline basis contract term unless specific customer contract terms conditions indicate accelerated method appropriate shipping handling hp includes costs related shipping handling cost sales periods presented advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 12 billion fiscal 2011 10 billion fiscal 2010 07 billion fiscal 2009 stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value hp recognizes compensation costs net estimated forfeiture rate recognizes compensation cost shares expected meet service performance vesting conditions straightline basis requisite service period award compensation costs determined aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience foreign currency transactions hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect new reporting period net revenue cost sales expenses related previously reported periods remeasured historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive income loss taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents original maturity investment three months less cash equivalents consist primarily highly liquid investments time deposits held major banks commercial paper october 31 2011 2010 carrying value cash equivalents approximates fair value due short period time maturity investments hps investments consist principally time deposits money market funds commercial paper corporate debt securities equity securities publiclytraded privatelyheld companies debt marketable equity securities generally considered availableforsale reported fair value unrealized gains losses net applicable taxes recorded accumulated comprehensive income component equity realized gains losses availableforsale securities included income expense consolidated statement earnings realized gains losses calculated based specific identification method hp monitors investment portfolio impairment periodic basis carrying value investment debt securities exceeds fair value decline value determined otherthantemporary decline hp intend sell debt securities likely hp required sell debt securities prior recovery amortized cost basis hp records impairment charge interest net amount credit loss balance comprehensive income loss hp carries equity investments privatelyheld companies cost fair value hp recognizes otherthantemporary impairment charge concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers aggregated accounts deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 18 gross accounts receivable october 31 2011 october 31 2010 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances past due delinquency status receivable based contractual payment terms receivable concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins allowance doubtful accounts hp establishes allowance doubtful accounts trade financing receivables hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position additional changes circumstances related specific customer hp would adjust estimates recoverability receivables see note 11 full description credit quality financing receivables allowance credit losses hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued inventory hp values inventory lower cost market cost computed firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolescence impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation computed using straightline accelerated methods estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value estimated useful lives assets used solely support customer services contract generally exceed term customer contract hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized internal use software costs using straightline method estimated useful lives software generally three five years software development costs incurred acquire develop software resale capitalized subsequent software product establishing technological feasibility significant capitalized software development costs amortized using greater straightline amortization method ratio current gross revenues product bear total current anticipated future gross revenues product estimated useful lives capitalized software resale generally three years less software development costs incurred subsequent product establishing technological feasibility usually significant instances costs expensed incurred business combinations hp includes results operations businesses acquired hps consolidated results respective dates acquisition due new accounting standards effective fiscal 2010 hp allocates fair value purchase consideration acquisitions tangible assets liabilities intangible assets acquired including inprocess research development iprd based estimated fair values excess fair value purchase consideration fair values identifiable assets liabilities recorded goodwill primary items generate goodwill include value synergies acquired companies hp acquired assembled workforce neither qualifies amortizable intangible asset iprd initially capitalized fair value intangible asset indefinite life assessed impairment thereafter iprd project complete reclassified amortizable purchased intangible asset amortized estimated useful life iprd project abandoned hp records charge value related intangible asset hps consolidated statement earnings period abandoned acquisitionrelated expenses restructuring costs recognized separately business combination expensed incurred prior fiscal 2010 iprd expensed acquisition date direct transaction costs included hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued part fair value purchase consideration restructuring costs included part assumed obligation deriving fair value purchase consideration allocation goodwill purchased intangible assets goodwill purchased intangible assets indefinite useful lives amortized tested impairment least annually hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value general hps reporting units consistent reportable segments identified note 19 however webos business within corporate investments segment reporting unit one step reporting segment level hp determines fair values reporting units based weighting income market approaches income approach hp calculates fair value reporting unit based present value estimated future cash flows market approach hp estimates fair value based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing performed carrying value net assets assigned reporting unit exceeds fair value reporting unit hp must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value hp records impairment loss equal difference hp estimates fair value indefinitelived purchased intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years longlived asset impairment hp evaluates property plant equipment purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable hp assesses recoverability assets based undiscounted future cash flow recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values fair value financial instruments hp measures certain financial assets liabilities fair value based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants financial instruments primarily comprised time deposits money market funds commercial paper corporate debt securities equity securities investments common stock hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued common stock equivalents derivatives see note 9 discussion fair value financial instruments derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 10 full description hps derivative financial instrument activities related accounting policies retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline basis remaining estimated service life participants measurement date hp plans october 31 see note 16 full description plans accounting funding policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records loss provision believes probable liability incurred amount reasonably estimated see note 18 full description hps loss contingencies related accounting policies note 2 stockbased compensation hps stockbased compensation plans include incentive compensation plans employee stock purchase plan espp stockbased compensation expense related income tax benefits total stockbased compensation expense income taxes fiscal 2011 2010 2009 685 million 668 million 635 million respectively resulting income tax benefit fiscal 2011 2010 2009 219 million 216 million 199 million respectively cash received option exercises purchases espp 09 billion fiscal 2011 26 billion fiscal 2010 18 billion fiscal 2009 actual tax benefit realized tax deduction option exercises sharebased payment awards fiscal 2011 2010 2009 220 million 414 million 252 million respectively incentive compensation plans hps incentive compensation plans include principal equity plans adopted 2004 amended 2010 2000 1995 1990 principal equity plans well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include performancebased restricted units prus stock options restricted stock awards employees meeting certain employment qualifications eligible receive stockbased awards hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued fiscal 2008 hp implemented program provides issuance prus representing hypothetical shares hp common stock pru awards may granted eligible employees including hps principal executive officer principal financial officer executive officers pru award reflects target number shares target shares may issued award recipient adjusting performance market conditions actual number shares recipient receives determined end threeyear performance period based results achieved versus company performance goals based hps annual cash flow operations percentage revenue total shareholder return tsr relative sp 500 threeyear performance period depending results achieved threeyear performance period actual number shares grant recipient receives end period may range 0 200 target shares granted based calculations described cash flow performance goals established beginning fiscal year end fiscal year portion target shares may credited award recipients name depending achievement cash flow performance goal year number shares credited varies 0 performance minimum level 150 performance maximum level performance minimum level maximum level proportionate percentage 30 150 applied based relative performance minimum maximum levels following expiration threeyear performance period number shares credited award recipient performance period adjusted tsr modifier tsr modifier varies 0 minimum level met resulting payout pru award 133 performance maximum level performance minimum level maximum level proportionate tsr modifier 66 133 applied based relative performance minimum maximum levels number shares received pru award recipient equals number shares credited award recipient performance period multiplied tsr modifier recipients pru awards generally must remain employed hp continuous basis end applicable threeyear performance period order receive portion shares subject award target shares subject pru awards dividend equivalent rights voting rights common stock earned issued following end applicable performance period expense awards net estimated forfeitures recorded requisite service period based number target shares expected earned achievement cash flow goals performance period stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal fair market value hps common stock option grant date determined reported sale prices hps common stock market closes date contractual term options granted since fiscal 2003 generally eight years contractual term options granted prior fiscal 2003 generally ten years prior march 2010 hp could choose certain cases establish discounted exercise price less 75 fair market value grant date hp granted discounted options since fiscal 2003 fiscal 2011 hp granted performancecontingent stock options require hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued satisfaction service market conditions prior expiration awards order vest principal equity plans hp granted certain employees cashsettled awards restricted stock awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units cashsettled awards restricted stock awards independent option grants generally subject forfeiture employment terminates prior release restrictions awards generally vest one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding however shares underlying restricted stock units included calculation diluted earnings per share eps hp expenses fair market value restricted stock awards determined date grant ratably period restrictions lapse performancebased restricted units hp estimates fair value target pru share using monte carlo simulation model tsr modifier contains market condition following weightedaverage assumptions used determine weightedaverage fair values pru awards fiscal years ended october 31 1reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2009 second year threeyear performance period applicable prus granted fiscal 2010 first year threeyear performance period applicable prus granted fiscal 2011 estimated fair value target share third year prus granted fiscal 2010 second third years prus granted fiscal 2011 determined measurement date applicable prus date annual cash flow goals approved prus expense amortized remainder applicable threeyear performance period 2reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2008 second year threeyear performance period applicable prus granted fiscal 2009 first year threeyear performance period applicable prus granted fiscal 2010 3reflects weightedaverage fair value second year threeyear performance period applicable prus granted fiscal 2008 first year threeyear performance period applicable prus granted fiscal 2009 hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued 4hp uses historic volatility pru awards implied volatility cannot used simulating multivariate prices companies sp 500 nonvested prus october 31 2011 2010 changes fiscal 2011 2010 follows 1vested shares relate awards vested 2008 pru plan 2the minimum level tsr met prus granted fiscal 2009 resulted cancellation approximately 109 million target shares october 31 2011 3excludes target shares third year prus granted fiscal 2010 second third years prus granted fiscal 2011 measurement date yet established measurement date related fair value excluded prus established annual cash flow goals approved 4excludes target shares third year prus granted fiscal 2009 second third years prus granted fiscal 2010 measurement date yet established october 31 2011 82 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expected recognize remaining weightedaverage vesting period 14 years october 31 2010 222 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expected recognize remaining weightedaverage vesting period 12 years stock options hp utilized blackscholes option pricing model value servicebased stock options granted principal equity plans hp examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis hp identified three employee populations apply blackscholes model table presents weightedaverage expected life months combined three identified employee populations expected life computation based historical exercise patterns postvesting termination behavior within three populations identified riskfree interest rate periods within contractual life award based us treasury yield curve effect time grant hp estimates fair value hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued performancecontingent stock options using combination monte carlo simulation model lattice model awards contain market conditions weightedaverage fair value stock options estimated using following weightedaverage assumptions 1the fair value calculation based stock options granted period option activity october 31 fiscal year follows relation fiscal 2011 acquisitions hp assumed approximately 6 million shares options weightedaverage exercise price 14 per share relation fiscal 2010 acquisitions hp assumed approximately 10 million shares options weightedaverage exercise price 19 per share aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options october 31 2011 2010 aggregate intrinsic value difference hps closing stock price last trading day fiscal 2011 fiscal 2010 exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal 2011 2010 2009 07 billion 13 billion 08 billion respectively total grant date fair value options vested expensed fiscal 2011 2010 2009 95 million 93 million 172 million respectively net taxes hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued information options outstanding october 31 2011 follows october 31 2011 264 million unrecognized pretax stockbased compensation expense related stock options hp expected recognize weightedaverage vesting period 23 years october 31 2010 280 million unrecognized pretax stockbased compensation expense related stock options hp expected recognize weightedaverage vesting period 16 years restricted stock awards nonvested restricted stock awards october 31 2011 2010 changes fiscal 2011 2010 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued details restricted stock awards granted assumed acquisitions follows fiscal 2011 restricted stock units assumed acquisitions fiscal 2010 approximately 3 million restricted stock units weightedaverage grant date fair value 48 per share assumed acquisitions details nonvested restricted stock awards fiscal year end follows october 31 2011 526 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expected recognize remaining weightedaverage vesting period 14 years october 31 2010 152 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expected recognize remaining weightedaverage vesting period 15 years employee stock purchase plan hp sponsors hewlettpackard company 2011 employee stock purchase plan 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock purchases made prior fiscal year 2011 made hewlettpackard company 2000 employee stock purchase plan 2000 espp expired november 2010 purchases made october 31 2011 employees purchased stock 2011 espp price equal 95 fair market value purchase date criteria noncompensatory plan met stockbased compensation expense recorded connection purchases may 1 2009 october 31 2010 discount offered purchases made 2000 espp purchases made april 30 2009 employees purchased stock 2000 espp semiannually price equal 85 fair market value purchase date hp recognized expense based 15 discount fair market value purchases hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued espp activity october 31 fiscal year follows shares reserved shares available future grant shares reserved future issuance espp incentive compensation plans follows 1includes 30 million 24 million shares expired november 2010 november 2009 respectively 2in november 2009 hp retired assumed compaq eds plans purposes granting new awards shares reserved future awards plans returned hps pool authorized shares available issuance hp plans hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 net earnings per share hp calculates basic earnings per share eps using net earnings weightedaverage number shares outstanding reporting period diluted eps includes dilutive effect outstanding stock options prus restricted stock units restricted stock reconciliation numerators denominators basic diluted eps calculations follows following fiscal years ended october 31 1net earnings available participating securities significant fiscal years 2011 2010 2009 hp considers restricted stock provides holder nonforfeitable right receive dividends participating security hp excludes options exercise prices greater average market price calculation diluted eps effect would antidilutive fiscal years 2011 2010 2009 hp excluded calculation diluted eps options purchase 25 million shares 5 million shares 85 million shares respectively addition hp also excluded calculation diluted eps options purchase additional 1 million shares 2 million shares 2 million shares fiscal years 2011 2010 2009 respectively whose combined exercise price unamortized fair value excess tax benefits greater periods average market price hps common stock effect would antidilutive hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables hp revolving trade receivablesbased facilities permitting sell certain trade receivables third parties accordance accounting requirements accounting standards codification relating transfers servicing trade receivables derecognized consolidated balance sheet sold third parties total aggregate capacity facilities 15 billion october 31 2011 including 10 billion partial recourse facility entered may 2011 aggregate capacity 05 billion nonrecourse facilities recourse obligation measured using market data similar transactions reported current liability consolidated balance sheet recourse obligation october 31 2011 material fiscal 2011 2010 trade receivables sold facilities 28 billion 17 billion respectively approximates amount cash received resulting losses sales trade accounts receivable twelve months ended october 31 2011 material hp 701 million october 31 2011 175 million october 31 2010 available programs inventory hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued current assets property plant equipment depreciation expense approximately 34 billion fiscal 2011 33 billion fiscal 2010 32 billion fiscal 2009 longterm financing receivables assets accrued liabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued liabilities note 5 supplemental cash flow information supplemental cash flow information consolidated statements cash flows follows following fiscal years ended october 31 note 6 acquisitions fiscal 2011 fiscal 2011 hp completed four acquisitions estimated fair value assets acquired liabilities assumed acquisition date four acquisitions set forth table reflects various preliminary fair value estimates analyses including preliminary work performed thirdparty valuation specialists subject change within measurement period valuations finalized fair values certain tangible assets liabilities acquired valuation intangible assets acquired certain legal matters income nonincomebased taxes residual goodwill yet finalized subject change hp expects continue obtain information assist determining fair value net assets acquired acquisition date measurement period measurement period adjustments hp determines material applied retrospectively period acquisition hps consolidated financial statements depending nature adjustments periods subsequent period acquisition could also affected pro forma results operations acquisitions presented material hps consolidated results operations either individually aggregate goodwill represents excess fair value purchase consideration net tangible intangible assets acquired generally deductible tax purposes hewlettpackard company subsidiaries notes consolidated financial statements continued note 6 acquisitions continued following table presents aggregate estimated fair values assets acquired liabilities assumed including items still preliminary allocations hps acquisitions fiscal 2011 acquisition autonomy corporation plc hps largest acquisition fiscal 2011 acquisition autonomy corporation plc autonomy october 31 2011 hp owned approximately 99 equity interest autonomy hp expects acquire 100 equity interest end first quarter fiscal 2012 autonomy provider infrastructure software enterprise hp reports financial results autonomy business hp software segment acquisition date fair value consideration 11 billion consisted cash paid outstanding common stock convertible bonds vested inthemoney stock awards estimated fair value earned unvested stock awards assumed hp connection acquisition hp recorded approximately 66 billion goodwill amortizable purchased intangible assets 46 billion hp amortizing purchased intangible assets straightline basis estimated weightedaverage life 88 years acquisitions prior years fiscal 2010 hp completed eleven acquisitions total fair value purchase consideration acquisitions 94 billion includes cash paid common stock vestedinthemoney stock awards estimated fair value earned unvested stock awards assumed well certain debt repaid acquisition date connection acquisitions hp recorded approximately 52 billion goodwill 24 billion purchased intangibles 331 million iprd largest four eleven acquisitions 3com corporation 3com palm inc palm 3par inc 3par arcsight inc arcsight fiscal 2009 hp completed two acquisitions total fair value purchase consideration acquisitions 390 million includes direct transaction costs assumption certain liabilities connection transactions connection transactions hp recorded 315 million goodwill 105 million purchased intangibles 7 million iprd larger two acquisitions acquisition lefthand networks inc hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill allocated hps business segments october 31 2011 2010 changes carrying amount goodwill fiscal years ended october 31 2011 2010 follows fiscal 2011 hp recorded approximately 69 billion goodwill related acquisitions based preliminary estimated fair values assets acquired liabilities assumed connection organizational realignments implemented first quarter fiscal 2011 hp also reclassified goodwill related hps networking business corporate investments enterprise servers storage networking essn goodwill related communications media solutions business hp software services fourth quarter fiscal 2011 hp determined would wind manufacture sale webos devices resulting palm acquisition including webos smartphones hp touchpad hp also announced would continue explore alternatives optimize value webos technology including among others licensing webos software related intellectual property selling portion webos assets decision triggered impairment review related goodwill purchased intangible assets recorded connection palm acquisition hp first performed impairment review purchased intangible assets represents value webos technology carrier relationships trade name based information available time review hp determined future value carrier relationships trade name carrying value webos technology approximates fair value hp estimated fair value webos technology based several methods including market approach using recent comparable transactions discounted cash flow approach using estimated cash flows potential licensing agreements based analysis hp recognized impairment loss 72 million primarily related carrier relationships trade name hp performed goodwill impairment test comparing carrying value relevant reporting unit fair value reporting unit fair value reporting unit significantly carrying value due hps decision wind sale webos devices hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued result hp recorded goodwill impairment charge 813 million goodwill impairment charge intangible asset impairment charge included impairment goodwill purchased intangible assets line item consolidated statement earnings december 9 2011 hp announced determined contribute webos software open source community support development going forward hp currently evaluating impact decision 273 million related intangible assets goodwill recorded consolidated balance sheet fiscal 2010 hp recorded approximately 52 billion goodwill related acquisitions based preliminary estimated fair value assets acquired liabilities assumed addition hp recorded goodwill adjustments primarily related increase deferred tax liability outside basis differences foreign subsidiaries electronic data systems corporation eds acquisition hp also recorded increase goodwill result currency translation related acquired subsidiary whose functional currency us dollar increases goodwill partially offset tax adjustments primarily related tax deductible stockbased awards certain acquisitions acquisition date preceded effective date new accounting standard business combinations purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed fiscal 2011 hp recorded approximately 47 billion purchased intangible assets iprd related acquisitions based preliminary estimated fair value assets acquired liabilities assumed fiscal 2010 hp recorded approximately 27 billion purchased intangible assets iprd related acquisitions based preliminary estimated fair value assets acquired liabilities assumed fiscal 2011 hp reclassified approximately 290 million iprd developed technology hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued october 31 2011 october 31 2010 47 billion 25 billion respectively intangible assets reached end amortizable periods tables reflect elimination cost accumulated amortization assets hp also performed annual impairment test reporting units indefinitelived compaq trade name result analysis hp concluded impairment goodwill existed august 1 2011 apart impairment webos device business discussed impairment goodwill indefinitelived intangible assets august 1 2010 however future impairment tests could result charge earnings excess fair value carrying value indefinitelived compaq trade name approximately 144 million august 1 2011 annual testing date order evaluate sensitivity fair value calculation applied hypothetical 10 decrease fair value intangible resulted excess fair value carrying value approximately 13 million addition future change hps branding strategy resulted reclassification compaq trade name indefinitelived intangible definitelived intangible would significant decrease fair value asset hp continue evaluate goodwill indefinitelived intangibles annual basis beginning fourth fiscal quarter whenever events changes circumstances changes managements business strategy indicate may potential indicator impairment finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weightedaverage useful lives 8 years developed core technology patents product trademarks weightedaverage useful lives 7 years estimated future amortization expense related finitelived purchased intangible assets october 31 2011 follows note 8 restructuring charges hp records restructuring charges associated managementapproved restructuring plans either reorganize one hps business segments remove duplicative headcount infrastructure associated one business acquisitions restructuring charges include severance costs eliminate specified number employee positions infrastructure charges vacate facilities consolidate operations contract cancellation cost restructuring charges recorded based upon planned employee termination dates site closure consolidation plans timing associated cash payments dependent upon type restructuring charge extend hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued multiyear period hp records shortterm portion restructuring liability accrued restructuring longterm portion liabilities consolidated balance sheets fiscal 2010 acquisitions connection acquisitions palm 3com fiscal 2010 hps management approved initiated plans restructure operations acquired companies including severance employees contract cancellation costs vacate duplicative facilities items total expected combined cost plans 121 million includes 33 million additional restructuring costs recorded fourth quarter fiscal 2011 connection hps decision wind webos device business october 31 2011 hp recorded majority costs plans based upon anticipated timing planned terminations facility closure costs respect palm plan restructuring charges anticipated majority remaining costs expected paid fiscal 2012 remaining costs pertaining 3com plan expected paid fiscal 2016 fixed lease payments made fiscal 2010 es restructuring plan june 1 2010 hps management announced plan restructure enterprise services business includes infrastructure technology outsourcing business process outsourcing application services business units multiyear restructuring program includes plans consolidate commercial data centers tools applications total expected cost plan recorded restructuring charges approximately 10 billion includes severance costs eliminate approximately 9000 positions infrastructure charges october 31 2011 hp recorded majority severance costs hp expects record majority infrastructure charges fiscal 2012 timing charges based upon planned termination dates site closure consolidation plans majority associated cash payments expected paid fourth quarter fiscal 2012 october 31 2011 approximately 5700 positions eliminated remaining anticipated next 12 months fiscal 2009 restructuring plan may 2009 hps management approved initiated restructuring plan structurally change improve effectiveness imaging printing group ipg personal systems group psg enterprise servers storage networking essn businesses total expected cost plan 294 million severancerelated costs associated planned elimination approximately 4400 positions october 31 2011 planned eliminations occurred majority restructuring costs paid fiscal 2008 hpeds restructuring plan connection acquisition eds august 26 2008 hps management approved initiated restructuring plan combine align hps services businesses eliminate duplicative overhead functions consolidate vacate duplicative facilities restructuring plan expected implemented four years acquisition date total expected cost 34 billion approximately 15 billion expected costs associated preacquisition eds reflected fair value purchase consideration eds costs subject change based hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued actual costs incurred remaining costs primarily associated hp recorded restructuring charge restructuring plan includes severance costs related eliminating approximately 25000 positions october 31 2011 planned eliminations occurred vast majority associated severance costs paid infrastructure charges restructuring plan include facility closure consolidation costs associated early termination certain contractual obligations hp recorded majority costs based upon execution site closure consolidation plans associated cash payments expected paid fiscal 2016 summary restructuring plans adjustments accrued restructuring expenses related hps restructuring plans described twelve months ended october 31 2011 follows october 31 2011 october 31 2010 hp included longterm portion restructuring liability 159 million 297 million respectively liabilities shortterm portion 654 million 911 million respectively accrued restructuring accompanying consolidated balance sheets note 9 fair value hp determines fair value based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants valuation techniques used hp based upon observable unobservable inputs observable market inputs reflect market data obtained independent sources unobservable inputs reflect hps assumptions market participant assumptions based best information available hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued observable inputs preferred basis valuation two types inputs create following fair value hierarchy level 1quoted prices unadjusted identical instruments active markets level 2quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market corroborated observable market data substantially full term assets liabilities level 3prices valuations require management inputs significant fair value measurement unobservable following section describes valuation methodologies hp uses measure financial assets liabilities fair value cash equivalents investments hp holds time deposits money market funds commercial paper debt securities primarily consisting corporate foreign government notes bonds common stock equivalents applicable hp uses quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value hp uses quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available hp uses internally developed valuation models whose inputs include bid prices thirdparty valuations utilizing underlying assets assumptions derivative instruments discussed note 10 hp mainly holds nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures active market quotes available hp uses industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases hp uses management judgment develop assumptions used determine fair value hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued following table presents hps assets liabilities measured fair value recurring basis hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments cash equivalents availableforsale investments cash equivalents availableforsale investments fair value october 31 2011 october 31 2010 follows cash equivalents consist investments time deposits commercial paper money market funds original maturities three months less interest income related cash equivalents approximately 167 million fiscal 2011 111 million fiscal 2010 119 million fiscal 2009 time deposits primarily issued institutions outside us october 31 2011 october 31 2010 availableforsale securities consist shortterm investments mature within twelve months less longterm investments maturities greater twelve months investments primarily include institutional bonds equity securities public companies fixedinterest securities time deposits hp estimates fair values investments based quoted market prices pricing models using current market rates estimated fair values may representative actual values realized future gross unrealized loss october 31 2011 due primarily declines certain debt securities 21 million continuous loss position twelve months gross unrealized loss october 31 2010 due primarily declines fair value certain debt securities included 28 million continuous loss position twelve months hp intend sell debt securities likely hp required sell debt securities prior recovery amortized cost fiscal 2011 hp hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued recognized insignificant impairment charge associated debt securities fiscal years 2010 2009 hp recognized impairment charge 12 million 24 million respectively total investments contractual maturities shortterm longterm investments availableforsale debt securities october 31 2011 follows summary carrying values balance sheet classification shortterm longterm investments debt equity securities october 31 2011 october 31 2010 follows equity securities privately held companies include cost basis equity method investments include marketable trading securities hp includes gains losses changes fair value securities offset losses gains related liabilities interest net hps consolidated statements earnings net impact associated securities material fiscal years 2011 2010 respectively derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts option contracts interest rate swaps total return swaps hedge certain foreign currency interest rate lesser extent equity exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp leveraged derivatives use derivative contracts speculative purposes hp designates derivatives fair value hedges cash flow hedges hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued hedges foreign currency exposure net investment foreign operation net investment hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivatives gross basis consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs operating activities consolidated statements cash flows result use derivative instruments hp exposed risk counterparties derivative contracts fail meet contractual obligations mitigate counterparty credit risk hp policy entering contracts carefully selected major financial institutions based upon credit ratings factors hp maintains dollar risk limits correspond institutions credit rating factors hps established policies procedures mitigating credit risk principal transactions shortterm cash include reviewing establishing limits credit exposure continually assessing creditworthiness counterparties master agreements counterparties include master netting arrangements mitigation credit exposure counterparties arrangements permit hp net amounts due hp counterparty amounts due hp counterparty mitigate credit exposure counterparties hp may enter collateral security arrangements counterparties arrangements require hp post collateral hold collateral counterparties derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties funds generally transferred within two business days october 31 2011 hp posted 96 million associated counterparties collateralized arrangements collateral amounts october 31 2010 material fair value hedges hp enters fair value hedges reduce exposure debt portfolio interest rate risk hp issues longterm debt us dollars based market conditions time financing hp uses interest rate swaps mitigate market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial investing fixedrate instruments hp may enter interest rate swaps convert fixed interest returns variable interest returns would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period cash flow hedges hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales operating expense intercompany lease loan denominated currencies hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued us dollar hps foreign currency cash flow hedges mature generally within twelve months however certain leasing revenuerelated forward contracts intercompany lease loan forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portion gain loss derivative instrument accumulated comprehensive income loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item fiscal years 2011 2010 2009 hp discontinue cash flow hedge probable forecasted transaction would occur net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity derivatives designated hedging instruments consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures hp also uses total return swaps lesser extent interest rate swaps based equity fixed income indices hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair values earnings period change hp recognizes gain loss foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities hp recognizes gain loss total return swaps interest rate swaps interest net period gain loss change market value executive deferred compensation plan liability hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt change fair value derivative foreign currency options forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings october 31 2011 2010 portion hedging instruments gain loss excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years 2011 2010 2009 hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued fair value derivative instruments consolidated balance sheets discussed note 9 hp estimates fair values derivatives primarily based pricing models using current market rates records derivatives balance sheet fair value gross notional fair value derivative financial instruments consolidated balance sheets recorded follows 1represents face amounts contracts outstanding october 31 2011 october 31 2010 respectively 2represents offsetting swaps acquired previous business combinations designated hedging instruments effect derivative instruments consolidated statements earnings beforetax effect derivative instrument related hedged item fair value hedging relationship fiscal years ended october 31 2011 october 31 2010 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued beforetax effect derivative instruments cash flow net investment hedging relationships fiscal years 2011 2010 follows october 31 2011 hp expects reclassify estimated net accumulated comprehensive loss approximately 45 million net taxes earnings next twelve months hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued along earnings effects related forecasted transactions association cash flow hedges beforetax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal years 2011 2010 follows financial instruments balance hps financial instruments accounts receivable financing receivables notes payable shortterm borrowings accounts payable accrued liabilities carrying amounts approximate fair value due short maturities estimated fair value hps short longterm debt approximately 311 billion october 31 2011 compared carrying value 306 billion date estimated fair value hps short longterm debt approximately 225 billion october 31 2010 compared carrying value 223 billion date estimated fair value debt based primarily quoted market prices well borrowing rates currently available hp bank loans similar terms maturities note 11 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting placement hp thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 october 31 2011 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 equipment leased customers operating leases 40 billion october 31 2011 35 billion october 31 2010 included machinery equipment accumulated depreciation equipment lease 13 billion october 31 2011 10 billion october 31 2010 october 31 2011 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 due homogenous nature leasing transactions hp manages financing receivables aggregate basis assessing monitoring credit risk credit risk generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions credit quality obligor evaluated lease inception monitored term transaction risk ratings assigned lease based creditworthiness obligor variables augment diminish inherent credit risk particular transaction variables include underlying value liquidity collateral essential use equipment term lease inclusion guarantees letters credit security deposits credit enhancements hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued credit risk profile gross financing receivables based internally assigned ratings follows following fiscal years ended october 31 accounts rated low risk typically equivalent standard poors rating bbb higher accounts rated moderate risk would generally equivalent bb lower hp closely monitors accounts rated high risk based upon impairment analysis specific reserves may established portion leases allowance doubtful accounts balance comprised general reserve determined based percentage financing receivables balance specific reserve established certain leases identified exposures customer default bankruptcy events make unlikely hp recover investment lease general reserve percentages maintained regional basis based several factors include consideration historical credit losses portfolio delinquencies trends overall weightedaverage risk rating portfolio information derived competitive benchmarking allowance doubtful accounts related financing receivables follows following fiscal years ended october 31 accounts generally put nonaccrual status cessation interest accrual reach 90 days past due certain circumstances delinquency deemed hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued administrative nature accounts may still accrue interest reach 90 days past due writeoff specific reserve generally recorded account reaches 180 days past due total financing receivables nonaccrual status 157 million 271 million october 31 2011 2010 respectively total financing receivables greater 90 days past due still accruing interest 71 million 83 million october 31 2011 2010 respectively note 12 guarantees indemnifications ordinary course business hp may provide certain clients subsidiary performance guarantees andor financial performance guarantees may backed standby letters credit surety bonds general hp would liable amounts guarantees event nonperformance hp hps subsidiaries permits termination related contract client likelihood hp believes remote hp believes company compliance performance obligations material service contracts performance guarantee hp certain service contracts supported client financing securitization arrangements specific circumstances involving nonperformance resulting service contract termination failure comply terms financing arrangement hp would required acquire certain assets hp considers possibility failure comply remote asset amounts involved immaterial ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates repair rates post sales support costs differ estimates revisions estimated warranty liability would required hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 guarantees continued changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 note 13 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 notes payable banks lines credit includes deposits associated hps bankingrelated activities approximately 355 million 348 million october 31 2011 2010 respectively hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued longterm debt longterm debt follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued disclosed note 10 consolidated financial statements hp uses interest rate swaps mitigate market risk exposures connection certain fixed interest global notes achieve primarily us dollar liborbased floating interest expense table reflect interest rate swap impact interest rate hp may redeem global notes set forth table time redemption prices described prospectus supplements relating thereto global notes senior unsecured debt may 2009 hp filed shelf registration statement 2009 shelf registration statement sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants 2009 shelf registration statement replaced registration statements filed march 2002 may 2006 hps board directors approved 160 billion us commercial paper program hps subsidiaries authorized issue additional 10 billion commercial paper 500 million capacity currently available used hewlettpackard international bank plc whollyowned subsidiary hp euro commercial papercertificate deposit programme hp 30 billion fiveyear credit facility expires may 2012 45 billion fouryear credit facility expires february 2015 commitment fees interest rates terms borrowing credit facilities vary based hps external credit ratings credit facilities senior unsecured committed borrowing arrangements primarily support issuance us commercial paper hps ability us commercial paper outstanding balance exceeds 75 billion supported credit facilities subject number factors including liquidity conditions business performance august 2011 hp entered new £50 billion 81 billion 364day senior unsecured bridge term loan agreement bridge facility support funding autonomy acquisition terms bridge facility amount credit available declines amount equal proceeds future issuance hp certain equity securities incurrence hp certain indebtedness october 31 2011 £22 billion 36 billion borrowing capacity remained available bridge facility bridge facility terminated november 2011 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued within including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2011 carrying value assets approximated carrying value borrowings 247 million october 31 2011 hp capacity issue unspecified amount additional debt securities common stock preferred stock depositary shares warrants 2009 shelf registration statement date hp also approximately 146 billion available borrowing resources including 133 billion commercial paper programs approximately 13 billion relating uncommitted lines credit £22 billion 36 billion bridge facility aggregate future maturities longterm debt face value excluding fair value adjustment related hedged debt 543 million premium debt issuance 35 million discount debt issuance 21 million follows october 31 2011 interest expense borrowings approximately 551 million fiscal 2011 417 million fiscal 2010 597 million fiscal 2009 subsequent event december 9 2011 hp issued 3 billion us dollar global notes 2009 shelf registration statement global notes consisted fixed rate notes market rates maturities three five ten years date issuance note 14 taxes earnings domestic foreign components earnings follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued provision benefit taxes earnings follows following fiscal years ended october 31 significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued breakdown current longterm deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 october 31 2011 hp 21 billion 49 billion 302 billion federal state foreign net operating loss carryforwards respectively amounts included respective totals begin expire fiscal 2012 hp also capital loss carryforward approximately 287 million begin expire fiscal 2012 hp provided valuation allowance 132 million deferred tax assets related federal state net operating losses 106 million deferred tax assets related capital loss carryforwards 85 billion deferred tax assets related foreign net operating loss carryforwards hp expect realize october 31 2011 hp recorded deferred tax assets various tax credit carryforwards 27 billion amount includes 19 billion us foreign tax credit carryforwards begin expire fiscal 2013 hp recorded valuation allowance 47 million hp alternative minimum tax credit carryforwards 25 million expire us research development credit carryforwards 517 million begin expire fiscal 2020 hp also tax credit carryforwards 331 million various states foreign countries hp provided valuation allowance 197 million reduce related deferred tax asset credits begin expire fiscal 2012 gross deferred tax assets october 31 2011 2010 2009 reduced valuation allowances 91 billion 88 billion 87 billion respectively total valuation allowances increased 307 million fiscal 2011 associated various net operating losses tax credits deferred tax assets valuation allowances increased 77 million fiscal 2010 consisting 106 million associated federal capital loss carryovers net 29 million decrease associated various net operating loss carryovers credits valuation allowances increased 69 billion fiscal 2009 consisting 70 billion associated foreign net operating loss carryovers arising fiscal 2009 associated internal restructuring transactions reduced 100 million associated state foreign net operating losses net excess tax benefits resulting exercise employee stock options employee stock programs recorded increase stockholders equity approximately 128 million fiscal 2011 300 million fiscal 2010 163 million fiscal 2009 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 jurisdictions favorable tax rates significant effective tax rate impact periods presented include singapore netherlands china ireland puerto rico hp plans reinvest earnings jurisdictions indefinitely outside united states therefore provided us taxes indefinitely reinvested earnings fiscal 2011 hp recorded 325 million net income tax charges related items unique year amounts included 468 million tax charges increases foreign state valuation allowances offset 78 million income tax benefits adjustments prior year foreign income tax accruals 63 million income tax benefits uncertain tax position reserve adjustments settlement tax audit matters 2 million tax benefits associated miscellaneous prior period items fiscal 2010 hp recorded 26 million net income tax benefits related items unique year amounts included adjustments prior year foreign income tax accruals credits settlement tax audit matters valuation allowance adjustments miscellaneous discrete items fiscal 2009 hp recorded 547 million net income tax benefits related items unique year recorded amounts included 383 million income tax benefits attributable net deferred tax assets foreign net operating loss carryovers arising pursuant internal restructuring transactions also included net tax benefit 154 million adjustment estimated fiscal 2008 tax accruals upon filing 2008 income tax returns 60 million income tax benefit valuation allowance reversals state foreign net operating losses miscellaneous items resulted net tax charge 50 million result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2024 gross income tax benefits attributable actions investments estimated 13 billion approximately 062 basic earnings per share fiscal year 2011 966 million approximately 041 basic earnings per share fiscal year 2010 853 million approximately 035 basic earnings per share fiscal year 2009 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued total amount gross unrecognized tax benefits 21 billion october 31 2011 reconciliation unrecognized tax benefits follows 11 billion 10 billion 950 million hps unrecognized tax benefits october 31 2011 2010 2009 respectively would affect hps effective tax rate realized hp recognizes interest income favorable settlements income tax receivables interest expense penalties accrued unrecognized tax benefits within income tax expense october 31 2011 hp accrued net 205 million payable interest penalties fiscal 2011 hp recognized net interest expense net tax net deficiencies 24 million hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution irs audit cycle within next 12 months however reasonably possible certain federal foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 249 million within next 12 months hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued hp subject income tax united states approximately 80 foreign countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits state foreign tax authorities irs began audit hps 2008 income tax returns 2010 began audit hps 2009 income tax returns 2011 hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agents reports rar fiscal 2001 2002 2006 2007 tax years proposed irs adjustments tax years would sustained reduce benefits tax refund claims hp filed net operating loss carrybacks earlier fiscal years tax credit carryforwards subsequent years approximately 557 million hp filed petitions united states tax court regarding certain proposed irs adjustments regarding tax years 1999 2003 continuing contest additional adjustments proposed irs tax years hp believes provided adequate reserves tax deficiencies reductions tax benefits could result irs actions respect major foreign state tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp believes adequate accruals provided open tax years tax years eds 2002 audited irs proposed adjustments resolved irs currently auditing edss tax years 2007 short period ended august 26 2008 eds received rars exam years 2003 2004 2005 2006 proposing total tax deficiencies 110 million including 30 million reduction carrybacks prior years hp contesting certain issues believes provided adequate reserves tax deficiencies reductions tax benefit could result irs actions hp provided us federal income foreign withholding taxes 291 billion undistributed earnings nonus operations october 31 2011 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated determines advantageous business operations tax cash management reasons note 15 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends declared 040 per common share fiscal 2011 032 per common share fiscal 2010 2009 share repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2011 hp executed share repurchases 259 million shares repurchases 262 million shares settled 101 billion included 4 million shares repurchased transactions executed fiscal 2010 settled fiscal 2011 hp shares repurchased fourth quarter fiscal 2011 settled next fiscal year fiscal 2010 hp executed share repurchases 241 million shares repurchases 240 million shares settled 110 billion included hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 stockholders equity continued 3 million shares repurchased transactions executed fiscal 2009 settled fiscal 2010 fiscal 2009 hp completed share repurchases approximately 120 million shares repurchases approximately 132 million shares settled 51 billion included approximately 14 million shares repurchased transactions executed fiscal 2008 settled fiscal 2009 foregoing shares repurchased settled fiscal 2011 fiscal 2010 fiscal 2009 open market repurchase transactions fiscal 2011 hps board directors authorized additional 10 billion future share repurchases fiscal 2010 hps board directors authorized additional 180 billion future share repurchases fiscal 2009 additional authorization future share repurchases hps board directors october 31 2011 hp remaining authorization approximately 108 billion future share repurchases comprehensive income changes components comprehensive income net taxes follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 stockholders equity continued components accumulated comprehensive loss net taxes follows following fiscal years ended october 31 note 16 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan traditional defined benefit pension plan based pay years service hp company cash account pension plan cash account pension plan benefits accrued pursuant cash accumulation account formula based upon percentage pay plus interest frozen effective january 1 2008 cash account pension plan retirement plan merged 2005 certain funding investment purposes merged plan referred hp pension plan following acquisition eds august 26 2008 hp announced modifying eds us qualified nonqualified plans employees accruing benefits plans effective january 1 2009 eds employees us ceased accruing pension benefits final pension benefit eds employees retire date calculated based pay service december 31 2008 effective october 30 2009 eds us qualified pension plan also merged hp pension plan eds us qualified pension plan like cash account pension plan retirement plan remains separate subplan within hp pension plan purposes determining benefit amounts result merger impact separate benefit structures plans hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations fair value plan assets projected hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued benefit obligations us defined benefit plans combined dpsp follows following fiscal years ended october 31 postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may become eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required coverage hp retiree medical program february 2007 hp limited future eligibility pre2003 hp retiree medical program employees within five years satisfying programs retirement criteria june 30 2007 employees meeting modified program criteria may become eligible participation hp retiree medical program november 2008 hp announced changing limits future costsharing pre2003 program whereby future cost increases paid participating retirees starting 2011 june 2008 hp modified rmsa plan provide generally employees employed hp july 31 2008 would eligible receive employer credits september 2008 hp modified rmsa plan provide employees would receive employer credits form matching contributions hp currently collects retiree drug subsidy us federal government relating retiree prescription drug benefits provides collecting retiree drug subsidy one several alternatives medicare part employers financing benefits march 2010 hp decided contract prescription drug plan leveraging employer group waiver plan process provide group benefits medicare part alternative collecting retiree drug subsidy change retiree prescription drug financing strategy take effect 2013 due health care reform legislation enacted march 2010 expected give hp access greater us federal subsidies time help pay retiree benefits aside impact health care hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued reform legislation expected affect cost hps retiree welfare programs subsidy offered hp retiree participants fixed fiscal year 2010 hp also announced elimination companypaid retiree life insurance effective january 1 2011 defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 626 million fiscal 2011 535 million fiscal 2010 568 million fiscal 2009 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation similar hp eds offered participation defined contribution plans us nonus employees including eds 401k plan time eds acquisition august 2008 employer match eds 401k plan 25 employee contribution based maximum contribution 6 employees salary effective january 1 2009 us employees participating eds 401k plan became eligible 4 matching contribution eligible compensation similar hp 401k plan contributions invested direction employee various funds although eds 401k plan offer hp stock fund effective april 1 2009 hp matching contributions hp 401k plan eds 401k plan changed quarterly discretionary performancebased match maximum 4 eligible compensation us employees determined fiscal quarter based business results hps matching contributions subsequent quarters fiscal 2009 quarters fiscal 2010 100 maximum 4 match effective beginning fiscal 2011 quarterly employer matching contributions hp 401k plan eds 401k plan longer discretionary equal 100 employees contributions maximum 4 eligible compensation effective december 31 2010 eds 401k plan merged hp 401k plan effective january 31 2004 hp designated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 8 million 7 million 8 million dividends hp common shares held hp stock fund fiscal 2011 2010 2009 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 21 million shares hp common stock october 31 2011 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued pension postretirement benefit expense hps net pension postretirement benefit cost gain recognized consolidated statements earnings follows following fiscal years ended october 31 weightedaverage assumptions used calculate net benefit cost follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets october 31 2011 october 31 2010 follows following table summarizes pretax net experience loss gain prior service benefit recognized accumulated comprehensive income loss companys defined benefit postretirement benefit plans october 31 2011 following table summarizes experience loss prior service benefit amortized accumulated comprehensive income recognized components net periodic benefit cost credit next fiscal year weightedaverage assumptions used calculate benefit obligation disclosed 2011 2010 fiscal close follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued defined benefit plans projected benefit obligations exceeding fair value plan assets follows defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued fair value considerations table sets forth fair value plan assets october 31 2011 asset category using threelevel hierarchy fairvalue inputs described note 9 1includes debt issued national state local governments agencies 2includes limited partnerships venture capital partnerships 3includes cash equivalents equities fixed income investments 4includes cash equivalents shortterm marketable securities 5includes international insured contracts derivative instruments unsettled transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued changes fair value measurements level 3 investments year ended october 31 2011 follows table sets forth fair value plan assets october 31 2010 asset category using threelevel hierarchy fairvalue inputs described note 9 1includes debt issued national state local governments agencies 2includes limited partnerships venture capital partnerships 3includes cash equivalents shortterm marketable securities 4includes international insured contracts unsettled transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued changes fair value measurements level 3 investments year ended october 31 2010 follows plan asset valuations following description valuation methodologies used pension plan assets measured fair value changes methodologies used reporting period investments securities valued closing price reported stock exchange individual securities traded corporate government assetbacked debt securities fair value based upon observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based upon observable quoted prices underlying assets alternative investments limited partnerships joint ventures private equities determined general partner general partners designee quarter periodic basis common collective trusts interest 10312 entities registered investment companies valued net asset value established funds sponsor based upon fair value assets underlying funds valuation assets requires judgment due absence quoted market prices assets therefore classified level 3 cash equivalents includes money market accounts valued based net asset value shares assets valued based upon level input eg quoted prices observable inputs level 1 unobservable inputs significant fair value measurement assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued plan asset allocations weightedaverage target actual asset allocations across hp eds plans respective measurement dates follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk depending funded status plan majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment liability exposures hp utilizes derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds provide diversification higher expected returns outside united states asset allocation decisions typically made independent board trustees us investment objectives designed generate returns enable plan meet future obligations countries local regulations require adjustments asset allocation typically leading higher percentage fixed income would otherwise deployed hps investment subsidiary acts consulting governance role reviewing investment strategy providing recommended list investment managers country plan final decisions asset allocation investment managers made local trustees basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued expected asset class returns reflect current yield us government bonds risk premiums asset class hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees hp closed acquisition eds august 26 2008 effective immediately close fiscal 2009 hp merged assets hp eds us pension plans expected return plan assets used calculating net benefit costs 76 fiscal 2012 reflects result recent asset allocation study commensurate investment strategy merged us pension plan approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation future contributions funding policy fiscal 2012 hp expects contribute approximately 597 million pension plans approximately 31 million cover benefit payments us nonqualified plan participants hp expects pay approximately 30 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2011 1the estimated future benefits payable postretirement plans reflected net expected medicare part subsidy hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense approximately 1042 million fiscal 2011 1062 million fiscal 2010 1112 million fiscal 2009 sublease rental income approximately 38 million fiscal 2011 46 million fiscal 2010 53 million fiscal 2009 october 31 2011 october 31 2010 property capital lease comprised primarily equipment furniture approximately 577 million 688 million respectively included property plant equipment accompanying consolidated balance sheets accumulated depreciation property capital lease approximately 454 million 482 million respectively october 31 2011 october 31 2010 related depreciation included depreciation expense future annual minimum lease payments sublease rental income commitments capital lease commitments october 31 2011 follows october 31 2011 hp unconditional purchase obligations approximately 23 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally inventory items future unconditional purchase obligations october 31 2011 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business hp records provision liability management believes probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters october 31 2011 reasonably possible additional material loss incurred amount excess amounts already recognized hps financial statements hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period unfavorable resolution one contingencies litigation proceedings investigations copyright levies described proceedings ongoing concluded involving hp certain european union eu member countries including litigation germany belgium austria seeking impose modify levies upon equipment multifunction devices mfds personal computers pcs printers alleging devices enable producing private copies copyrighted materials descriptions ongoing proceedings included levies generally based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted legal proceedings hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 stuttgart court appeals may 11 2005 stuttgart court appeals issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law court issued written decision january 25 2008 vg wort subsequently filed application german federal supreme court section 321a german code civil procedure contending court consider arguments may 9 2008 german federal supreme court denied vg worts application vg wort appealed decision filing claim german federal constitutional court challenging ruling printers subject levies september 21 2010 constitutional court published decision holding german federal supreme court erred referring questions interpretation german copyright law court justice european union cjeu therefore revoked german federal hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued supreme court decision remitted matter july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich civil court munich germany seeking levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fsc december 23 2004 munich civil court held pcs subject levy fsc must pay €12 plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 munich court appeals december 15 2005 munich court appeals affirmed munich civil court decision fsc filed appeal german federal supreme court february 2006 october 2 2008 german federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject levies photocopiers established law vg wort subsequently filed claim german federal constitutional court challenging ruling january 2011 constitutional court published decision holding german federal supreme court decision inconsistent german constitution revoking german federal supreme court decision constitutional court remitted matter german federal supreme court action july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested hp extrajudicial means amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based copying speed operated normal print mode set default device schedule court proceedings determined decision court expected september 2012 based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates units impacted levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain skold et al v intel corporation hewlettpackard company lawsuit hp joined june 14 2004 pending state court santa clara county california lawsuit alleges intel corporation intel misled public suppressing concealing alleged material fact systems use intel pentium 4 processor less powerful slower systems using intel pentium iii processor processors made competitor intel lawsuit alleges hp aided abetted intels allegedly unlawful conduct plaintiffs seek unspecified damages hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued restitution attorneys fees costs certification nationwide class february 27 2009 court denied prejudice plaintiffs motion nationwide class certification third time august 31 2011 california court appeal reversed trial courts denial class certification remanded case back trial court proceedings november 23 2011 plaintiffs filed motion seeking certify nationwide class asserting claims california consumers legal remedies act california unfair competition law hearing plaintiffs motion currently scheduled march 2 2012 inkjet printer litigation described hp involved several lawsuits claiming breach express implied warranty unjust enrichment deceptive advertising unfair business practices plaintiffs alleged among things hp employed smart chip certain inkjet printing products order register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contended consumers received false ink depletion warnings smart chip limits ability consumers use cartridge full capacity choose competitive products •a consolidated lawsuit captioned hp inkjet printer litigation pending united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees january 4 2008 court heard plaintiffs motions class certification add class representative hps motion summary judgment july 25 2008 court denied three motions march 30 2009 plaintiffs filed renewed motion class certification hearing plaintiffs motion class certification scheduled april 9 2010 postponed •a lawsuit captioned blennis v hp filed january 17 2007 united states district court northern district california plaintiffs seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees class certification hearing scheduled may 21 2010 taken calendar •a lawsuit captioned rich v hp filed hp may 22 2006 united states district court northern district california suit alleges hp designed color inkjet printers unnecessarily use color ink addition black ink printing black white images text plaintiffs seeking certify nationwide injunctive class californiaonly damages class certification hearing scheduled may 7 2010 taken calendar •two class actions hp subsidiary hewlettpackard canada co pending canada one commenced british columbia february 2006 one commenced ontario june 2006 plaintiffs seeking class certification restitution declaratory relief injunctive relief unspecified statutory compensatory punitive damages august 25 2010 hp plaintiffs hp inkjet printer litigation blennis v hp rich v hp entered agreement settle lawsuits behalf proposed classes agreement subject approval court becomes final terms proposed settlement lawsuits consolidated eligible class members right hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued obtain ecredits exceed 5 million aggregate use purchasing printers printer supplies hps website part proposed settlement hp also agreed provide class members additional information regarding hp inkjet printer functionality change content certain software user guide messaging provided users regarding life inkjet printer cartridges addition class counsel class representatives paid attorneys fees expenses stipends march 29 2011 court granted final approval settlement april 27 2011 certain class members objected settlement filed appeal courts order granting final approval settlement goldblatt v hp consumer class action filed hp december 1 2011 united states district court northern district california alleging hp printers design defect software installed printers could allow hackers unauthorized users gain access printers steal personal confidential information consumers otherwise control cause physical damage printers plaintiff also alleges hp aware security vulnerability failed disclose consumers complaint seeks certification nationwide class purchasers hp printers seeks unspecified damages restitution punitive damages injunctive relief attorneys fees costs fair labor standards act litigation hp involved several lawsuits plaintiffs seeking unpaid overtime compensation damages based allegations various employees eds hp misclassified exempt employees fair labor standards act andor violation california labor code state laws matters include following •cunningham et al v electronic data systems corporation purported collective action filed may 10 2006 us district court southern district new york claiming current former eds employees allegedly involved installing andor maintaining computer software hardware misclassified exempt employees another purported collective action steavens et al v electronic data systems corporation filed october 23 2007 also pending court alleging similar facts steavens case consolidated pretrial purposes cunningham case december 14 2010 court granted conditional certification class consisting employees 20 legacy eds job codes consolidated cunningham steavens matter plaintiffs also allege various state law class claims misclassification plaintiffs yet sought class certification •heffelfinger et al v electronic data systems corporation class action filed november 2006 california superior court claiming certain eds information technology workers california misclassified exempt employees case subsequently transferred us district court central district california january 7 2008 certified class information technology workers california june 6 2008 court granted defendants motion summary judgment plaintiffs subsequently filed appeal us court appeals ninth circuit hearing appeal held august 2011 decision pending two purported class actions originally filed california superior court karlbom et al v electronic data systems corporation filed march 16 2009 george et al v electronic data systems corporation filed april 2 2009 allege similar facts karlbom case pending san diego county superior hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued court temporarily stayed based pending steavens consolidated matter george case pending us district court southern district new york consolidated pretrial purposes cunningham steavens cases september 9 2011 court granted request plaintiffs counsel george matter amend plaintiffs complaint sever case steavens consolidated matter plaintiff thereafter filed first amended complaint october 21 2011 november 23 2011 court transferred george matter back us district court central district california •blake et al v hewlettpackard company purported collective action filed february 17 2011 us district court southern district texas claiming class information technology help desk support personnel misclassified exempt employees substantive rulings made case addition matters may 24 2011 purported collective action captioned fenn et al v hewlettpackard company filed united states district court district idaho suit alleges customer service representatives working hps us call centers paid time spent startup shutdown tasks booting shutting computers violation fair labor standards act december 12 2011 court denied plaintiffs motion conditional class certification india directorate revenue intelligence proceedings described hewlettpackard india sales private ltd hpi subsidiary hp certain current former hp employees received show cause notices india directorate revenue intelligence dri alleging underpayment certain customs duties •on april 30 may 10 2010 dri issued show cause notices hpi seven current hp employees one former hp employee alleging hp underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties june 2 2010 dri issued additional show cause notice hpi three current hpi employees alleging hp failed pay customs duties appropriate value recovery cds containing microsoft operating systems seeking recover approximately 53 million plus penalties hp deposited total approximately 167 million dri agreed post provisional bond exchange dris agreement seize hp products spare parts interrupt transaction business hp india •on june 17 2010 dri issued show cause notices hpi two current hpi employees regarding noninclusion value software contained products imported third party original design manufacturers total amount alleged unpaid customs duties relating software including interest proposed demanded notices approximately 130000 amount hpi deposited dri also seeking impose penalties •on october 1 2010 connection existing dri investigation commenced sap ag dri issued show cause notice hpi alleging underpayment customs duties related importation certain sap software amount alleged duty differential hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued approximately 38000 amount deposited dri also seeking impose interest penalties hp intends contest show cause notices judicial process hp responded show cause notices russia gpo related investigations german public prosecutors office german ppo conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard ise gmbh germany former subsidiary hp general prosecutors office russian federation approximately €35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network us department justice sec also conducting investigation russia gpo deal potential violations foreign corrupt practices act fcpa person entity could subject fines civil penalties 500000 per violation equitable remedies including disgorgement injunctive relief addition criminal penalties could range greater 2 million per violation twice gross pecuniary gain loss violation addition information russia gpo deal us enforcement authorities requested information related certain transactions including transactions russia serbia commonwealth independent states cis subregion dating back 2000 ii information related two former hp executives seconded russia whether hp personnel russia germany austria serbia netherlands cis involved kickbacks improper payments channel partners stateowned private entities hp cooperating investigating agencies ect proceedings january 2011 postal service brazil empresa brasileira de correios e telégrafos ect notified hp initiated administrative proceedings hp subsidiary brazil hp brazil consider whether suspend hp brazils right bid contract ect related alleged improprieties bidding contracting processes whereby employees hp brazil employees several companies coordinated bids three ect contracts 2007 2008 late july 2011 ect notified hp decided apply penalties hp brazil suspending hp brazils right bid contract ect five years based upon evidence august 2011 hp filed petitions ect requesting decision revoked seeking injunctive relief application penalties suspended final nonappealable decision made merits case hp currently awaiting response ect petitions ect rule substance hps petitions timely manner hp filed lawsuit seeking similar relief court first instance decided merits hps lawsuit denied hps request injunctive relief suspending application penalties pending final nonappealable decision merits case hp appealed denial request injunctive relief appeal pending intermediate appellate court reporting judge assigned intermediate appellate court issued preliminary ruling denying request injunctive relief reducing length sanctions five two years decision intermediate appellate court expected early 2012 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued stockholder litigation described hp involved stockholder litigation commenced certain current former hp executive officers certain current former members hp board directors plaintiffs seeking recover certain compensation paid hp defendants damages •heather bendit et al v mark v hurd et al formerly henrietta klein v mark v hurd et al lawsuit filed september 24 2010 california superior court alleging individual defendants wasted corporate assets breached fiduciary duties failing implement oversee hps compliance fcpa •saginaw police fire pension fund v marc l andreessen et al lawsuit filed october 19 2010 united states district court northern district california alleging among things defendants breached fiduciary duties unjustly enriched consciously disregarding hps alleged violations fcpa •aj copeland v raymond j lane et al lawsuit filed march 7 2011 united states district court northern district california alleging among things defendants breached fiduciary duties wasted corporate assets connection hps alleged violations fcpa severance payments made former chairman chief executive officer mark hurd hps acquisition 3par inc lawsuit also alleges violations section 14a exchange act connection hps 2010 2011 proxy statements •richard gammel v hewlettpackard company et al putative securities class action filed september 13 2011 united states court central district california alleging among things november 22 2010 august 18 2011 defendants violated section 10b 20a securities exchange act 1934 concealing material information making false statements hps business model future webos touchpad hps pc business •ernesto espinoza v léo apotheker et al lawsuit filed september 21 2011 united states court central district california alleging among things defendants violated section 10b 20a securities exchange act 1934 concealing material information making false statements hps business model future webos touchpad hps pc business lawsuit also alleges defendants breached fiduciary duties wasted corporate assets unjustly enriched authorized companys repurchase stock august 29 2010 july 21 2011 •larry salat v léo apotheker et al lawsuit filed september 21 2011 united states court central district california alleging among things defendants violated section 10b 20a securities exchange act 1934 concealing material information making false statements hps business model future webos touchpad hps pc business lawsuit also alleges defendants breached fiduciary duties wasted corporate assets unjustly enriched authorized companys repurchase stock august 29 2010 july 21 2011 •luis gonzalez v léo apotheker et al lawsuit filed september 29 2011 california superior court alleging among things defendants breached fiduciary duties hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued wasted corporate assets unjustly enriched concealing material information making false statements hps business model future webos touchpad hps pc business authorizing companys repurchase stock august 29 2010 july 21 2011 •richard tyner v léo apotheker et al lawsuit filed october 5 2011 california superior court alleging among things defendants breached fiduciary duties wasted corporate assets unjustly enriched concealing material information making false statements hps business model future webos touchpad hps pc business authorizing companys repurchase stock august 29 2010 july 21 2011 environmental operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred product takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims clean costs amount timing costs environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies note 19 segment information description segments hp leading global provider products technologies software solutions services individual consumers small mediumsized businesses smb large enterprises including customers government health education sectors offerings span personal computing access devices multivendor customer services including infrastructure technology business process outsourcing technology support maintenance application development support services consulting integration services imaging printingrelated products services enterprise information technology infrastructure including enterprise storage server technology hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued networking products solutions management software information management solutions security intelligencerisk management solutions hp operations organized seven business segments financial reporting purposes personal systems group psg services imaging printing group ipg enterprise servers storage networking essn hp software hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology business segments based organizational structure information reviewed hps management evaluate business segment results hp reclassified segment operating results fiscal 2010 fiscal 2009 conform certain fiscal 2011 organizational realignments none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share future changes organizational structure may result changes business segments disclosed description types products services provided business segment follows •personal systems group provides commercial pcs consumer pcs workstations calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise smb customers connectivity manageability networked environments commercial pcs include hp probook hp elitebook lines notebooks compaq pro compaq elite hp pro hp elite lines business desktops well allinone touchsmart omni pcs hp mininote pcs retail pos systems hp thin clients hp slate tablet pcs consumer pcs include hp compaq series multimedia consumer notebooks desktops mini notebooks including touchsmart line touchenabled allinone notebooks desktops hps workstations designed users demanding enhanced performance computer animation engineering design programs requiring highresolution graphics run windows linuxbased operating systems •services provides consulting outsourcing technology services across infrastructure applications business process domains services divided four main business units infrastructure technology outsourcing technology services applications services business process outsourcing infrastructure technology outsourcing delivers comprehensive services encompass data center workplace desktop network communications security compliance business continuity enterprise managed services technology services provides consulting support services including mission critical services converged infrastructure services networking services data center transformation services infrastructure services storage server unified communication environments well warranty support across hps product lines applications services helps clients revitalize manage applications assets flexible projectbased consulting services longerterm outsourcing contracts full life cycle services encompass application development testing modernization system integration maintenance management business process outsourcing provides broad array enterprise shared services customer relationship management services financial process management services administrative services hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued •imaging printing group provides consumer commercial printer hardware supplies media scanning devices ipg also focused imaging solutions commercial markets solutions range managed print services capturing highvalue pages areas industrial applications outdoor signage graphic arts business inkjet web solutions delivers hps consumer smb inkjet solutions hardware supplies media webconnected hardware services develops hps retail publishing web businesses includes single function allinone inkjet printers targeted toward consumers smbs well retail publishing solutions snapfish eprintcenter laserjet enterprise solutions delivers products services solutions mediumsized business enterprise segments including laserjet printers supplies multifunction devices scanners webconnected hardware services enterprise software solutions exstream software web jetadmin managed enterprise solutions include managed print service products solutions delivered enterprise customers partnering thirdparty software providers offer workflow solutions enterprise environment graphics solutions include large format printing designjet scitex large format supplies webpress supplies indigo printing specialty printing systems inkjet highspeed production solutions hps printer supplies offerings include laserjet toner inkjet printer cartridges graphic solutions ink products printingrelated media •enterprise servers storage networking provides server storage networking combined hp softwares cloud service automation software suite hps cloudsystem enables infrastructure platform softwareasaservice private public hybrid environments industry standard servers offers primarily entrylevel midrange proliant servers run primarily windows linux novell operating systems leverage intel amd processors business spans range product lines including pedestaltower servers densityoptimized rack servers hps bladesystem family server blades business critical systems offers hp integrity servers based intel itaniumbased processor well hp integrity nonstop solutions business critical systems also offers scaleup x86 proliant servers scalability systems four industry standard processors hps storage business offers broad range products including storage area networks network attached storage management software virtualization technologies storeonce data deduplication solutions tape drives tape libraries hps networking offerings include switch router wireless lan tippingpoint network security products •hp software provides enterprise management software information management solutions security intelligencerisk management solutions delivered form traditional software licenses softwareasaservice augmented support professional services hp software solutions allow large organizations manage infrastructure operations application life cycles application quality security services business processes structured unstructured data addition solutions help businesses proactively safeguard digital assets comply corporate regulatory policies control internal external security risks •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial life cycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments includes business intelligence solutions hp labs webos software certain business incubation projects business intelligence solutions enable businesses standardize consistent data management schemes connect share data across enterprise apply analytics segment also derives revenue licensing specific hp technology third parties segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately corporate level unallocated costs include primarily restructuring charges associated adjustments related restructuring actions amortization purchased intangible assets impairment goodwill purchased intangible assets stockbased compensation expense related hpgranted employee stock options prus restricted stock awards employee stock purchase plan certain acquisitionrelated charges purchased iprd well certain corporate governance costs hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued selected operating results information business segment follows following fiscal years ended october 31 1certain fiscal 2011 organizational reclassifications reflected retroactively provide improved visibility comparability fiscal 2010 fiscal 2009 reclassifications resulted transfer revenue operating profit among essn hp software services corporate investments reclassifications segments included transfer networking business corporate investments essn transfer communications media solutions business hp software services transfer business intelligence business hp software corporate investments impact previously reported financial results psg hpfs ipg 2includes results 3com 3par dates acquisition april 2010 september 2010 respectively 3includes results arcsight date acquisition october 2010 4includes results palm date acquisition july 2010 impact decision wind webos device business quarter ended october 31 2011 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hp allocates assets business segments based primary segments benefiting assets total assets segment reconciliation segment assets hp consolidated total assets follows october 31 total assets allocated corporate investments segment decreased 68 fiscal 2011 mostly due impairment charge goodwill certain purchased intangible assets associated palm acquisition following decision wind webos device business assets allocated hp software increased 111 fiscal 2011 due acquisition autonomy addition connection certain fiscal 2011 organizational realignments hp reclassified total assets networking business corporate investments essn total assets communications hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued media solutions business hp software services material changes total assets hps segments since october 31 2010 major customers single customer represented 10 hps total net revenue fiscal year presented geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location years ended october 31 2011 2010 2009 united states country represented 10 hps total consolidated net revenue hp reports revenue net sales taxes use taxes valueadded taxes directly imposed governmental authorities hps revenue producing transactions customers october 31 2011 united states netherlands 10 hps total consolidated net assets october 31 2010 single country united states 10 hps total consolidated net assets october 31 2009 belgium united states held 10 hps total consolidated net assets single country united states 10 hps total consolidated net property plant equipment period presented hps longlived assets goodwill purchased intangible assets composed principally net property plant equipment net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 1certain fiscal 2011 organizational reclassifications reflected retroactively provide improved visibility comparability fiscal 2010 fiscal 2009 reclassifications resulted transfer revenue operating profit among essn hp software services corporate investments reclassifications segments included transfer networking business corporate investments essn transfer communications media solutions business hp software services transfer business intelligence business hp software corporate investments revenue also transferred among business units hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued within services within psg addition net revenue reported infrastructure technology outsourcing business unit eliminations intersegment net revenue reduced reflect change intersegment reporting model impact previously reported financial results hpfs ipg business units within ipg 2the handhelds business unit includes devices run windows mobile software realigned business unit within psg fiscal 2011 3includes results 3par date acquisition september 2010 4the networking business added essn fiscal 2011 also includes results 3com date acquisition april 2010 5the business technology optimization software business units consolidated single business unit within hp software segment fiscal 2011 also includes results arcsight date acquisition october 2010 6includes results palm date acquisition july 2010 impact decision wind webos device business quarter ended october 31 2011 hewlettpackard company subsidiaries quarterly summary unaudited millions except per share amounts 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year item 9item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated statements comprehensive income consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements note 1 summary significant accounting policies note 2 stockbased compensation note 3 net earnings per share note 4 balance sheet details note 5 supplemental cash flow information note 6 acquisitions note 7 goodwill purchased intangible assets note 8 restructuring charges note 9 fair value note 10 financial instruments note 11 financing receivables operating leases note 12 guarantees note 13 borrowings note 14 taxes earnings note 15 stockholders equity note 16 retirement postretirement benefit plans note 17 commitments note 18 litigation contingencies note 19 segment information quarterly summary report independent registered public accounting firm board directors stockholders hewlettpackard company audited accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2012 2011 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2012 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position hewlettpackard company subsidiaries october 31 2012 2011 consolidated results operations cash flows three years period ended october 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states hewlettpackard companys internal control financial reporting october 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated december 27 2012 expressed unqualified opinion thereon ernst young llp san jose california december 27 2012 report independent registered public accounting firm board directors stockholders hewlettpackard company audited hewlettpackard companys internal control financial reporting october 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria hewlettpackard companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion hewlettpackard company maintained material respects effective internal control financial reporting october 31 2012 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets hewlettpackard company subsidiaries october 31 2012 2011 related consolidated statements earnings comprehensive income stockholders equity cash flows three years period ended october 31 2012 report dated december 27 2012 expressed unqualified opinion thereon ernst young llp san jose california december 27 2012 managements report internal control financial reporting hps management responsible establishing maintaining adequate internal control financial reporting hp hps internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles hps internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets hp ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures hp made accordance authorizations management directors hp iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition hps assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hps management assessed effectiveness hps internal control financial reporting october 31 2012 utilizing criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment hps management determined hps internal control financial reporting effective october 31 2012 effectiveness hps internal control financial reporting october 31 2012 audited ernst young llp hps independent registered public accounting firm stated report appears page 76 annual report form 10k margaret c whitman margaret c whitman president chief executive officer december 27 2012 catherine lesjak catherine lesjak executive vice president chief financial officer december 27 2012 hewlettpackard company subsidiaries consolidated statements earnings accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries consolidated statements stockholders equity accompanying notes integral part consolidated financial statements hewlettpackard company subsidiaries notes consolidated financial statements note 1 summary significant accounting policies principles consolidation consolidated financial statements include accounts hewlettpackard company whollyowned subsidiaries controlled majorityowned subsidiaries collectively hp accounts equity investments companies hp ability exercise significant influence hold controlling interest equity method hp records proportionate share income losses interest net consolidated statements earnings hp eliminated significant intercompany accounts transactions reclassifications segment reorganization connection organizational realignments implemented first quarter fiscal 2012 certain costs previously reported cost sales reclassified selling general administrative expenses better align costs functional areas benefit expenditures hp made certain segment business unit realignments order optimize operating structure reclassifications prior year financial information made conform current year presentation none changes impacts hps previously reported consolidated net revenue earnings operations net earnings net earnings per share see note 19 discussion hps segment reorganization use estimates preparation financial statements accordance us generally accepted accounting principles gaap requires management make estimates assumptions affect amounts reported hps consolidated financial statements accompanying notes actual results could differ materially estimates revenue recognition net revenue derived primarily sale products services following revenue recognition policies define manner hp accounts sales transactions hp recognizes revenue persuasive evidence sales arrangement exists delivery occurred services rendered sales price fee fixed determinable collectibility reasonably assured additionally hp recognizes hardware revenue sales channel partners including resellers distributors valueadded solution providers time sale channel partners economic substance apart hp completed obligations related sale hps revenue recognition policies provide sales arrangement contains multiple elements hardware software products licenses andor services hp allocates revenue element based selling price hierarchy selling price deliverable based vendor specific objective evidence vsoe available third party evidence tpe vsoe available estimated selling price esp neither vsoe tpe available multiple element arrangements morethanincidental software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using guidance recognizing software revenue hp limits amount revenue recognition delivered elements amount contingent future delivery products services future performance obligations subject customerspecified return refund privileges hp evaluates deliverable arrangement determine whether represents separate unit accounting deliverable constitutes separate unit accounting standalone value customernegotiated refund return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially hps control delivered element constitutes separate unit accounting instances aforementioned criteria met deliverable combined undelivered elements allocation arrangement consideration revenue recognition determined combined unit single unit allocation consideration determined arrangement inception basis units relative selling price hp establishes vsoe selling price using price charged deliverable sold separately rare instances using price established management relevant authority tpe selling price established evaluating largely similar interchangeable competitor products services standalone sales similarly situated customers best estimate selling price established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions competitor pricing strategies industry technology life cycles instances revenue derived sales thirdparty vendor services revenue recorded gross basis hp principal transaction net costs hp acting agent customer vendor several factors considered determine whether hp principal agent notably whether hp primary obligor customer established pricing inventory credit risks hp reports revenue net required taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority products hardware hps standard terms conditions sale hp transfers title risk loss customer time product delivered customer revenue recognized accordingly unless customer acceptance uncertain significant obligations remain hp reduces revenue estimated customer returns price protection rebates programs offered sales agreements established hp distributors resellers hp records revenue sale equipment salestype leases product revenue inception lease hp accrues estimated cost postsale obligations including basic product warranties based historical experience time hp recognizes revenue hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued software accordance specific guidance recognizing software revenue applicable hp recognizes revenue perpetual software licenses inception license term assuming revenue recognition criteria met termbased software license revenue recognized subscription basis term license entitlement hp uses residual method allocate revenue software licenses inception license term vsoe fair value undelivered elements exists postcontract support revenue recognition criteria satisfied revenue generated maintenance unspecified upgrades updates whenandifavailable basis recognized period items delivered hp recognizes revenue software hosting softwareasaservice saas arrangements service delivered generally straightline basis contractual period performance software hosting arrangements software licenses sold associated software revenue recognized according whether perpetual licenses term licenses sold subject guidance saas arrangements software licenses sold entire arrangement recognized subscription basis term arrangement services hp recognizes revenue fixedprice support maintenance contracts including extended warranty contracts software postcontract customer support agreements ratably contract period recognizes costs associated contracts incurred time material contracts hp recognizes revenue costs services rendered hp recognizes revenue fixedprice consulting arrangements contract period proportional performance basis determined relationship actual labor costs incurred date estimated total contract labor costs estimates regularly revised life contract hp recognizes revenue certain design build design development andor construction software andor systems projects using percentageofcompletion method hp uses costtocost method measurement towards completion determined percentage cost incurred date total estimated costs project hp uses completed contract method reasonable reliable cost estimates project cannot made outsourcing services revenue generally recognized service provided amount earned contingent upon future event service provided evenly contract term service billings uneven revenue recognized straightline basis contract term hp recognizes revenue operating leases straightline basis service revenue rental period hp recognizes costs associated outsourcing contracts incurred unless costs relate startup phase outsourcing contract generally standalone value case hp defers subsequently amortizes setup costs contractual services period deferred contract costs amortized straightline basis remaining original term unless accelerated method deemed appropriate based actual projected contract financial performance indicators recoverability deferred contract costs associated particular contract analyzed periodic basis using undiscounted estimated cash flows whole contract remaining contract term undiscounted cash flows insufficient recover longlived assets deferred contract costs deferred contract costs written based discounted cash flow model cash flow deficiency remains reducing balance hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued deferred contract costs zero remaining longlived assets related contract evaluated impairment hp recognizes losses consulting outsourcing arrangements period contractual losses become probable estimable hp records amounts invoiced customers excess revenue recognized deferred revenue recognition criteria met hp records revenue earned recognized excess amounts invoiced fixedprice contracts trade receivables financing income salestype directfinancing leases produce financing income hp recognizes consistent rates return lease term deferred revenue related deferred contract costs deferred revenue represents amounts received advance product support contracts software customer support contracts outsourcing startup services work consulting integration projects product sales leasing income product support contracts include standalone product support packages routine maintenance service contracts upgrades extensions standard product warranty well high availability services complex global networked multivendor environments hp defers service amounts time hp bills customer hp generally recognizes amounts ratably support contract life hp delivers services hp also defers subsequently amortizes certain costs related startup activities enable performance customers longterm services contract deferred contract costs including startup unbilled costs generally amortized straightline basis contract term unless specific customer contract terms conditions indicate accelerated method appropriate shipping handling hp includes costs related shipping handling cost sales periods presented advertising hp expenses advertising costs incurred advertising first run costs totaled approximately 10 billion fiscal 2012 12 billion fiscal 2011 10 billion fiscal 2010 stockbased compensation stockbased compensation expense sharebased payment awards granted determined based grantdate fair value hp recognizes compensation costs net estimated forfeiture rate recognizes compensation cost shares expected meet service performance vesting conditions straightline basis requisite service period award compensation costs determined aggregate grant level servicebased awards individual vesting tranche level awards performance andor market conditions hp estimates forfeiture rate based historical experience foreign currency translation hp uses us dollar predominately functional currency assets liabilities denominated nonus dollars remeasured us dollars current exchange rates hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued monetary assets liabilities historical exchange rates nonmonetary assets liabilities net revenue cost sales expenses remeasured average exchange rates effect new reporting period net revenue cost sales expenses related previously reported periods remeasured historical exchange rates hp includes gains losses foreign currency remeasurement net earnings certain foreign subsidiaries designate local currency functional currency hp records translation assets liabilities us dollars balance sheet dates translation adjustments includes component accumulated comprehensive loss taxes earnings hp recognizes deferred tax assets liabilities expected tax consequences temporary differences tax bases assets liabilities reported amounts using enacted tax rates effect year differences expected reverse hp records valuation allowance reduce deferred tax assets amount likely realized cash equivalents hp classifies investments cash equivalents original maturity investment three months less cash equivalents consist primarily highly liquid investments time deposits held major banks money market funds mutual funds october 31 2012 2011 carrying value cash equivalents approximates fair value due short period time maturity investments hps investments consist principally time deposits institutional bonds mutual funds corporate debt securities equity securities publiclytraded privatelyheld companies debt marketable equity securities generally considered availableforsale reported fair value unrealized gains losses net applicable taxes recorded accumulated comprehensive loss component equity realized gains losses availableforsale securities included income expense consolidated statement earnings realized gains losses calculated based specific identification method hp monitors investment portfolio impairment periodic basis carrying value investment debt securities exceeds fair value decline value determined otherthantemporary decline hp intend sell debt securities likely hp required sell debt securities prior recovery amortized cost basis hp records impairment charge interest net amount credit loss balance comprehensive income loss hp carries equity investments privatelyheld companies cost fair value hp recognizes otherthantemporary impairment charge concentrations credit risk financial instruments potentially subject hp significant concentrations credit risk consist principally cash equivalents investments accounts receivable trade customers contract manufacturers financing receivables derivatives hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued hp maintains cash equivalents short longterm investments derivatives certain financial instruments various financial institutions financial institutions located many different geographical regions hps policy designed limit exposure one institution part cash risk management processes hp performs periodic evaluations relative credit standing financial institutions hp sustained material credit losses instruments held financial institutions hp utilizes forward contracts derivative contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty could result material loss hp sells significant portion products thirdparty distributors resellers result maintains individually significant receivable balances parties financial condition operations distributors resellers aggregated accounts deteriorate substantially hps operating results could adversely affected ten largest distributor reseller receivable balances concentrated primarily north america europe collectively represented approximately 14 gross accounts receivable october 31 2012 october 31 2011 single customer accounts 10 accounts receivable credit risk respect accounts receivable financing receivables generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions hp performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances past due delinquency status receivable based contractual payment terms receivable concentration hp obtains significant number components single source suppliers due technology availability price quality considerations loss single source supplier deterioration hps relationship single source supplier unilateral modification contractual terms hp supplied components single source supplier could adversely affect hps revenue gross margins allowance doubtful accounts hp establishes allowance doubtful accounts trade financing receivables hp maintains bad debt reserves based variety factors including length time receivables past due trends overall weightedaverage risk rating total portfolio macroeconomic conditions significant onetime events historical experience use thirdparty credit risk models generate quantitative measures default probabilities based market factors financial condition customers hp records specific reserve individual accounts hp becomes aware specific customer circumstances case bankruptcy filings deterioration customers operating results financial position additional changes circumstances related specific customer hp adjusts estimates recoverability receivables see note 11 full description credit quality financing receivables allowance credit losses hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued inventory hp values inventory lower cost market cost computed firstin firstout basis adjustments reduce cost inventory net realizable value made required estimated excess obsolescence impaired balances property plant equipment hp states property plant equipment cost less accumulated depreciation hp capitalizes additions improvements expenses maintenance repairs incurred depreciation computed using straightline accelerated methods estimated useful lives assets estimated useful lives five 40 years buildings improvements three 15 years machinery equipment hp depreciates leasehold improvements life lease asset whichever shorter hp depreciates equipment held lease initial term lease equipments estimated residual value estimated useful lives assets used solely support customer services contract generally exceed term customer contract upon retirement disposition asset cost related accumulated depreciation removed gain loss recognized consolidated statements earnings hp capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software hp amortizes capitalized internal use software costs using straightline method estimated useful lives software generally three five years software development costs incurred acquire develop software resale capitalized subsequent software product establishing technological feasibility significant capitalized software development costs amortized using greater straightline amortization method ratio current gross revenues product bear total current anticipated future gross revenues product estimated useful lives capitalized software resale generally three years less software development costs incurred subsequent product establishing technological feasibility usually significant instances costs expensed incurred business combinations hp includes results operations businesses acquired hps consolidated results respective dates acquisition hp allocates fair value purchase consideration acquisitions tangible assets acquired liabilities assumed intangible assets acquired including inprocess research development iprd based estimated fair values excess fair value purchase consideration fair values identifiable assets liabilities recorded goodwill primary items generate goodwill include value synergies acquired companies hp acquired assembled workforce neither qualifies amortizable intangible asset iprd initially capitalized fair value intangible asset indefinite life assessed impairment thereafter iprd project complete reclassified amortizable purchased intangible asset amortized estimated useful life iprd project abandoned hp records charge value related intangible asset hps consolidated statement earnings period abandoned hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued acquisitionrelated expenses restructuring costs recognized separately business combination expensed incurred goodwill purchased intangible assets goodwill purchased intangible assets indefinite useful lives amortized tested impairment least annually hp reviews goodwill purchased intangible assets indefinite lives impairment annually beginning fourth fiscal quarter whenever events changes circumstances indicate carrying value asset may recoverable goodwill hp performs twostep impairment test first step hp compares fair value reporting unit carrying value hp determines fair values reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach hp calculates fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach hp estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weighting fair value derived market approach ranges 0 50 depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp may estimate fair value reporting unit using income approach order assess reasonableness calculated fair values reporting units hp also compares sum reporting units fair values hps market capitalization calculates implied control premium excess sum reporting units fair values market capitalization hp evaluates control premium comparing control premiums recent comparable transactions implied control premium reasonable light recent transactions hp reevaluate fair value estimates reporting units adjusting discount rates andor assumptions result significant decline hps stock price occurred fiscal 2012 reevaluation could correlate lower estimated fair values certain hps reporting units fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired testing required fair value reporting unit less carrying value hp must perform second step impairment test measure amount impairment loss second step reporting units fair value allocated assets liabilities reporting unit including unrecognized intangible assets hypothetical analysis calculates implied fair value goodwill manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying value difference recorded impairment loss except services software corporate investments hps reporting units consistent reportable segments identified note 19 enterprise services es technology services ts businesses reporting units within services segment es includes infrastructure technology outsourcing ito application business services abs business units software segment includes two reporting units autonomy corporation plc autonomy hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued legacy hp software business webos business also separate reporting unit within corporate investments segment hp estimates fair value indefinitelived purchased intangible assets using income approach hp recognizes impairment loss estimated fair value indefinitelived purchased intangible assets less carrying value hp reviews purchased intangible assets finite lives impairment whenever events changes circumstances indicate carrying value asset may recoverable recoverability intangible assets assessed based undiscounted future cash flows expected result use asset undiscounted future cash flows less carrying value purchased intangible assets finite lives considered impaired amount impairment loss measured difference carrying amount assets fair value based discounted cash flow approach available appropriate comparable market values hp amortizes purchased intangible assets finite lives using straightline method estimated economic lives assets ranging one ten years longlived asset impairment hp evaluates longlived assets impairment whenever events changes circumstances indicate carrying value asset may recoverable hp assesses recoverability assets based undiscounted future cash flow recognizes impairment loss estimated undiscounted future cash flow expected result use asset plus net proceeds expected disposition asset less carrying value asset hp identifies impairment hp reduces carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values fair value financial instruments hp measures certain financial assets liabilities fair value based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants financial instruments primarily comprised time deposits money market funds corporate debt securities equity securities investments common stock common stock equivalents derivatives see note 9 discussion fair value financial instruments derivative financial instruments hp uses derivative financial instruments primarily forwards swaps options hedge certain foreign currency interest rate exposures hp also may use derivative instruments designated hedges forwards used hedge foreign currency balance sheet exposures hp use derivative financial instruments speculative purposes see note 10 full description hps derivative financial instrument activities related accounting policies retirement postretirement plans hp various defined benefit contributory noncontributory retirement postretirement plans hp generally amortizes unrecognized actuarial gains losses straightline hewlettpackard company subsidiaries notes consolidated financial statements continued note 1 summary significant accounting policies continued basis remaining estimated service life participants measurement date hp plans october 31 see note 16 full description plans accounting funding policies loss contingencies hp involved various lawsuits claims investigations proceedings arise ordinary course business hp records loss provision believes probable liability incurred amount reasonably estimated see note 18 full description hps loss contingencies related accounting policies accounting pronouncements september 2011 financial accounting standards board issued new guidance testing goodwill impairment new guidance allow entity first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test entity longer required calculate fair value reporting unit unless entity determines based qualitative assessment likely fair value less carrying amount hp adopted accounting standard fourth fiscal quarter 2012 hps annual goodwill impairment test fourth quarter fiscal 2012 hp performed quantitative test reporting units due recent trading values hps stock price hp believed appropriate recent fair values reporting units order assess reasonableness sum fair values compared hps market capitalization note 2 stockbased compensation hps stockbased compensation plans include incentive compensation plans employee stock purchase plan espp stockbased compensation expense related income tax benefits total stockbased compensation expense income taxes fiscal 2012 2011 2010 635 million 685 million 668 million respectively resulting income tax benefit fiscal 2012 2011 2010 197 million 219 million 216 million respectively cash received option exercises purchases espp 07 billion fiscal 2012 09 billion fiscal 2011 26 billion fiscal 2010 benefit realized tax deduction option exercises sharebased payment awards fiscal 2012 2011 2010 57 million 220 million 414 million respectively incentive compensation plans hps incentive compensation plans include principal equity plans adopted 2004 amended 2010 2000 1995 principal equity plans well various equity plans assumed acquisitions stockbased awards outstanding stockbased awards granted principal equity plans include restricted stock awards stock options performancebased restricted units prus employees meeting certain employment qualifications eligible receive stockbased awards hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued principal equity plans hp granted certain employees restricted stock awards cashsettled awards restricted stock awards nonvested stock awards may include grants restricted stock grants restricted stock units restricted stock awards cashsettled awards generally subject forfeiture employment terminates prior release restrictions awards generally vest one three years date grant period ownership shares cannot transferred restricted stock cash dividend voting rights common stock considered currently issued outstanding restricted stock units dividend equivalent rights equal cash dividend paid restricted stock restricted stock units voting rights common stock shares underlying restricted stock units considered issued outstanding however shares underlying restricted stock units included calculation diluted earnings per share eps hp expenses fair market value restricted stock awards determined date grant ratably period restrictions lapse stock options granted principal equity plans generally nonqualified stock options principal equity plans permit options granted qualify incentive stock options us internal revenue code stock options generally vest three four years date grant exercise price stock option equal fair market value hps common stock option grant date determined reported sale prices hps common stock market closes date fiscal 2012 2011 hp granted performancecontingent stock options vest upon satisfaction service market conditions prior expiration awards hps pru program provides issuance prus representing hypothetical shares hp common stock pru award reflects target number shares target shares may issued award recipient adjusting performance market conditions actual number shares recipient receives determined end threeyear performance period based results achieved versus company performance goals may range 0 200 target shares granted performance goals prus granted fiscal year 2012 based hps annual cash flow operations percentage revenue hps annual revenue growth performance goals prus granted previous years based hps annual cash flow operations percentage revenue market condition based total shareholder return tsr relative sp 500 threeyear performance period recipients pru awards generally must remain employed hp continuous basis end applicable threeyear performance period order receive portion shares subject award target shares subject pru awards dividend equivalent rights voting rights common stock earned issued following end applicable performance period expense awards net estimated forfeitures recorded requisite service period based number target shares expected earned achievement cash flow revenue growth goals performance period hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued restricted stock awards nonvested restricted stock awards october 31 2012 2011 changes fiscal 2012 2011 follows details restricted stock awards granted follows details nonvested restricted stock awards fiscal year end follows october 31 2012 508 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expected recognize remaining weightedaverage vesting period 13 years october 31 2011 526 million unrecognized pretax stockbased compensation expense related nonvested restricted stock awards hp expected recognize remaining weightedaverage vesting period 14 years hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued stock options hp utilized blackscholes option pricing model value servicebased stock options granted principal equity plans hp examined historical pattern option exercises effort determine discernable activity patterns based certain employee populations analysis hp identified three employee populations apply blackscholes model table presents weightedaverage expected life months combined three identified employee populations expected life computation based historical exercise patterns postvesting termination behavior within three populations identified riskfree interest rate periods within contractual life award based us treasury yield curve effect time grant hp estimates fair value performancecontingent stock options using combination monte carlo simulation model lattice model awards contain market conditions hp estimated weightedaverage fair value stock options using following weightedaverage assumptions 1the fair value calculation based stock options granted period option activity october 31 fiscal year follows connection fiscal 2011 acquisitions hp assumed options purchase approximately 6 million shares weightedaverage exercise price 14 per share aggregate intrinsic value table represents total pretax intrinsic value option holders would received option holders exercised options october 31 2012 hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued 2011 aggregate intrinsic value difference hps closing stock price last trading day fiscal 2012 fiscal 2011 exercise price multiplied number inthemoney options total intrinsic value options exercised fiscal 2012 2011 2010 02 billion 07 billion 13 billion respectively total grant date fair value options vested expensed fiscal 2012 2011 2010 104 million 95 million 93 million respectively net taxes information options outstanding october 31 2012 follows october 31 2012 157 million unrecognized pretax stockbased compensation expense related stock options hp expected recognize weightedaverage vesting period 18 years october 31 2011 264 million unrecognized pretax stockbased compensation expense related stock options hp expected recognize weightedaverage vesting period 23 years performancebased restricted units pru awards granted fiscal year 2012 hp estimates fair value target shares using hps closing stock price measurement date weightedaverage fair value per share first year threeyear performance period applicable prus granted fiscal year 2012 2700 estimated fair value target shares second third years prus granted fiscal year 2012 determined measurement date applicable prus occur period annual performance goals approved prus expense amortized remainder applicable threeyear performance period pru awards granted prior fiscal year 2012 hp estimates fair value target shares subject awards using monte carlo simulation model tsr modifier represents market condition following weightedaverage assumptions addition projections market hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued conditions used determine weightedaverage fair values pru awards fiscal years ended october 31 1reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2010 second year threeyear performance period applicable prus granted fiscal 2011 estimated fair value target shares third year prus granted fiscal 2011 determined measurement date applicable prus occur period annual performance goals approved prus expense amortized remainder applicable threeyear performance period 2reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2009 second year threeyear performance period applicable prus granted fiscal 2010 first year threeyear performance period applicable prus granted fiscal 2011 3reflects weightedaverage fair value third year threeyear performance period applicable prus granted fiscal 2008 second year threeyear performance period applicable prus granted fiscal 2009 first year threeyear performance period applicable prus granted fiscal 2010 4hp uses historic volatility pru awards implied volatility cannot used simulating multivariate prices companies sp 500 hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued nonvested prus october 31 2012 2011 changes fiscal 2012 2011 follows 1the minimum level tsr met prus granted fiscal 2010 2009 resulted cancellation approximately 56 million 109 million target shares october 31 2012 october 31 2011 respectively 2excludes target shares third year prus granted fiscal 2011 second third years prus granted fiscal 2012 measurement date yet established measurement date related fair value excluded prus established annual performance goals approved 3excludes target shares third year prus granted fiscal 2010 second third years prus granted fiscal 2011 measurement date yet established october 31 2012 17 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expected recognize remaining weightedaverage vesting period 11 years october 31 2011 82 million unrecognized pretax stockbased compensation expense related prus assigned fair value hp expected recognize remaining weightedaverage vesting period 14 years employee stock purchase plan hp sponsors hewlettpackard company 2011 employee stock purchase plan 2011 espp pursuant eligible employees may contribute 10 base compensation subject certain income limits purchase shares hps common stock purchases made prior fiscal year 2011 made hewlettpackard company 2000 employee stock purchase plan 2000 espp expired november 2010 purchases made october 31 2011 employees purchased stock 2011 espp price equal 95 fair market value purchase date criteria noncompensatory plan met stockbased compensation expense recorded connection purchases may 1 2009 october 31 2010 discount offered purchases made 2000 espp hewlettpackard company subsidiaries notes consolidated financial statements continued note 2 stockbased compensation continued espp activity october 31 fiscal year follows shares reserved shares available future grant shares reserved future issuance espp incentive compensation plans follows 1includes 30 million shares expired november 2010 note 3 net earnings per share hp calculates basic earnings loss per share diluted loss per share using net earnings loss weightedaverage number shares outstanding reporting period diluted earnings per share includes dilutive effect outstanding stock options prus restricted stock units restricted stock hewlettpackard company subsidiaries notes consolidated financial statements continued note 3 net earnings per share continued reconciliation numerators denominators basic diluted earnings loss per share calculations follows following fiscal years ended october 31 1net loss earnings available participating securities significant fiscal years 2012 2011 2010 hp considers restricted stock provides holder nonforfeitable right receive dividends participating security 2for fiscal year 2012 hp excluded calculation diluted loss per share 10 million shares potentially issuable employee stock plans effect included would antidilutive hp excludes options exercise prices greater average market price calculation diluted earnings per share effect would antidilutive fiscal years 2012 2011 2010 hp excluded calculation diluted earnings loss per share options purchase 56 million shares 25 million shares 5 million shares respectively addition hp also excluded calculation diluted earnings loss per share options purchase additional 1 million shares 1 million shares 2 million shares fiscal years 2012 2011 2010 respectively whose combined exercise price unamortized fair value excess tax benefits greater periods average market price hps common stock effect would antidilutive note 4 balance sheet details balance sheet details follows following fiscal years ended october 31 accounts financing receivables hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued hp thirdparty financing arrangements order facilitate working capital requirements certain partners consisting revolving shortterm financing arrangements certain circumstances may contain partial recourse result transfer hps receivables risk third party transfers qualify true sales receivables derecognized consolidated balance sheets upon transfer hp receives payment receivables third party within mutually agreed upon time period arrangements involving element recourse obligation measured using market data similar transactions reported current liability consolidated balance sheets recourse obligation october 31 2012 2011 material october 31 2012 capacity partial recourse facility 876 million arrangements involving recourse total aggregate capacity 636 million fiscal 2012 2011 trade receivables sold facilities 43 billion 28 billion respectively approximates amount cash received resulting costs associated sales trade accounts receivable twelve months ended october 31 2012 2011 material hp 08 billion october 31 2012 07 billion october 31 2011 available capacity programs inventory current assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued property plant equipment depreciation expense approximately 33 billion fiscal 2012 34 billion fiscal 2011 33 billion fiscal 2010 twelve months ended october 31 2012 additions gross property plant equipment 37 billion partially offset sales retirements totaling 27 billion accumulated depreciation associated assets sold retired 22 billion longterm financing receivables assets accrued liabilities hewlettpackard company subsidiaries notes consolidated financial statements continued note 4 balance sheet details continued liabilities note 5 supplemental cash flow information supplemental cash flow information consolidated statements cash flows follows following fiscal years ended october 31 note 6 acquisitions prior years fiscal 2011 hp completed four acquisitions total fair value purchase consideration acquisitions 114 billion includes cash paid outstanding common stock convertible bonds vestedinthemoney stock awards estimated fair value earned unvested stock awards assumed connection acquisitions hp recorded approximately 69 billion goodwill 47 billion purchased intangibles assumed 206 million net liabilities hps largest acquisition fiscal 2011 acquisition autonomy total fair value purchase consideration 110 billion fiscal 2010 hp completed eleven acquisitions total fair value purchase consideration acquisitions 94 billion includes cash paid common stock vestedinthemoney stock awards estimated fair value earned unvested stock awards assumed well certain debt repaid acquisition date connection acquisitions hp recorded approximately 52 billion goodwill 24 billion purchased intangibles 331 million iprd largest four eleven acquisitions 3com corporation 3com palm inc palm 3par inc 3par arcsight inc arcsight hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill allocated hps reportable segments october 31 2012 2011 changes carrying amount goodwill fiscal years ended october 31 2012 2011 follows fiscal 2012 decrease goodwill related impairment loss within services software segments discussed connection certain fiscal 2012 organizational realignments hp reclassified 280 million goodwill related tippingpoint network security solutions business enterprise servers storage networking essn segment software segment additionally hp recorded increase goodwill 244 million software segment due change estimated fair values purchased intangible assets net tangible assets associated acquisition autonomy conjunction completing purchase accounting first quarter goodwill october 31 2011 net accumulated impairment losses 813 million related corporate investments segment goodwill october 31 2012 net accumulated impairment losses 14518 million amount 7961 million relates services 5744 million relates software remaining 813 million relates fiscal 2011 charge related corporate investments mentioned hp reviews goodwill impairment annually first day fourth fiscal quarter whenever events changes circumstances indicate carrying value goodwill may recoverable hps goodwill impairment test involves twostep process first step hp compares fair value reporting unit carrying value fair value reporting unit exceeds carrying value goodwill impaired testing required fair value reporting unit less carrying value hp must perform second step impairment test measure amount impairment loss second step reporting units fair value allocated assets liabilities reporting unit including unrecognized intangible hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued assets hypothetical analysis calculates implied fair value goodwill manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying value difference recorded impairment loss except services software corporate investments hps reporting units consistent reportable segments identified note 19 es ts businesses reporting units within services segment es includes ito abs business units software segment includes two reporting units autonomy legacy hp software business webos business also separate reporting unit within corporate investments segment hp estimated fair value reporting units using weighting fair values derived significantly income approach lesser extent market approach income approach hp calculates fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach estimates fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting unit weighting fair value derived market approach ranges 0 50 depending level comparability publiclytraded companies reporting unit market comparables meaningful available hp may estimate fair value reporting unit using income approach order assess reasonableness calculated fair values reporting units hp also compares sum reporting units fair values hps market capitalization calculates implied control premium excess sum reporting units fair values market capitalization hp evaluates control premium comparing control premiums recent comparable market transactions implied control premium reasonable light recent transactions hp reevaluate fair value estimates reporting units adjusting discount rates andor assumptions result significant decline hps stock price occurred fiscal 2012 reevaluation could correlate lower estimated fair values certain hps reporting units fiscal 2012 hp determined sufficient indicators potential impairment existed require interim goodwill impairment analysis es reporting unit indicators included recent trading values hps stock coupled market conditions business trends within es fair value es reporting unit based income approach decline fair value es reporting unit resulted lower projected revenue growth rates profitability levels well increase risk factor included discount rate used calculate discounted cash flows increase discount rate due implied control premium resulting recent trading values hp stock resulting adjustments discount rates caused significant reduction fair value es reporting unit based step one step two analyses hp recorded 80 billion goodwill impairment charge fiscal 2012 remaining goodwill es reporting unit october 31 2012 prior completing goodwill hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued impairment test hp tested recoverability es longlived assets goodwill concluded assets impaired hp initiated annual goodwill impairment analysis fourth quarter fiscal 2012 concluded fair value carrying value autonomy reporting unit fair value autonomy reporting unit based income approach decline estimated fair value autonomy reporting unit results lower projected revenue growth rates profitability levels well increase risk factor included discount rate used calculate discounted cash flows increase discount rate due implied control premium resulting recent trading values hp stock lower projected operating results reflect changes assumptions related organic revenue growth rates market trends business mix cost structure expected deal synergies expectations anticipated shortterm longterm operating results autonomy business assumptions incorporate hps analysis believes accounting improprieties incomplete disclosures misrepresentations autonomy occurred prior autonomy acquisition respect autonomys preacquisition business related operating results addition noted estimating fair value reporting unit hp may need adjust discount rates andor assumptions order derive reasonable implied control premium comparing sum fair values hps reporting units hps market capitalization due recent trading values hp stock resulting adjustments discount rate arrive appropriate control premium caused significant reduction fair value autonomy reporting unit well fair values hps reporting units prior conducting step one goodwill impairment test autonomy reporting unit hp first evaluated recoverability longlived assets including purchased intangible assets indicators impairment present hp tests longlived assets goodwill recoverability comparing carrying value asset group undiscounted cash flows hp considered lower expected revenue profitability levels sustained period time trading values hp stock downward revisions managements shortterm longterm forecast autonomy business indicators impairment autonomy longlived assets based results recoverability test hp determined carrying value autonomy asset group exceeded undiscounted cash flows therefore recoverable hp compared fair value asset group carrying value determined impairment loss impairment loss allocated carrying values longlived assets individual fair values hp estimated fair value purchased intangible assets primarily technology assets income approach described based analysis hp recorded impairment charge 31 billion purchased intangible assets resulted remaining carrying value approximately 08 billion october 31 2012 decline fair value autonomy intangible assets attributable factors discussed fair value autonomy reporting unit decline fair value autonomy reporting unit autonomy intangibles well fair value changes assets liabilities step two goodwill impairment test resulted implied fair value goodwill substantially carrying value goodwill autonomy reporting unit result hp recorded goodwill impairment charge 57 billion resulted 12 billion remaining carrying value autonomy goodwill october 31 2012 hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued goodwill impairment charge purchased intangible assets impairment charge totaling 88 billion included impairment goodwill purchased intangible assets line item consolidated statements earnings subsequent autonomy purchase price allocation period concluded first quarter fiscal 2012 conjunction hps annual goodwill impairment testing hp identified certain indicators impairment indicators impairment included lower expected revenue profitability levels sustained period time trading values hp stock downward revisions managements shortterm longterm forecast autonomy business hp revised multiyear forecast autonomy business timing forecast revision coincided timing hps overall forecasting process reporting units completed year fourth fiscal quarter conjunction annual goodwill impairment analysis change assumptions used revised forecast fair value estimates utilized impairment testing autonomy goodwill longlived assets incorporated insights gained owned autonomy business preceding year revised forecast reflected changes related organic revenue growth rates current market trends business mix cost structure expected deal synergies expectations anticipated shortterm longterm operating results autonomy business driven hps analysis regarding certain accounting improprieties incomplete disclosures misrepresentations autonomy occurred prior autonomy acquisition respect autonomys preacquisition business related operating results accordingly change fair values represented change accounting estimate occurred outside purchase price allocation period resulting recorded impairment charge based results annual impairment test reporting units hp concluded goodwill impairment existed august 1 2012 apart impairment charges discussed excess fair value carrying value hps reporting units august 1 2012 annual testing date ranged approximately 9 approximately 330 carrying value autonomy legacy hp software reporting units lowest excess fair value carrying value 10 9 respectively hp continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances significant adverse changes business climate operating results changes managements business strategy significant declines hps stock price indicate may potential indicator impairment fiscal 2011 hp recorded approximately 69 billion goodwill related acquisitions based preliminary estimated fair values assets acquired liabilities assumed connection organizational realignments implemented first quarter fiscal 2011 hp also reclassified goodwill related networking business corporate investments essn goodwill related communications media solutions business software services fourth quarter fiscal 2011 hp determined would wind manufacture sale webos devices resulting palm acquisition including webos smartphones hp touchpad hp also announced would continue explore alternatives optimize value webos technology including among others licensing webos software related intellectual property selling portion webos assets decision triggered impairment review related goodwill purchased intangible assets recorded connection palm acquisition hp first performed impairment review purchased intangible assets represents value webos technology carrier relationships trade name based hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued information available time review hp determined future value carrier relationships trade name carrying value webos technology approximated fair value hp estimated fair value webos technology based several methods including market approach using recent comparable transactions discounted cash flow approach using estimated cash flows potential licensing agreements based analysis hp recognized impairment loss 72 million primarily related carrier relationships trade name hp performed goodwill impairment test comparing carrying value relevant reporting unit fair value reporting unit fair value reporting unit significantly carrying value due hps decision wind sale webos devices result hp recorded goodwill impairment charge 813 million goodwill impairment charge intangible asset impairment charge included impairment goodwill purchased intangible assets line item consolidated statement earnings purchased intangible assets hps purchased intangible assets associated completed acquisitions following fiscal years ended october 31 composed fiscal 2012 majority decrease gross intangibles related 944 million fully amortized intangible assets eliminated gross accumulated amounts first quarter 293 million decrease estimated fair value autonomys purchased intangible assets recognized conjunction finalization purchase price allocation additionally hp recorded total intangible asset impairment charges 43 billion 31 billion related autonomy reporting unit described remaining 12 billion related change compaq branding strategy discussed may 23 2012 hp approved change branding strategy personal computers result limited focused use compaq trade name acquired fiscal 2002 conjunction change branding strategy hp revised assumption useful life intangible asset resulted reclassification asset indefinitelived intangible finitelived intangible remaining useful life approximately five years changes triggered hewlettpackard company subsidiaries notes consolidated financial statements continued note 7 goodwill purchased intangible assets continued impairment review compaq trade name intangible asset conducting impairment review purchased intangible asset hp compares fair value asset carrying value fair value asset less carrying value difference recorded impairment loss hp estimated fair value compaq trade name calculating present value royalties saved would paid third party hp owned trade name following completion analysis hp determined fair value trade name asset less carrying value due primarily change useful life assumption decrease expected future revenues related compaqbranded products resulting focused branding strategy result hp recorded impairment charge 12 billion third quarter fiscal 2012 included impairment goodwill purchased intangible assets line item consolidated statements earnings finitelived purchased intangible assets consist customer contracts customer lists distribution agreements weightedaverage useful lives eight years developed core technology patents product tradenames product trademarks weightedaverage useful lives seven years estimated future amortization expense related finitelived purchased intangible assets october 31 2012 follows note 8 restructuring charges hp records restructuring charges associated managementapproved restructuring plans either reorganize one hps business segments remove duplicative headcount infrastructure associated one business acquisitions restructuring charges include severance costs eliminate specified number employees infrastructure charges vacate facilities consolidate operations contract cancellation costs restructuring charges recorded based upon planned employee termination dates site closure consolidation plans timing associated cash payments dependent upon type restructuring charge extend multiyear period hp records shortterm portion restructuring liability accrued restructuring longterm portion liabilities consolidated balance sheets fiscal 2012 restructuring plan may 23 2012 hp adopted multiyear restructuring plan 2012 plan designed simplify business processes accelerate innovation deliver better results customers employees stockholders hp estimates eliminate approximately 29000 positions connection hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued 2012 plan fiscal year 2014 portion employees exiting company part voluntary enhanced early retirement eer programs united states certain countries discussed note 16 majority us eer program funded hps us pension plan connection 2012 plan hp expects record aggregate charges approximately 37 billion end hps 2014 fiscal year accounting recognition criteria met amount hp expects approximately 31 billion relate workforce reductions eer programs approximately 06 billion relate items including data center real estate consolidation due uncertainties associated attrition acceptance rates future international eer programs total expected headcount reductions could vary much 15 estimates could also experience similar variations total expense 2012 plan hp recorded charge approximately 21 billion fiscal year 2012 relating 2012 plan amount included costs eer plans united states canada 41 million stockbased compensation expense accelerated vesting stockbased awards held participating eer employees special termination benefit stb expense 126 million certain eer participants whose retirement incentive benefit paid cash outside hps pension plans october 31 2012 hp eliminated approximately 11700 positions part 2012 plan 21 billion charge also includes 105 million data center real estate consolidation 56 million related asset impairments cash payments associated 2012 plan expected paid fiscal 2015 fiscal 2010 acquisitions connection acquisitions palm inc palm 3com corporation 3com fiscal 2010 hps management approved initiated plans restructure operations acquired companies including severance employees contract cancellation costs vacate duplicative facilities items total expected combined cost plans 101 million includes 33 million additional restructuring costs recorded fourth quarter fiscal 2011 connection hps decision wind webos device business october 31 2011 hp recorded majority costs plans based upon anticipated timing planned terminations facility closure costs palm 3com plans closed restructuring charges anticipated unused accrual amount 13 million credited restructuring expense fiscal year 2012 remaining severance costs associated webos plan expected paid fiscal year 2013 fiscal 2010 enterprise services business restructuring plan june 1 2010 hps management announced plan restructure es business includes ito abs business units multiyear restructuring program includes plans consolidate commercial data centers tools applications total expected cost plan recorded restructuring charges approximately 10 billion includes severance costs eliminate approximately 8200 positions infrastructure charges execution restructuring activities evolved certain components related cost estimates revised total cost plan remains consistent first quarter fiscal 2012 hp reduced severance accrual 100 million recognized additional infrastructure related charges 104 million majority infrastructure charges paid fiscal 2012 hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued remaining charges expected paid first half fiscal 2015 october 31 2012 approximately 8200 positions eliminated plan closed restructuring charges anticipated hp expects majority remaining severance plan paid fiscal year 2013 fiscal 2009 restructuring plan may 2009 hps management approved initiated restructuring plan structurally change improve effectiveness imaging printing group ipg personal systems group psg essn businesses total expected cost plan 301 million severancerelated costs associated planned elimination approximately 4400 positions planned eliminations occurred restructuring costs paid october 31 2012 fiscal 2008 hpeds restructuring plan connection acquisition electronic data systems corporation eds august 26 2008 hps management approved initiated restructuring plan combine align hps services businesses eliminate duplicative overhead functions consolidate vacate duplicative facilities restructuring plan expected implemented total expected cost 33 billion approximately 15 billion expected costs associated preacquisition eds reflected fair value purchase consideration eds costs subject change based actual costs incurred remaining costs primarily associated hp recorded restructuring charge restructuring plan includes severance costs related eliminating approximately 25000 positions october 31 2011 actions occurred associated severance costs paid infrastructure charges restructuring plan include facility closure consolidation costs associated early termination certain contractual obligations hp recorded majority costs based upon execution site closure consolidation plans associated cash payments expected paid fiscal 2016 hewlettpackard company subsidiaries notes consolidated financial statements continued note 8 restructuring charges continued summary restructuring plans adjustments accrued restructuring expenses related hps restructuring plans described twelve months ended october 31 2012 follows 1includes reclassification liability related eer plan 833 million additional pension benefits 227 million certain healthcare medical savings account benefits pension post retirement plans described note 16 october 31 2012 2011 hp included longterm portion restructuring liability 256 million 159 million respectively liabilities shortterm portion 771 million 654 million respectively accrued restructuring accompanying consolidated balance sheets hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value hp determines fair value based exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants valuation techniques used hp based upon observable unobservable inputs observable market inputs reflect market data obtained independent sources unobservable inputs reflect hps assumptions market participant assumptions based best information available observable inputs preferred basis valuation two types inputs create following fair value hierarchy level 1quoted prices unadjusted identical instruments active markets level 2quoted prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market corroborated observable market data substantially full term assets liabilities level 3prices valuations require management inputs significant fair value measurement unobservable following section describes valuation methodologies hp uses measure financial assets liabilities fair value cash equivalents investments hp holds time deposits money market funds mutual funds debt securities primarily consisting corporate foreign government notes bonds common stock equivalents applicable hp uses quoted prices active markets identical assets determine fair value quoted prices active markets identical assets available determine fair value hp uses quoted prices similar assets liabilities inputs observable either directly indirectly quoted prices identical similar assets available hp uses internally developed valuation models whose inputs include bid prices thirdparty valuations utilizing underlying assets assumptions derivative instruments discussed note 10 hp mainly holds nonspeculative forwards swaps options hedge certain foreign currency interest rate exposures active market quotes available hp uses industry standard valuation models applicable models project future cash flows discount future amounts present value using marketbased observable inputs including interest rate curves credit risk foreign exchange rates forward spot prices currencies certain cases marketbased observable inputs available cases hp uses management judgment develop assumptions used determine fair value short longterm debt estimated fair value publiclytraded debt based quoted market prices identical liability traded asset active market debt quoted market price available expected present value method uses rates currently available hp debt similar terms remaining maturities used estimate fair value portion hps fixedrate debt obligations hedged reflected consolidated balance sheets amount equal debts carrying value including fair value adjustment representing changes fair value hedged debt obligations arising movements benchmark interest rates estimated fair value hps short longterm debt approximated carrying value 284 billion october 31 2012 estimated fair value hps short hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued longterm debt approximately 311 billion october 31 2011 compared carrying value 306 billion date measured fair value consolidated balance sheets short longterm debt would classified level 2 fair value hierarchy hps nonmarketable equity investments nonfinancial assets intangible assets goodwill property plant equipment recorded fair value impairment charge recognized fiscal year ended october 31 2012 hp recognized goodwill intangible asset impairment charge 88 billion associated autonomy reporting unit within software segment goodwill impairment charge 80 billion associated es reporting unit within services segment intangible asset impairment charge 12 billion associated compaq trade name within personal systems segment remeasurement goodwill classified level 3 fair value assessment due significance unobservable inputs developed using companyspecific information hp used income approach measure fair value es autonomy reporting units income approach hp calculates fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows discount rate also reflects adjustments required comparing sum fair values hps reporting units hps market capitalization discussed note 7 unobservable inputs used fair value reporting units include projected revenue growth rates profitability risk factor added discount rate inputs used measure fair value intangible assets autonomy compaq trade name largely unobservable accordingly measurements classified level 3 fair value intangible assets autonomy estimated using income approach based managements cash flow projections revenue growth rates operating margins taking consideration industry market conditions hp estimated fair value compaq trade name calculating present value royalties saved would paid third party hp owned trade name discount rates used fair value calculations autonomy intangibles compaq trade name based weighted average cost capital adjusted relevant risk associated assets unobservable inputs used valuations include projected revenue growth rates operating margins royalty rates risk factor added discount rate discount rates ranged 11 16 projected revenue growth rates ranged 61 13 61 rate reflects significant decline expected future revenues compaqbranded products fiscal year 2013 fiscal year 2014 due change branding strategy discussed note 7 information impairments measured nonrecurring fair value adjustments see note 7 hewlettpackard company subsidiaries notes consolidated financial statements continued note 9 fair value continued following table presents hps assets liabilities measured fair value recurring basis hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments cash equivalents availableforsale investments cash equivalents availableforsale investments fair value october 31 2012 october 31 2011 follows cash equivalents consist investments time deposits money market funds mutual funds original maturities three months less interest income related cash equivalents approximately 155 million fiscal 2012 167 million fiscal 2011 111 million fiscal 2010 time deposits primarily issued institutions outside united states october 31 2012 october 31 2011 availableforsale securities consist shortterm investments mature within twelve months less longterm investments maturities greater twelve months investments primarily include institutional bonds mutual funds equity securities public companies fixedinterest securities time deposits hp estimates fair values investments based quoted market prices pricing models using current market rates estimated fair values may representative actual values realized future gross unrealized loss october 31 2012 2011 due primarily declines fair value certain debt securities 17 million 21 million respectively continuous loss position twelve months hp intend sell debt securities hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued likely hp required sell debt securities prior recovery amortized cost contractual maturities shortterm longterm investments availableforsale debt securities october 31 2012 follows fiscal 2012 hp recognized 60 million impairment charge related public equity investment hp determined impairment temporary hp made determination primarily based closing prices quarter impairment equity securities privately held companies include cost basis equity method investments amounted 51 million 48 million periods ended october 31 2012 october 31 2011 respectively included longterm financing receivables assets derivative financial instruments hp global company exposed foreign currency exchange rate fluctuations interest rate changes normal course business part risk management strategy hp uses derivative instruments primarily forward contracts option contracts interest rate swaps total return swaps hedge certain foreign currency interest rate lesser extent equity exposures hps objective offset gains losses resulting exposures losses gains derivative contracts used hedge thereby reducing volatility earnings protecting fair values assets liabilities hp leveraged derivatives use derivative contracts speculative purposes hp designates derivatives fair value hedges cash flow hedges foreign currency exposure net investment foreign operation net investment hedges additionally derivatives designated hedging instruments hp categorizes economic hedges derivatives hp recognizes derivatives gross basis consolidated balance sheets fair value reports current assets longterm financing receivables assets accrued liabilities hp classifies cash flows derivative programs operating activities consolidated statements cash flows result use derivative instruments hp exposed risk counterparties derivative contracts fail meet contractual obligations mitigate counterparty credit risk hp policy entering contracts carefully selected major financial institutions based upon credit ratings factors hp maintains dollar risk limits correspond institutions credit rating factors hps established policies procedures mitigating credit risk principal transactions shortterm cash include reviewing establishing hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued limits credit exposure continually assessing creditworthiness counterparties master agreements counterparties include master netting arrangements mitigation credit exposure counterparties arrangements permit hp net amounts due hp counterparty amounts due hp counterparty mitigate credit exposure counterparties hp may enter collateral security arrangements counterparties arrangements require hp post collateral hold collateral counterparties derivative fair values exceed contractually established thresholds generally based credit ratings hp counterparties funds generally transferred within two business days due date october 31 2012 hp held 198 million collateral posted 72 million collateralized arrangements 49 million reuse counterparty cash collateral 23 million cash october 31 2011 hp posted 96 million associated counterparties collateralized arrangements october 31 2012 2011 hp derivative instruments collateralized arrangements significant net liability position fair value hedges hp enters fair value hedges reduce exposure debt portfolio interest rate risk hp issues longterm debt us dollars based market conditions time financing hp uses interest rate swaps mitigate market risk exposures connection debt achieve primarily us dollar liborbased floating interest expense swap transactions generally involve principal interest obligations us dollardenominated amounts alternatively hp may choose swap fixed floating interest payments may terminate previously executed swap believes larger proportion fixedrate debt would beneficial investing fixedrate instruments hp may enter interest rate swaps convert fixed interest payments variable interest payments would classify swaps fair value hedges derivative instruments designated qualify fair value hedges hp recognizes gain loss derivative instrument well offsetting loss gain hedged item interest net consolidated statements earnings current period cash flow hedges hp uses combination forward contracts options designated cash flow hedges protect foreign currency exchange rate risks inherent forecasted net revenue lesser extent cost sales operating expense intercompany lease loan denominated currencies us dollar hps foreign currency cash flow hedges mature generally within twelve months however certain leasing revenuerelated forward contracts intercompany lease loan forward contracts extend duration lease term five years derivative instruments designated qualify cash flow hedges hp initially records effective portion gain loss derivative instrument accumulated comprehensive income loss separate component stockholders equity subsequently reclassifies amounts earnings period hedged transaction recognized earnings hp reports effective portion cash flow hedges financial statement line item changes value hedged item fiscal year 2012 significant impact results operations result discontinued cash flow hedges fiscal years 2011 2010 hp discontinue cash flow hedge probable forecasted transaction would occur hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued net investment hedges hp uses forward contracts designated net investment hedges hedge net investments certain foreign subsidiaries whose functional currency local currency derivative instruments designated net investment hedges hp records effective portion gain loss derivative instrument together changes hedged items cumulative translation adjustment separate component stockholders equity derivatives designated hedging instruments consist primarily forward contracts hp uses hedge foreign currency balance sheet exposures hp also uses total return swaps lesser extent interest rate swaps based equity fixed income indices hedge executive deferred compensation plan liability derivative instruments designated hedging instruments hp recognizes changes fair values earnings period change hp recognizes gain loss foreign currency forward contracts used hedge balance sheet exposures interest net period remeasurement gain loss related foreign currency denominated assets liabilities hp recognizes gain loss total return swaps interest rate swaps interest net period gain loss change market value executive deferred compensation plan liability hedge effectiveness interest rate swaps designated fair value hedges hp measures effectiveness offsetting change fair value hedged debt change fair value derivative foreign currency options forward contracts designated cash flow net investment hedges hp measures effectiveness comparing cumulative change hedge contract cumulative change hedged item based forward rates hp recognizes ineffective portion hedge well amounts included assessment effectiveness consolidated statements earnings october 31 2012 2011 portion hedging instruments gain loss excluded assessment effectiveness material fair value cash flow net investment hedges hedge ineffectiveness fair value cash flow net investment hedges material fiscal years 2012 2011 2010 hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued fair value derivative instruments consolidated balance sheets discussed note 9 hp estimates fair values derivatives primarily based pricing models using current market rates records derivatives balance sheet fair value gross notional fair value derivative financial instruments consolidated balance sheets follows 1represents face amounts contracts outstanding october 31 2012 october 31 2011 respectively 2represents offsetting swaps acquired previous business combinations designated hedging instruments effect derivative instruments consolidated statements earnings beforetax effect derivative instruments related hedged items fair value hedging relationship fiscal years ended october 31 2012 october 31 2011 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued beforetax effect derivative instruments cash flow net investment hedging relationships fiscal years 2012 2011 follows october 31 2012 hp expects reclassify estimated net accumulated comprehensive loss approximately 86 million net taxes earnings next twelve months hewlettpackard company subsidiaries notes consolidated financial statements continued note 10 financial instruments continued along earnings effects related forecasted transactions association cash flow hedges beforetax effect derivative instruments designated hedging instruments consolidated statements earnings fiscal years 2012 2011 follows financial instruments balance hps financial instruments accounts receivable financing receivables accounts payable accrued liabilities carrying amounts approximate fair value due short maturities note 11 financing receivables operating leases financing receivables represent salestype directfinancing leases resulting placement hp thirdparty products receivables typically terms two five years usually collateralized security interest underlying assets financing receivables also include billed receivables operating leases components net financing receivables hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued included financing receivables longterm financing receivables assets follows following fiscal years ended october 31 october 31 2012 scheduled maturities hps minimum lease payments receivable follows following fiscal years ended october 31 equipment leased customers operating leases 39 billion october 31 2012 40 billion october 31 2011 included property plant equipment accumulated depreciation equipment lease 15 billion october 31 2012 13 billion october 31 2011 october 31 2012 minimum future rentals noncancelable operating leases related leased equipment follows following fiscal years ended october 31 due homogenous nature leasing transactions hp manages financing receivables aggregate basis assessing monitoring credit risk credit risk generally diversified due large number entities comprising hps customer base dispersion across many different industries geographical regions credit quality obligor evaluated lease inception monitored term transaction risk ratings assigned lease based creditworthiness obligor variables augment diminish inherent credit risk particular transaction variables include underlying value liquidity collateral essential use equipment term lease inclusion guarantees letters credit security deposits credit enhancements hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued credit risk profile gross financing receivables based internally assigned ratings follows following fiscal years ended october 31 accounts rated low risk typically equivalent standard poors rating bbb higher accounts rated moderate risk would generally equivalent bb lower hp closely monitors accounts rated high risk based upon impairment analysis may establish specific reserves portion leases allowance doubtful accounts balance comprised general reserve determined based percentage financing receivables balance specific reserve established certain leases identified exposures customer default bankruptcy events make unlikely hp recover investment lease general reserve percentages maintained regional basis based several factors include consideration historical credit losses portfolio delinquencies trends overall weightedaverage risk rating portfolio information derived competitive benchmarking allowance doubtful accounts related financing receivables follows following fiscal years ended october 31 accounts generally put nonaccrual status cessation interest accrual reach 90 days past due nonaccrual status may impact customers risk rating certain hewlettpackard company subsidiaries notes consolidated financial statements continued note 11 financing receivables operating leases continued circumstances delinquency deemed administrative nature accounts may still accrue interest reach 90 days past due writeoff specific reserve generally recorded account reaches 180 days past due total financing receivables nonaccrual status 225 million 157 million october 31 2012 2011 respectively total financing receivables greater 90 days past due still accruing interest 113 million 71 million october 31 2012 2011 respectively note 12 guarantees indemnifications ordinary course business hp may provide certain clients subsidiary performance guarantees andor financial performance guarantees may backed standby letters credit surety bonds general hp would liable amounts guarantees event nonperformance hp hps subsidiaries permits termination related contract client likelihood hp believes remote hp believes company compliance performance obligations material service contracts performance guarantee hp certain service contracts supported client financing securitization arrangements specific circumstances involving nonperformance resulting service contract termination failure comply terms financing arrangement hp would required acquire certain assets hp considers possibility failure comply remote asset amounts involved immaterial ordinary course business hp enters contractual arrangements hp may agree indemnify third party arrangement losses incurred relating services perform behalf hp losses arising certain events defined within particular contract may include example litigation claims relating past performance indemnification obligations may subject maximum loss clauses historically payments made related indemnifications immaterial warranty hp provides estimated cost product warranties time recognizes revenue hp engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers however product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside hps baseline experience affect estimated warranty obligation actual product failure rates repair rates post sales support costs differ estimates revisions estimated warranty liability would required hewlettpackard company subsidiaries notes consolidated financial statements continued note 12 guarantees continued changes hps aggregate product warranty liabilities follows following fiscal years ended october 31 note 13 borrowings notes payable shortterm borrowings notes payable shortterm borrowings including current portion longterm debt follows following fiscal years ended october 31 notes payable banks lines credit includes deposits associated hps bankingrelated activities approximately 369 million 355 million october 31 2012 2011 respectively longterm debt longterm debt follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued disclosed note 10 hp uses interest rate swaps mitigate market risk exposures connection certain fixed interest global notes achieve primarily us dollar liborbased floating interest expense interest rates table adjusted reflect impact interest rate swaps hp may redeem global notes set forth table time redemption prices described prospectus supplements relating thereto global notes senior unsecured debt may 2012 hp filed shelf registration statement 2012 shelf registration statement sec enable company offer sale time one offerings unspecified amount debt securities common stock preferred stock depositary shares warrants 2012 shelf registration statement replaced registration statement filed may 2009 hps board directors authorized issuance 160 billion aggregate principal amount commercial paper hp hps subsidiaries authorized issue additional 10 billion aggregate principal amount commercial paper hp maintains two commercial paper programs whollyowned subsidiary maintains third program hps us program provides issuance us dollar denominated commercial paper maximum aggregate principal amount 160 billion hps euro commercial paper program established september 2012 provides issuance commercial paper outside united states denominated us dollars euros british pounds maximum aggregate principal amount 30 billion equivalent alternative currencies combined aggregate principal amount commercial hewlettpackard company subsidiaries notes consolidated financial statements continued note 13 borrowings continued paper issued programs one time cannot exceed 160 billion board authorization hp subsidiarys euro commercial papercertificate deposit programme provides issuance commercial paper various currencies maximum aggregate principal amount 500 million hp maintains senior unsecured committed credit facilities primarily support issuance commercial paper hp 30 billion fiveyear credit facility expires march 2017 45 billion fouryear credit facility expires february 2015 facilities support us commercial paper program fiveyear credit facility amended september 2012 also support euro commercial paper program amounts available fiveyear credit facility euros pounds sterling limited us dollar equivalent 22 billion 300 million respectively commitment fees interest rates terms borrowing credit facilities vary based hps external credit ratings hps ability us commercial paper outstanding balance exceeds 75 billion supported credit facilities subject number factors including liquidity conditions business performance within including capital lease obligations borrowings collateralized certain financing receivable assets october 31 2012 carrying value assets approximated carrying value borrowings 225 million october 31 2012 hp capacity issue unspecified amount additional debt securities common stock preferred stock depositary shares warrants 2012 shelf registration statement date hp also approximately 174 billion available borrowing resources including 161 billion authorized capacity commercial paper programs approximately 13 billion relating uncommitted lines credit extent hp able utilize 2012 shelf registration statement commercial paper programs sources liquidity given time subject number factors including market demand hp securities commercial paper hps financial performance hps credit ratings market conditions generally aggregate future maturities longterm debt face value excluding fair value adjustment related hedged debt 399 million premium debt issuance 23 million discount debt issuance 21 million follows october 31 2012 interest expense borrowings approximately 865 million fiscal 2012 551 million fiscal 2011 417 million fiscal 2010 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings domestic foreign components loss earnings taxes follows following fiscal years ended october 31 provision benefit taxes earnings follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued significant components deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 decline deferred tax liabilities associated purchased intangible assets primarily attributable impairment purchased intangible assets fiscal year breakdown current longterm deferred tax assets deferred tax liabilities follows following fiscal years ended october 31 decline longterm deferred tax liabilities primarily attributable reversals deferred income tax liabilities attributable impaired purchased intangible assets noted temporary basis differences related certain foreign subsidiaries reduced impairment charges goodwill hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued october 31 2012 hp 29 billion 62 billion 257 billion federal state foreign net operating loss carryforwards respectively amounts included respective totals begin expire fiscal 2013 hp also capital loss carryforward approximately 286 million begin expire fiscal 2015 hp provided valuation allowance 166 million deferred tax assets related federal state net operating losses 104 million deferred tax assets related capital loss carryforwards 76 billion deferred tax assets related foreign net operating loss carryforwards hp expect realize october 31 2012 hp recorded deferred tax assets various tax credit carryforwards 39 billion amount includes 29 billion us foreign tax credit carryforwards begin expire fiscal 2018 hp recorded valuation allowance 47 million hp alternative minimum tax credit carryforwards 23 million expire us research development credit carryforwards 566 million begin expire fiscal 2016 hp also tax credit carryforwards 417 million various states foreign countries hp provided valuation allowance 209 million reduce related deferred tax asset credits begin expire fiscal 2013 gross deferred tax assets october 31 2012 2011 2010 reduced valuation allowances 102 billion 91 billion 88 billion respectively total valuation allowances increased 11 billion fiscal 2012 associated primarily net effects increases 13 billion 317 million 669 million respectively valuation allowances certain us deferred tax assets related legal entities within enterprise services business us deferred tax assets certain foreign deferred tax assets respectively 11 billion decrease foreign valuation allowance attributable foreign currency translation total valuation allowances increased 307 million fiscal 2011 associated various net operating losses tax credits deferred tax assets valuation allowances increased 77 million fiscal 2010 consisting 106 million associated federal capital loss carryovers net 29 million decrease associated various net operating loss carryovers credits net excess tax benefit recorded resulting exercise employee stock options employee stock programs fiscal 2012 deficit approximately 175 million recorded decrease stockholders equity fiscal 2012 excess tax benefits 128 million 300 million recorded fiscal 2011 fiscal 2010 respectively differences us federal statutory income tax rate hps effective tax rate follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued jurisdictions favorable tax rates significant effective tax rate impact periods presented include singapore netherlands china ireland puerto rico hp plans reinvest earnings jurisdictions indefinitely outside united states therefore provided us taxes indefinitely reinvested earnings fiscal 2012 hp recorded 13 billion income tax charge record valuation allowances certain us deferred tax assets related enterprise services business noted addition hp recorded charges 297 million various foreign valuation allowances well 26 million income tax benefits related adjustments prior year foreign income tax accruals settlement tax audit matters miscellaneous items fiscal 2011 hp recorded 325 million net income tax charges related items unique year amounts included 468 million tax charges increases foreign state valuation allowances offset 78 million income tax benefits adjustments prior year foreign income tax accruals 63 million income tax benefits uncertain tax position reserve adjustments settlement tax audit matters 2 million tax benefits associated miscellaneous prior period items fiscal 2010 hp recorded 26 million net income tax benefits related items unique year amounts included adjustments prior year foreign income tax accruals credits settlement tax audit matters valuation allowance adjustments miscellaneous items result certain employment actions capital investments hp undertaken income manufacturing services certain countries subject reduced tax rates cases wholly exempt taxes 2024 gross income tax benefits attributable actions investments estimated 900 million approximately 046 basic earnings per share fiscal year 2012 13 billion approximately 062 basic earnings per share fiscal year 2011 966 million approximately 041 basic earnings per share fiscal year 2010 gross income tax benefits offset partially accruals us income taxes undistributed earnings among factors hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued total amount gross unrecognized tax benefits 26 billion october 31 2012 reconciliation unrecognized tax benefits follows 14 billion 11 billion 10 billion hps unrecognized tax benefits october 31 2012 2011 2010 respectively would affect hps effective tax rate realized hp recognizes interest income favorable settlements income tax receivables interest expense penalties accrued unrecognized tax benefits within income tax expense october 31 2012 hp accrued net 210 million payable interest penalties fiscal 2012 hp recognized net interest expense net tax net deficiencies 5 million hp engages continuous discussion negotiation taxing authorities regarding tax matters various jurisdictions hp expect complete resolution internal revenue service irs audit cycle within next 12 months however reasonably possible certain federal foreign state tax issues may concluded next 12 months including issues involving transfer pricing matters accordingly hp believes reasonably possible existing unrecognized tax benefits may reduced amount 15 million within next 12 months hewlettpackard company subsidiaries notes consolidated financial statements continued note 14 taxes earnings continued hp subject income tax united states approximately 80 foreign countries subject routine corporate income tax audits many jurisdictions addition hp subject numerous ongoing audits state foreign tax authorities irs began audit hps 2009 income tax return 2011 hp received irs notices deficiency fiscal 1999 2000 2003 2004 2005 tax years revenue agents reports rar fiscal 2001 2002 2006 2007 2008 tax years proposed irs adjustments tax years would sustained reduce benefits tax refund claims hp filed net operating loss carrybacks earlier fiscal years tax credit carryforwards subsequent years approximately 589 million hp filed petitions united states tax court regarding certain proposed irs adjustments regarding tax years 1999 2003 continuing contest additional adjustments proposed irs tax years united states tax court recently ruled hp regarding one irs adjustments hp intends appeal decision hp believes provided adequate reserves tax deficiencies reductions tax benefits could result irs actions respect major foreign state tax jurisdictions hp longer subject tax authority examinations years prior 1999 hp believes adequate accruals provided open tax years tax years hps us group subsidiaries providing enterprise services 2002 audited irs proposed adjustments resolved rars received exam years 2003 2004 2005 2006 2007 short period ended august 26 2008 proposing total tax deficiencies 320 million hp contesting certain issues believes provided adequate reserves tax deficiencies reductions tax benefits could result irs actions irs began audit 2011 2009 income tax return hps us group subsidiaries providing enterprise services issued rar short period ended october 31 2008 proposing total tax deficiency 17 million hp contesting certain issues believes provided adequate reserves tax deficiencies reductions tax benefits could result irs actions hp provided us federal income foreign withholding taxes 334 billion undistributed earnings nonus operations october 31 2012 hp intends reinvest earnings indefinitely outside united states hp distribute earnings foreign tax credits may become available current law reduce resulting us income tax liability determination amount unrecognized deferred tax liability related earnings practicable hp remit nonindefinitely reinvested earnings nonus subsidiaries deferred us federal withholding taxes provided excess cash accumulated determines advantageous business operations tax cash management reasons note 15 stockholders equity dividends stockholders hp common stock entitled receive dividends declared hps board directors dividends paid quarterly dividends declared 050 per common share fiscal 2012 040 per common share fiscal 2011 032 per common share fiscal 2010 hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 stockholders equity continued share repurchase program hps share repurchase program authorizes open market private repurchase transactions fiscal 2012 hp executed share repurchases 67 million shares settled 16 billion fiscal 2011 hp executed share repurchases 259 million shares repurchases 262 million shares settled 101 billion included 4 million shares repurchased transactions executed fiscal 2010 settled fiscal 2011 fiscal 2010 hp executed share repurchases 241 million shares repurchases 240 million shares settled 110 billion included 3 million shares repurchased transactions executed fiscal 2009 settled fiscal 2010 foregoing shares repurchased settled fiscal 2012 fiscal 2011 fiscal 2010 open market repurchase transactions fiscal 2012 additional authorization future share repurchases hps board directors fiscal 2011 hps board directors authorized additional 100 billion future share repurchases fiscal 2010 hps board directors authorized additional 180 billion future share repurchases october 31 2012 hp remaining authorization approximately 92 billion future share repurchases taxes related items comprehensive loss income hewlettpackard company subsidiaries notes consolidated financial statements continued note 15 stockholders equity continued components accumulated comprehensive loss net taxes follows following fiscal years ended october 31 note 16 retirement postretirement benefit plans defined benefit plans hp sponsors number defined benefit pension plans worldwide significant united states hp retirement plan retirement plan traditional defined benefit pension plan based pay years service hp company cash account pension plan cash account pension plan benefits accrued pursuant cash accumulation account formula based upon percentage pay plus interest frozen effective january 1 2008 cash account pension plan retirement plan merged 2005 certain funding investment purposes effective october 30 2009 eds us qualified pension plan also merged hp pension plan merged plan referred hp pension plan hp reduces benefit payable us employee retirement plan service 1993 amounts due employee hps frozen defined contribution deferred profitsharing plan dpsp hp closed dpsp new participants 1993 dpsp plan obligations equal plan assets recognized offset pension plan hp calculates defined benefit pension cost obligations fair value plan assets projected benefit obligations us defined benefit plans combined dpsp follows following fiscal years ended october 31 postretirement benefit plans fiscal 2005 substantially hps us employees december 31 2002 could become eligible partially subsidized retiree medical benefits retiree life insurance benefits pre2003 hp retiree medical program pre2003 program certain retiree medical hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued programs plan participants pre2003 program make contributions based choice medical option length service us employees hired rehired january 1 2003 may become eligible participate postretirement medical plan hp retiree medical program must bear full cost participation effective january 1 2006 employees whose combination age years service less 62 longer eligible subsidized pre2003 program instead eligible hp retiree medical program employees longer eligible pre2003 program well employees hired january 1 2003 eligible certain credits hp retirement medical savings account plan rmsa plan upon attaining age 45 upon retirement former employees may use credits rmsa plan reimbursement certain eligible medical expenses including premiums required coverage hp retiree medical program february 2007 hp limited future eligibility pre2003 hp retiree medical program employees within five years satisfying programs retirement criteria june 30 2007 employees meeting modified program criteria may become eligible participation hp retiree medical program november 2008 hp announced changing limits future costsharing pre2003 program whereby future cost increases paid participating retirees starting 2011 june 2008 hp modified rmsa plan provide generally employees employed hp july 31 2008 would eligible receive employer credits september 2008 hp modified rmsa plan provide employees would receive employer credits form matching contributions hp currently collects retiree drug subsidy us federal government relating retiree prescription drug benefits provides collecting retiree drug subsidy one several alternatives medicare part employers financing benefits march 2010 hp decided contract prescription drug plan leveraging employer group waiver plan process provide group benefits medicare part alternative collecting retiree drug subsidy change retiree prescription drug financing strategy take effect 2013 due health care reform legislation enacted march 2010 expected give hp access greater us federal subsidies time help pay retiree benefits aside impact health care reform legislation expected affect cost hps retiree welfare programs subsidy offered hp retiree participants fixed fiscal year 2010 hp also announced elimination companypaid retiree life insurance effective january 1 2011 defined contribution plans hp offers various defined contribution plans us nonus employees total defined contribution expense 628 million fiscal 2012 626 million fiscal 2011 535 million fiscal 2010 us employees automatically enrolled hewlettpackard company 401k plan hp 401k plan meet eligibility requirements unless decline participation effective april 1 2009 hp matching contributions hp 401k plan changed quarterly discretionary performancebased match maximum 4 eligible compensation us employees determined fiscal quarter based business results hps matching contributions quarters fiscal 2010 100 maximum 4 match effective beginning fiscal 2011 quarterly employer matching contributions hp 401k plan hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued longer discretionary equal 100 employees contributions maximum 4 eligible compensation effective january 31 2004 hp designated hp stock fund investment option hp 401k plan employee stock ownership plan result participants hp stock fund may receive dividends cash may reinvest dividends hp stock fund hp paid approximately 10 million 8 million 7 million dividends hp common shares held hp stock fund fiscal 2012 2011 2010 respectively hp records dividends reduction retained earnings consolidated statements stockholders equity hp stock fund held approximately 20 million shares hp common stock october 31 2012 pension postretirement benefit expense hps net pension postretirement benefit cost credit recognized consolidated statements earnings follows following fiscal years ended october 31 weightedaverage assumptions used calculate net benefit cost follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued funded status funded status defined benefit postretirement benefit plans follows following fiscal years ended october 31 net amounts recognized hps defined benefit postretirement benefit plans hps consolidated balance sheets october 31 2012 october 31 2011 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued following table summarizes pretax net experience loss gain prior service benefit recognized accumulated comprehensive loss companys defined benefit postretirement benefit plans october 31 2012 following table summarizes experience loss prior service benefit amortized accumulated comprehensive loss income recognized components net periodic benefit cost credit next fiscal year weightedaverage assumptions used calculate benefit obligation disclosed follows fiscal years ended october 31 2012 2011 defined benefit plans projected benefit obligations exceeding fair value plan assets follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued defined benefit plans accumulated benefit obligations exceeding fair value plan assets follows fair value considerations table sets forth fair value plan assets october 31 2012 asset category using threelevel hierarchy fairvalue inputs described note 9 1includes debt issued national state local governments agencies 2includes limited partnerships venture capital partnerships 3includes publicly privately traded rics 4includes cash equivalents shortterm marketable securities 5includes international insured contracts derivative instruments unsettled transactions hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued changes fair value measurements level 3 investments year ended october 31 2012 follows hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued table sets forth fair value plan assets october 31 2011 asset category using threelevel hierarchy fairvalue inputs described note 9 1includes debt issued national state local governments agencies 2includes limited partnerships venture capital partnerships 3includes publicly privately traded rics 4includes cash equivalents shortterm marketable securities 5includes international insured contracts derivative instruments unsettled transactions 6certain nonus debt securities hedge funds aggregate 32 billion reclassified level 1 level 2 based upon analysis investments hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued changes fair value measurements level 3 investments year ended october 31 2011 follows plan asset valuations following description valuation methodologies used pension plan assets measured fair value changes methodologies used reporting period investments securities valued closing price reported stock exchange individual securities traded corporate government assetbacked debt securities fair value based upon observable inputs comparable market transactions corporate government debt securities traded active exchanges fair value based upon observable quoted prices underlying assets alternative investments limited partnerships joint ventures private equities determined general partner general partners designee quarter periodic basis common collective trusts interest 10312 entities registered investment companies valued net asset value established funds sponsor based upon fair value assets underlying funds valuation assets requires judgment due absence quoted market prices assets therefore classified level 3 cash equivalents includes money market accounts valued based net asset value shares assets valued based upon level input eg quoted prices observable inputs level 1 unobservable inputs significant fair value measurement assets hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued plan asset allocations weightedaverage target actual asset allocations across benefit plans respective measurement dates follows investment policy hps investment strategy worldwide plan assets seek competitive rate return relative appropriate level risk depending funded status plan majority plans investment managers employ active investment management strategies goal outperforming broad markets invest risk management practices include diversification across asset classes investment styles periodic rebalancing toward asset allocation targets number plans investment managers authorized utilize derivatives investment liability exposures hp utilizes derivatives effect asset allocation changes hedge certain investment liability exposures target asset allocation selected us plan reflects riskreturn profile hp feels appropriate relative plans liability structure return goals hp conducts periodic assetliability studies us plan assets order model various potential asset allocations comparison plans forecasted liabilities liquidity needs hp invests portion us defined benefit plan assets postretirement benefit plan assets private market securities venture capital funds provide diversification higher expected returns outside united states asset allocation decisions typically made independent board trustees us investment objectives designed generate returns enable plan meet future obligations countries local regulations require adjustments asset allocation typically leading higher percentage fixed income would otherwise deployed hps investment subsidiary acts consulting governance role reviewing investment strategy providing recommended list investment managers country plan final decisions asset allocation investment managers made local trustees basis expected longterm rate return plan assets expected longterm rate return assets us plan reflects expected returns major asset class plan invests weight asset class target mix hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued expected asset class returns reflect current yield us government bonds risk premiums asset class hps investment policy employ primarily active investment managers seek outperform broader market asset class expected returns adjusted reflect expected additional returns net fees approach used arrive expected rate return assets nonus plans reflects asset allocation policy plan expected country real returns equity fixed income investments annual basis hp gathers empirical data local country subsidiaries determine expected longterm rates return equity fixed income securities hp weights expected real rates return based country specific allocation mixes adjusted inflation settlements first quarter fiscal 2012 hp completed transfer substitutional portion japan pension liability obligation japanese government transfer resulted recognizing net gain 28 million comprised net settlement loss 150 million gain government subsidy 178 million government subsidy consisted elimination 344 million pension obligations transfer 166 million pension assets japanese government retirement incentive program part 2012 restructuring plan company announced voluntary enhanced early retirement program us employees participation eer program limited employees whose combined age years service equaled 65 approximately 8500 employees elected participate eer program leave company dates designated company majority eer participants left company august 31 2012 others exiting august 31 2013 us defined benefit pension plan amended provide eer benefit paid plan electing eer participants current participants pension plan retirement incentive benefit calculated lump sum ranges five fourteen months pay depending years service time retirement program result retirement incentive hp recognized stb expense 833 million reflected present value additional benefits hp distribute pension plan assets hp recorded expenses restructuring charge addition us defined benefit plan remeasurement also required resulted material change 2012 net periodic pension expense hp extended employees participating eer program opportunity continue health care coverage active employee contribution rates 24 months following retirement addition employees grandfathered certain employersubsidized retiree medical plans hp providing 12000 employer credits rmsa program items resulted additional stb expense 227 million offset net curtailment gains programs 37 million due primarily resulting accelerated recognition existing prior service costcredits entire stb approximately 30 million curtailment gains recognized second half fiscal 2012 hp reported net expense restructuring charge hewlettpackard company subsidiaries notes consolidated financial statements continued note 16 retirement postretirement benefit plans continued future contributions funding policy fiscal 2013 hp expects contribute approximately 674 million nonus pension plans approximately 33 million cover benefit payments us nonqualified plan participants hp expects pay approximately 124 million cover benefit claims hps postretirement benefit plans hps funding policy contribute cash pension plans meets least minimum contribution requirements established local government funding taxing authorities estimated future benefits payable hp estimates future benefits payable retirement postretirement plans place follows october 31 2012 1the estimated future benefits payable postretirement plans reflected net expected medicare part subsidy 2increase future benefits payable primarily attributable 2012 eer program note 17 commitments hp leases certain real personal property noncancelable operating leases certain leases require hp pay property taxes insurance routine maintenance include renewal options escalation clauses rent expense approximately 1012 million fiscal 2012 1042 million fiscal 2011 1062 million fiscal 2010 sublease rental income approximately 37 million fiscal 2012 38 million fiscal 2011 46 million fiscal 2010 october 31 2012 october 31 2011 property capital lease comprised primarily equipment furniture approximately 882 million 577 million respectively included property plant equipment accompanying consolidated balance sheets accumulated depreciation property capital lease approximately 453 million 454 million respectively october 31 2012 october 31 2011 related depreciation included depreciation expense hewlettpackard company subsidiaries notes consolidated financial statements continued note 17 commitments continued future annual minimum lease payments sublease rental income commitments capital lease commitments october 31 2012 follows october 31 2012 hp unconditional purchase obligations approximately 16 billion unconditional purchase obligations include agreements purchase goods services enforceable legally binding hp specify significant terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction unconditional purchase obligations exclude agreements cancelable without penalty unconditional purchase obligations related principally inventory items future unconditional purchase obligations october 31 2012 follows note 18 litigation contingencies hp involved lawsuits claims investigations proceedings including identified consisting intellectual property commercial securities employment employee benefits environmental matters arise ordinary course business hp records provision liability management believes probable liability incurred amount loss reasonably estimated hp believes adequate provisions matters october 31 2012 reasonably possible additional material loss incurred amount excess amounts already recognized hps financial statements hp reviews provisions least quarterly adjusts provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular case based experience hp believes damage amounts claimed specific matters discussed meaningful indicator hps potential liability litigation inherently unpredictable however hp believes valid defenses respect legal matters pending nevertheless cash flows results operations could materially affected particular period unfavorable resolution one contingencies hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued litigation proceedings investigations copyright levies described proceedings ongoing concluded involving hp certain european union eu member countries including litigation germany belgium austria seeking impose modify levies upon equipment multifunction devices mfds personal computers pcs printers alleging devices enable producing private copies copyrighted materials descriptions ongoing proceedings included levies generally based upon number products sold perproduct amounts levies vary eu member countries yet levies digital devices expected implement similar legislation enable extend existing levy schemes eu member countries expected limit scope levy schemes applicability digital hardware environment hp companies various industry associations opposed extension levies digital environment advocated alternative models compensation rights holders verwertungsgesellschaft wort vg wort collection agency representing certain copyright holders instituted legal proceedings hp stuttgart civil court seeking levies printers december 22 2004 court held hp liable payments regarding printers using ascii code sold germany determine amount payable per unit hp appealed decision january 2005 stuttgart court appeals may 11 2005 stuttgart court appeals issued decision confirming levies due june 6 2005 hp filed appeal german federal supreme court karlsruhe december 6 2007 german federal supreme court issued judgment printers subject levies existing law court issued written decision january 25 2008 vg wort subsequently filed application german federal supreme court section 321a german code civil procedure contending court consider arguments may 9 2008 german federal supreme court denied vg worts application vg wort appealed decision filing claim german federal constitutional court challenging ruling printers subject levies september 21 2010 constitutional court published decision holding german federal supreme court erred referring questions interpretation german copyright law court justice european union cjeu therefore revoked german federal supreme court decision remitted matter july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive cjeu conducted oral hearing october 2012 expected issue decision approximately seven months thereafter matter remitted back german federal supreme court september 2003 vg wort filed lawsuit fujitsu siemens computer gmbh fsc munich civil court munich germany seeking levies pcs industry test case germany hp agreed object delay vg wort sues hp levies pcs following final decision fsc december 23 2004 munich civil court held pcs subject levy fsc must pay € 12 plus compound interest pc sold germany since march 2001 fsc appealed decision january 2005 munich court appeals december 15 2005 munich court appeals affirmed munich civil court decision fsc filed appeal german federal supreme court february 2006 october 2 2008 german federal supreme court issued judgment pcs photocopiers within meaning german copyright law effect december 31 2007 therefore subject hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued levies photocopiers established law vg wort subsequently filed claim german federal constitutional court challenging ruling january 2011 constitutional court published decision holding german federal supreme court decision inconsistent german constitution revoking german federal supreme court decision constitutional court remitted matter german federal supreme court action july 21 2011 german federal supreme court stayed proceedings referred several questions cjeu regard interpretation european copyright directive cjeu conducted oral hearing october 2012 expected issue decision approximately seven months thereafter matter remitted back german federal supreme court reprobel cooperative society authority collect distribute remuneration reprography belgian copyright holders requested hp extrajudicial means amend certain copyright levy declarations submitted inkjet mfds sold belgium january 2005 december 2009 enable collect copyright levies calculated based generally higher copying speed mfds operated draft print mode rather operated normal print mode march 2010 hp filed lawsuit reprobel frenchspeaking chambers court first instance brussels seeking declaratory judgment copyright levies payable sales mfds belgium alternatively copyright levies payable mfds must assessed based copying speed operated normal print mode set default device november 16 2012 court issued decision holding belgium law conformity eu law number respects ordered november 2013 reprobel substantiate amounts claimed reprobel commensurate harm resulting legitimate copying reprographic exception based industry opposition extension levies digital products hps assessments merits various proceedings hps estimates number units impacted amounts levies hp accrued amounts believes adequate address matters described however ultimate resolution matters associated financial impact hp including number units impacted amount levies imposed ability hp recover amounts increased prices remains uncertain skold et al v intel corporation hewlettpackard company lawsuit filed hp june 14 2004 pending state court santa clara county california lawsuit alleges intel corporation intel concealed performance problems related intel pentium 4 processor among others things manipulation performance benchmarks lawsuit alleges hp aided abetted intels allegedly unlawful conduct plaintiffs seek unspecified damages restitution attorneys fees costs november 23 2011 plaintiffs filed motion seeking certify nationwide class asserting claims california unfair competition law april 19 2012 court issued order granting part denying part plaintiffs motion intel court certified nationwide class excluding residents illinois hp court certified class limited california residents purchased computers hp personal family household use required order plaintiffs filed amended complaint limits claims hp california class reserving right seek additional statespecific subclasses hp hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued inkjet printer litigation described hp involved several lawsuits claiming breach express implied warranty unjust enrichment deceptive advertising unfair business practices plaintiffs alleged among things hp employed smart chip certain inkjet printing products order register ink depletion prematurely render cartridge unusable builtin expiration date hidden documented marketing materials consumers plaintiffs also contended consumers received false ink depletion warnings smart chip limits ability consumers use cartridge full capacity choose competitive products •a consolidated lawsuit captioned hp inkjet printer litigation filed united states district court northern district california seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees •a lawsuit captioned blennis v hp filed january 17 2007 united states district court northern district california seeking class certification restitution damages including enhanced damages injunctive relief interest costs attorneys fees •a lawsuit captioned rich v hp filed hp may 22 2006 united states district court northern district california alleging hp designed color inkjet printers unnecessarily use color ink addition black ink printing black white images text seeking certify nationwide injunctive class californiaonly damages class •two class actions hp subsidiary hewlettpackard canada co pending canada one commenced british columbia february 2006 one commenced ontario june 2006 plaintiffs seeking class certification restitution declaratory relief injunctive relief unspecified statutory compensatory punitive damages august 25 2010 hp plaintiffs hp inkjet printer litigation blennis v hp rich v hp entered agreement settle lawsuits behalf proposed classes terms settlement lawsuits consolidated eligible class members right obtain ecredits exceed 5 million aggregate use purchasing printers printer supplies hps website part settlement hp also agreed provide class members additional information regarding hp inkjet printer functionality change content certain software user guide messaging provided users regarding life inkjet printer cartridges addition settlement provides class counsel class representatives paid attorneys fees expenses stipends march 29 2011 court granted final approval settlement april 27 2011 certain class members objected settlement filed appeal united states court appeals ninth circuit courts order granting final approval settlement fair labor standards act litigation hp involved several lawsuits plaintiffs seeking unpaid overtime compensation damages based allegations various employees eds hp misclassified exempt employees fair labor standards act andor violation california labor code state laws matters include following •cunningham et al v electronic data systems corporation purported collective action filed may 10 2006 united states district court southern hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued district new york claiming current former eds employees allegedly involved installing andor maintaining computer software hardware misclassified exempt employees another purported collective action steavens et al v electronic data systems corporation filed october 23 2007 also pending court alleging similar facts steavens case consolidated pretrial purposes cunningham case december 14 2010 court granted conditional certification class consisting employees 20 legacy eds job codes consolidated cunningham steavens matter approximately 2600 current former eds employees filed consents optin litigation plaintiffs alleged separate opt classes based overtime laws states california washington massachusetts new york plaintiffs dismissed claims •salva v hewlettpackard company purported collective action filed june 15 2012 united states district court western district new york alleging certain information technology employees allegedly involved installing andor maintaining computer software hardware misclassified exempt employees fair labor standards act august 31 2012 hp filed answer plaintiffs complaint counterclaims named two three named plaintiffs also august 31 2012 hp filed motion transfer venue united states district court eastern district texas hearing hps motion transfer venue scheduled november 21 2012 postponed court •heffelfinger et al v electronic data systems corporation class action filed november 2006 california superior court claiming certain eds information technology workers california misclassified exempt employees case subsequently transferred united states district court central district california january 7 2008 certified class information technology workers california june 6 2008 court granted defendants motion summary judgment plaintiffs subsequently filed appeal united states court appeals ninth circuit june 7 2012 court appeals affirmed summary judgment two named plaintiffs reversed summary judgment third named plaintiff remanding case back trial court inviting trial court revisit prior certification order defendant moved decertify class november 2012 trial court issued tentative order granting defendants motion another purported class action originally filed california superior court karlbom et al v electronic data systems corporation filed march 16 2009 alleges similar facts pending san diego county superior court •blake et al v hewlettpackard company purported nationwide collective action filed february 17 2011 united states district court southern district texas claiming class information technology support personnel misclassified exempt employees fair labor standards act february 10 2012 plaintiffs filed motion requesting court conditionally certify case collective action hp opposed plaintiffs motion conditional certification court taken motion advisement one optin plaintiff joined named plaintiff lawsuit time motion filed india directorate revenue intelligence proceedings april 30 may 10 2010 india directorate revenue intelligence dri issued show cause notices hewlettpackard india hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued sales private ltd hpi subsidiary hp seven current hp employees one former hp employee alleging hp underpaid customs duties importing products spare parts india seeking recover aggregate approximately 370 million plus penalties prior issuance show cause notices hp deposited approximately 16 million dri agreed post provisional bond exchange dris agreement seize hp products spare parts interrupt transaction business hp india april 11 2012 bangalore commissioner customs issued order products show cause notice affirming certain duties penalties hpi named individuals approximately 386 million hpi already deposited 9 million december 11 2012 hpi voluntarily deposited additional 10 million connection products show cause notice april 20 2012 commissioner issued order parts show cause notice affirming certain duties penalties hpi certain named individuals approximately 17 million hpi already deposited 7 million order hpi deposited additional 3 million connection parts show cause notice avoid certain penalties hpi filed appeals commissioners orders customs tribunal along applications waiver predeposit remaining demand amounts condition hearing appeals customs department also filed crossappeals customs tribunal hearing deposit waiver expected held december 2012 postponed request customs tribunal new hearing date expected set february 2013 hearing customs tribunal expected set actual amount additional deposit required hpi proceed appeals amount additional deposit products appeal expected zero 367 million plus interest amount additional deposit spare parts appeal expected zero 3 million march 12 2012 chennai additional commissioner customs issued order affirming duties interest penalties approximately 254000 one two june 17 2010 software show cause notices hpi deposited 108000 investigation order deposited additional 21500 software order avoid certain penalties hpi filed appeal commissioner appeals along application waiver predeposit remaining demand amount condition hearing appeal amount additional deposit chennai software appeal expected zero 80000 russia gpo related investigations german public prosecutors office german ppo conducting investigation allegations current former employees hp engaged bribery embezzlement tax evasion relating transaction hewlettpackard ise gmbh germany former subsidiary hp general prosecutors office russian federation approximately €35 million transaction referred russia gpo deal spanned years 2001 2006 delivery installation network german ppo issued indictment four individuals including one current two former hp employees charges including bribery breach trust tax evasion german ppo also asked hp made associated party case german ppos request granted hps participation court proceedings would limited portion proceedings could ultimately bear question whether hp subject potential disgorgement profits based conduct indicted current former employees hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued us department justice sec also conducting investigation russia gpo deal potential violations foreign corrupt practices act fcpa person entity could subject fines civil penalties 500000 per violation equitable remedies including disgorgement injunctive relief addition criminal penalties could range greater 2 million per violation twice gross pecuniary gain loss violation addition information russia gpo deal us enforcement authorities requested information hp relating certain transactions russia commonwealth independent states subregion dating back 2000 hp cooperating investigating agencies ect proceedings january 2011 postal service brazil empresa brasileira de correios e telégrafos ect notified hp initiated administrative proceedings hp subsidiary brazil hp brazil consider whether suspend hp brazils right bid contract ect related alleged improprieties bidding contracting processes whereby employees hp brazil employees several companies coordinated bids three ect contracts 2007 2008 late july 2011 ect notified hp decided apply penalties hp brazil suspending hp brazils right bid contract ect five years based upon evidence august 2011 hp filed petitions ect requesting decision revoked seeking injunctive relief application penalties suspended final nonappealable decision made merits case hp currently awaiting response ect petitions ect rule substance hps petitions timely manner hp filed lawsuit seeking similar relief court first instance decided merits hps lawsuit denied hps request injunctive relief suspending application penalties pending final nonappealable decision merits case hp appealed denial request injunctive relief intermediate appellate court issued preliminary ruling denying request injunctive relief reducing length sanctions five two years hp appealed decision december 2011 obtained ruling staying enforcement ects sanctions hp heard full merits case hp expects appeal merits last several years stockholder litigation described hp involved various stockholder litigation commenced certain current former hp executive officers andor certain current former members hp board directors plaintiffs seeking recover certain compensation paid hp defendants damages •saginaw police fire pension fund v marc l andreessen et al lawsuit filed october 19 2010 united states district court northern district california alleging among things defendants breached fiduciary duties unjustly enriched consciously disregarding hps alleged violations fcpa august 15 2011 defendants filed motion dismiss lawsuit march 21 2012 court granted defendants motion dismiss court entered judgment defendants favor closed case may 29 2012 june 28 2012 plaintiff filed appeal united states court appeals ninth circuit hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued •aj copeland v raymond j lane et al lawsuit filed march 7 2011 united states district court northern district california alleging among things defendants breached fiduciary duties wasted corporate assets connection hps alleged violations fcpa hps severance payments made mr hurd hps acquisition 3par inc lawsuit also alleges violations section 14a exchange act connection hps 2010 2011 proxy statements february 8 2012 defendants filed motion dismiss lawsuit october 10 2012 court granted defendants motion dismiss leave file amended complaint november 1 2012 plaintiff filed amended complaint adding unjust enrichment claim claims defendants violated section 14a exchange act breached fiduciary duties connection hps 2012 proxy statement •richard gammel v hewlettpackard company et al putative securities class action filed september 13 2011 united states district court central district california alleging among things november 22 2010 august 18 2011 defendants violated sections 10b 20a exchange act concealing material information making false statements hps business model future webos operating system hps commitment developing integrating webos products including touchpad tablet pc april 11 2012 defendants filed motion dismiss lawsuit september 4 2012 court granted defendants motion dismiss gave plaintiff 30 days file amended complaint october 19 2012 plaintiff filed amended complaint asserts causes action drops one defendants shortens period alleged violations exchange act occurred february 9 2011 august 18 2011 •ernesto espinoza v léo apotheker et al larry salat v léo apotheker et al consolidated lawsuits filed september 21 2011 united states district court central district california alleging among things defendants violated section 10b 20a exchange act concealing material information making false statements hps business model future webos touchpad hps pc business lawsuits also allege defendants breached fiduciary duties wasted corporate assets unjustly enriched authorized hps repurchase stock august 29 2010 july 21 2011 •luis gonzalez v léo apotheker et al richard tyner v léo apotheker et al consolidated lawsuits filed september 29 2011 october 5 2011 respectively california superior court alleging among things defendants breached fiduciary duties wasted corporate assets unjustly enriched concealing material information making false statements hps business model future webos touchpad hps pc business authorizing hps repurchase stock august 29 2010 july 21 2011 lawsuits currently stayed pending resolution espinozasalat consolidated action federal court •cement concrete workers district council pension fund v hewlettpackard company et al putative securities class action filed august 3 2012 united states district court northern district california alleging among things november 13 2007 august 6 2010 defendants violated sections 10b 20a exchange act making hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued statements regarding hps standards business conduct sbc false misleading mr hurd serving hps chairman chief executive officer period violating sbc concealing misbehavior manner jeopardized continued employment hp autonomyrelated legal matters investigations result findings ongoing investigation hp provided information uk serious fraud office us department justice sec related accounting improprieties disclosure failures misrepresentations autonomy occurred prior connection hps acquisition autonomy november 21 2012 representatives us department justice advised hp opened investigation relating autonomy hp cooperating three investigating agencies litigation described hp involved various stockholder litigation relating among things november 20 2012 announcement recorded noncash charge impairment goodwill intangible assets within software segment approximately 88 billion fourth quarter 2012 fiscal year hps statements based hps findings ongoing investigation majority impairment charge related accounting improprieties misrepresentations market disclosure failures autonomy occurred prior connection hps acquisition autonomy impact improprieties failures misrepresentations expected future financial performance autonomy business long term stockholder litigation commenced among others certain current former hp executive officers certain current former members hp board directors certain advisors hp plaintiffs litigation matters seeking recover certain compensation paid hp defendants andor damages matters include following •allan j nicolow v hewlettpackard company et al putative securities class action filed november 26 2012 united states district court northern district california alleging among things august 19 2011 november 20 2012 defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business •philip ricciardi v michael r lynch et al lawsuit filed november 26 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy lawsuit also alleges defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 •ernesto espinoza v michael r lynch et al lawsuit filed november 27 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued financial performance hps enterprise services business lawsuit also alleges defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 •andrea bascheri et al v léo apotheker et al lawsuit filed november 30 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business lawsuit also alleges defendants breached fiduciary duties wasted corporate assets unjustly enriched causing hp misrepresent business financial prospects causing hp repurchase stock allegedly inflated prices august 2011 october 2012 lawsuit alleges certain individual defendants engaged assisted insider trading thereby breached fiduciary duties unjustly enriched violated sections 25402 25403 california corporations code •davin pokoik v hewlettpackard company et al putative securities class action filed november 30 2012 united states district court northern district california alleging among things august 19 2011 november 19 2012 defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business •martin bertisch v léo apotheker et al lawsuit filed december 3 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business lawsuit also alleges defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps hiring leo apotheker chief executive officer hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 •mike laffen v hewlettpackard co et al putative class action filed december 6 2012 united states district court northern district california alleging among things december 12 2011 november 22 2012 hps 401k plan committee hps investment review committee breached fiduciary obligations hps 401k plan participants thereby violated sections 404a1 405a employee retirement income security act 1974 amended erisa •miriam birinkrant v michael r lynch et al lawsuit filed december 14 2012 california superior court alleging among things defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps acquisition autonomy causing hp repurchase stock allegedly inflated prices august 2011 october 2012 hewlettpackard company subsidiaries notes consolidated financial statements continued note 18 litigation contingencies continued •city birmingham retirement relief system v léo apotheker et al lawsuit filed december 18 2012 united states district court northern district california alleging among things defendants violated sections 10b 20a exchange act concealing material information making false statements related hps acquisition autonomy financial performance hps enterprise services business lawsuit also alleges defendants breached fiduciary duties wasted corporate assets unjustly enriched connection hps acquisition autonomy financial performance hps enterprise services business •karyn lustig v margaret c whitman et al putative class action filed december 18 2012 united states district court northern district california alleging among things august 19 2011 november 20 2012 defendants breached fiduciary obligations hps 401k plan participants thereby violated sections 404a1 405a erisa concealing negative information regarding financial performance autonomy hps enterprise services business failing restrict participants investing hp stock environmental hps operations products subject various federal state local foreign laws regulations concerning environmental protection including laws addressing discharge pollutants air water management disposal hazardous substances wastes cleanup contaminated sites content hps products recycling treatment disposal products particular hp faces increasing complexity product design procurement operations adjusts new future requirements relating chemical materials composition products safe use energy consumption associated products including requirements relating climate change hp also subject legislation increasing number jurisdictions makes producers electrical goods including computers printers financially responsible specified collection recycling treatment disposal past future covered products sometimes referred product takeback legislation hp could incur substantial costs products could restricted entering certain jurisdictions could face sanctions violate become liable environmental laws products become noncompliant environmental laws hps potential exposure includes fines civil criminal sanctions thirdparty property damage personal injury claims clean costs amount timing costs environmental laws difficult predict hp party otherwise involved proceedings brought us state environmental agencies comprehensive environmental response compensation liability act cercla known superfund state laws similar cercla may become party otherwise involved proceedings brought private parties contribution towards cleanup costs hp also conducting environmental investigations remediations several current former operating sites pursuant administrative orders consent agreements state environmental agencies hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information description segments hp leading global provider products technologies software solutions services individual consumers small mediumsized businesses smbs large enterprises including customers government health education sectors hps offerings span personal computing access devices multivendor customer services including infrastructure technology business process outsourcing technology support maintenance application development support services consulting integration services imaging printingrelated products services enterprise information technology infrastructure including enterprise storage server technology networking products solutions management software information management solutions security intelligencerisk management solutions hps operations organized seven reportable business segments financial reporting purposes personal systems formerly known personal systems group psg printing formerly known imaging printing group ipg services essn software hp financial services hpfs corporate investments hps organizational structure based number factors management uses evaluate view run business operations include limited customer base homogeneity products technology reportable business segments based organizational structure information reviewed hps management evaluate business segment results part realignment structure hps business fiscal 2012 hp structured personal systems segment printing segment beneath newly formed printing personal systems group pps financial reporting segment hp sometimes provides financial data aggregating segments within order provide supplementary view business effective november 1 2012 hp created enterprise group segment consisting business units within essn segment ts business unit part existing services segment remaining business units hps services segment ito abs combine comprise new enterprise services segment description types products services provided business segment follows printing personal systems groups mission leverage respective strengths personal systems business printing business creating single unified business customerfocused poised capitalize rapidly shifting industry trends business segments within pps described detail •personal systems provides commercial pcs consumer pcs workstations calculators related accessories software services commercial consumer markets commercial pcs optimized commercial uses including enterprise smb customers connectivity manageability networked environments commercial pcs include hp probook hp elitebook lines notebooks compaq pro compaq elite hp pro hp elite lines business desktops well allinone touchsmart omni pcs hp mininote pcs retail pos systems hp thin clients hp slate tablet pcs consumer pcs include hp pavilion hp elite envy compaq presario series multimedia consumer notebooks desktops mini notebooks including touchsmart line touchenabled allinone notebooks desktops hps workstations designed users demanding hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued enhanced performance computer animation engineering design programs requiring highresolution graphics run windows linuxbased operating systems •printing provides consumer commercial printer hardware supplies media scanning devices printing also focused imaging solutions commercial markets solutions range managed print services capturing highvalue pages areas industrial applications outdoor signage graphic arts business inkjet web solutions delivers hps consumer smb inkjet solutions hardware supplies media webconnected hardware services includes singlefunction allinone inkjet printers targeted toward consumers smbs well snapfish eprintcenter laserjet enterprise solutions delivers products services solutions smb enterprise segments including laserjet printers supplies multifunction devices scanners webconnected hardware services enterprise software solutions exstream software web jetadmin managed enterprise solutions include managed print service products support solutions delivered enterprise customers partnering thirdparty software providers offer workflow solutions enterprise environment graphics solutions include large format printing designjet scitex supplies indigo digital presses supplies inkjet highspeed production solutions supplies speciality printing systems graphics services graphic solutions targets print service providers architects engineers designers photofinishers industrial solution providers •services provides technology consulting outsourcing support services across infrastructure applications business process domains services divided three main areas infrastructure technology outsourcing technology services application business services infrastructure technology outsourcing delivers comprehensive services encompass data center security cloudbased computing workplace technology network unified communications enterprise service management technology services provides technology consulting support services transforming converging supporting infrastructure technology consulting portfolio includes strategic advisory services cloud consulting services unified communications solutions data center transformation services education consulting services addition warranty support across hps product lines support services includes hp foundation care portfolio reactive hardware software support services hp proactive care includes advanced remote systemmonitoring tools continuous onsite rapid response direct access hps technical experts resources hp datacenter care flexible customer support hp multivendor systems lifecycle event services eventbased services offering hps technology expertise consulting phase technology life cycle application business services helps clients develop revitalize manage applications information assets full application life cycle approach encompasses application development testing modernization system integration maintenance management packaged custombuilt applications application business services portfolio also includes intellectual propertybased industry solutions services technologies help clients better manage critical business processes hp also offer services customer relationship management finance administration human resources payroll document processing •enterprise servers storage networking provides server storage networking combined hps cloud service automation software suite hp cloudsystem hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued cloudsystem enables infrastructure platform softwareasaservice private public hybrid environments industry standard servers offers proliant servers running primarily windows linux virtualization platforms microsoft corporation vmware inc major vendors leveraging intel corporation advanced micro devices inc x86 processors business spans range server product lines including pedestaltower traditional rack densityoptimized rack hps bladesystem family server blades solutions large distributed computing companies hyperscale class buy deploy compute nodes massive scale business critical systems offers hp integrity servers based intel itaniumbased processor hp integrity nonstop solutions scaleup x86 proliant servers scalability systems four industry standard processors hps storage offerings include storage area networks network attached storage management software virtualization technologies storeonce data deduplication solutions tape drives tape libraries hps networking portfolio includes switches routers span data center campus branch environments deliver network management unified communications hps wireless networking offerings include wireless lan access points controllersswitches •software provides enterprise information management solutions structured unstructured data management software security intelligencerisk management solutions delivered form traditional software licenses softwareasaservice hybrid appliance deployment models augmented support professional services hp software solutions allow organizations gain customer insight optimize infrastructure operations application life cycles application quality security services business processes addition solutions help businesses proactively safeguard digital assets comply corporate regulatory policies control internal external security risks •hp financial services supports enhances hps global product services solutions providing broad range valueadded financial life cycle management services hpfs enables hps worldwide customers acquire complete solutions including hardware software services hpfs offers leasing financing utility programs asset recovery services well financial asset management services large global enterprise customers hpfs also provides array specialized financial services smbs educational governmental entities hpfs offers innovative customized flexible alternatives balance unique customer cash flow technology obsolescence capacity needs •corporate investments includes business intelligence solutions hp labs webos business certain business incubation projects business intelligence solutions enable business standardize consistent data management schemes connect share data across enterprise apply analytics segment data hp derives results business segments directly internal management reporting system accounting policies hp uses derive business segment results substantially consolidated company uses management measures performance business segment based several metrics including earnings operations management uses results part evaluate performance assign resources business segments hp allocate business segments certain operating expenses manages separately hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued corporate level unallocated costs include primarily restructuring charges associated adjustments related restructuring actions impairment amortization purchased intangible assets impairment goodwill stockbased compensation expense related hpgranted employee stock options prus restricted stock awards employee stock purchase plan certain acquisitionrelated charges purchased iprd well certain corporate governance costs segment revenue includes revenues sales external customers intersegment revenues reflect transactions segments carried armslength transfer price intersegment revenues primarily consist sales hardware software sourced internally majority cases structured hpfs operating leases hps consolidated net revenue derived reported elimination intersegment revenues arrangements accordance us gaap provide improved visibility comparability hp reclassified segment operating results fiscal 2011 2010 conform certain fiscal 2012 organizational realignments realignment resulted transfer revenue operating profit among services printing essn software corporate investments addition revenue transferred among business units within services realignments include •the transfer indigo scitex support laserjet enterprise solutions trade support business ts business unit within services commercial hardware business unit within printing •the transfer tippingpoint business networking business unit within essn software •the transfer business intelligence services business corporate investments newly formed abs business unit within services •the consolidation application services business process outsourcing services business units within services new abs business unit •the transfer information management services business software new abs business unit within services changes impact previously reported financial results personal systems hpfs addition none changes impacted hps previously reported consolidated net revenue earnings operations net earnings net earnings per share hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued selected operating results information business segment follows following fiscal years ended october 31 1includes results 3com 3par dates acquisition april 2010 september 2010 respectively 2includes results arcsight autonomy dates acquisition october 2010 october 2011 respectively 3includes results palm date acquisition july 2010 impact decision wind webos device business quarter ended october 31 2011 reconciliation segment operating results information hp consolidated totals follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued hp allocates assets business segments based primary segments benefiting assets total assets segment reconciliation segment assets hp consolidated total assets follows october 31 assets allocated personal systems segment decreased 19 fiscal 2012 driven largely recording impairment charge purchased intangible assets related change branding strategy impacting compaq trade name described note 7 assets allocated services segment decreased 23 due primarily recording impairment charge goodwill related es reporting unit described note 7 addition assets allocated software segment decreased 42 due primarily recording impairment charge goodwill purchased intangible assets related autonomy reporting unit described note 7 total assets allocated corporate investments segment decreased 68 fiscal 2011 mostly due impairment charge goodwill certain purchased intangible assets associated palm acquisition following decision wind webos device business assets allocated software segment increased 111 fiscal 2011 due acquisition autonomy addition connection certain fiscal 2011 organizational realignments hp reclassified total assets networking business corporate investments essn total assets communications media solutions business software services material changes total assets hps segments since october 31 2010 major customers single customer represented 10 hps total net revenue fiscal year presented hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued geographic information net revenue classified major geographic areas hp operates follows following fiscal years ended october 31 net revenue geographic area based upon sales location predominately represents customer location years ended october 31 2012 2011 2010 united states country represented 10 hps total consolidated net revenue hp reports revenue net sales taxes use taxes valueadded taxes directly imposed governmental authorities hps revenue producing transactions customers october 31 2012 united states cayman islands ireland 10 hps total consolidated net assets october 31 2011 united states netherlands 10 hps total consolidated net assets october 31 2010 single country united states 10 hps total consolidated net assets net property plant equipment classified major geographic areas hp operates follows following fiscal years ended october 31 hewlettpackard company subsidiaries notes consolidated financial statements continued note 19 segment information continued net revenue segment business unit following table provides net revenue segment business unit following fiscal years ended october 31 1includes results 3par date acquisition september 2010 2the networking business added essn fiscal 2011 also includes results 3com date acquisition april 2010 3includes results arcsight autonomy dates acquisition october 2010 october 2011 respectively 4includes results palm date acquisition july 2010 impact decision wind webos device business quarter ended october 31 2011 hewlettpackard company subsidiaries quarterly summary unaudited millions except per share amounts 1cost products cost services financing interest 2eps quarter computed using weightedaverage number shares outstanding quarter eps fiscal year computed using weightedaverage number shares outstanding year thus sum eps four quarters may equal eps fiscal year 3in connection organizational realignments implemented first quarter fiscal 2012 certain costs previously reported cost sales reclassified selling general administrative expenses better align costs functional areas benefit expenditures item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2002 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits following exhibits filed herewith incorporated reference exhibits previously filed sec hp shall furnish copies exhibits reasonable fee covering expense furnishing copies upon request exhibit number description applicable 2a master separation distribution agreement hewlettpackard company agilent technologies inc effective august 12 1999 appears exhibit 2 registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 2b agreement plan reorganization among hewlettpackard company heloise merger corporation compaq computer corporation dated september 4 2001 appears exhibit 21 registrants form 8k dated august 31 2001 exhibit incorporated herein reference 3a registrants certificate incorporation appears exhibit 3a registrants quarterly report form 10q fiscal quarter ended april 30 1998 exhibit incorporated herein reference 3b registrants amendment certificate incorporation appears exhibit 3b registrants quarterly report form 10q fiscal quarter ended january 31 2001 exhibit incorporated herein reference 3c registrants amended restated bylaws adopted november 22 2002 3d registrants certificate designation rights preferences privileges series participating preferred stock appears exhibit 34 registrants form 8a dated september 4 2001 exhibit incorporated herein reference 4a indenture dated october 14 1997 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 42 registrants registration statement form s3 registration 33344113 exhibit incorporated herein reference 4b supplemental indenture dated march 16 2000 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 4b registrants quarterly report form 10q fiscal quarter ended july 31 2000 exhibit incorporated herein reference 4c form registrants 715 global notes due june 15 2005 related officers certificate appear exhibits 41 43 registrants form 8k filed june 15 2000 exhibits incorporated herein reference 4d senior indenture appears exhibit 41 registrants registration statement form s3 dated february 18 2000 amended amendment 1 thereto dated march 17 2000 registration 33330786 exhibit incorporated herein reference 4e form registrants fixed rate note floating rate note related officers certificate appear exhibits 41 42 44 registrants form 8k filed may 24 2001 exhibits incorporated herein reference 4f preferred stock rights agreement dated august 31 2001 hewlettpackard company computershare investor services llc appears exhibit 41 registrants form 8k dated august 31 2001 exhibit incorporated herein reference 4g underwriting agreement dated december 3 2001 hewlettpackard company credit suisse first boston corporation salomon smith barney inc representatives several underwriters named therein appears exhibit 11 registrants form 8k dated december 7 2001 exhibit incorporated herein reference 4h form 575 global note due december 15 2006 officers certificate appear exhibits 41 42 registrants form 8k dated december 7 2001 exhibits incorporated herein reference 4i form 550 global note due july 1 2007 form related officers certificate appear exhibits 41 43 registrants form 8k dated june 26 2002 exhibits incorporated herein reference 4j form registrants 650 global note due july 1 2012 form related officers certificate appear exhibits 42 43 registrants form 8k filed june 26 2002 exhibits incorporated herein reference 4k form registrants fixed rate note form floating rate note appear exhibits 41 42 registrants form 8k dated december 11 2002 exhibits incorporated herein reference 58 applicable none 10a registrants 2000 stock plan amended restated effective november 21 2002 10b registrants 1997 director stock plan amended restated effective july 18 2002 appears exhibit 10h registrants quarterly report form 10q fiscal quarter ended july 31 2002 exhibit incorporated herein reference 10c registrants 1995 incentive stock plan amended restated effective november 21 2002 10d registrants 1990 incentive stock plan amended restated effective november 21 2002 10e registrants 1985 incentive compensation plan amended restated effective november 21 2002 10f compaq computer corporation 2001 stock option plan amended restated effective november 21 2002 10g compaq computer corporation 1998 stock option plan amended restated effective november 21 2002 10h compaq computer corporation 1995 equity incentive plan amended restated effective november 21 2002 10i compaq computer corporation 1989 equity incentive plan amended restated effective november 21 2002 10j form restricted stock grant notice1989 equity incentive plan appears exhibit 10ww registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10k compaq computer corporation 1985 stock option plan amended restated effective november 21 2002 10l compaq computer corporation 1985 executive key employee stock option plan amended restated effective november 21 2002 10m compaq computer corporation 1985 nonqualified stock option plan amended restated effective november 21 2002 10n compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 105 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10o amendment compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 1011 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10p compaq computer corporation 1998 former nonemployee replacement option plan appears exhibit 109 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10q storageapps inc 2000 stock incentive plan amended restated effective november 21 2002 10r flexible stock incentive plan indigo nv amended restated effective november 21 2002 10s indigo nv 1996 international flexible stock incentive plan amended restated november 21 2002 10t verifone inc amended restated 1992 nonemployee directors stock option plan appears exhibit 991 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10u verifone inc amended restated 1987 supplemental stock option plan amended restated effective november 21 2002 10v verifone inc amended restated incentive stock option plan form agreement appears exhibit 992 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10w 1995 convex stock option conversion plan amended restated effective november 21 2002 10x 1993 metrix stock option conversion plan amended restated effective november 21 2002 10y registrants 2000 employee stock purchase plan amended march 29 2001 appears exhibit 10v registrants form 10k fiscal year ended october 31 2001 exhibit incorporated herein reference 10z registrants 1998 subsidiary employee stock purchase plan subscription agreement appear appendices e e1 registrants proxy statement dated january 12 1998 respectively appendices incorporated herein reference 10aa registrants excess benefit retirement plan amended restated november 1 1999 appears exhibit 10c registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 10bb first amendment registrants excess benefit retirement plan amended restated november 1 1999 10cc compaq computer corporation cash account pension restoration plan 10dd compaq computer corporation 401k investment plan appears exhibit 41 registrants form s8 registration statement registration 33387742 dated may 7 2002 exhibit incorporated herein reference 10ee compaq computer corporation deferred compensation supplemental savings plan appears exhibit 42 registrants form s8 registration statement registration 33387742 dated may 7 2002 exhibit incorporated herein reference 10ff registrants balance score card plan amended restated may 1 2002 10gg registrants executive deferred compensation plan amended restated effective october 1 2002 10hh registrants 2001 executive transition program appears exhibit 10z registrants form 10k fiscal year ended october 31 2001 exhibit incorporated herein reference 10ii employment agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10gg registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10jj incentive stock plan stock option agreement nonqualified dated july 17 1999 registrant carleton fiorina appears exhibit 10ii registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10kk restricted stock agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10jj registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10ll restricted stock unit agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10kk registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10mm form executive severance agreement appears exhibit 10uu registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10nn form executive officers severance agreement appears exhibit 10vv registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10oo form indemnity agreement compaq executive officers appears exhibit 10xx registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10pp general waiver release agreement executed michael capellas attached benefits summary upon termination dated november 11 2002 10qq registrants service anniversary stock plan amended restated effective november 21 2002 10rr registrants foreign employees stock appreciation rights plan amended restated november 21 2002 10ss registrants employee stock purchase plan amended restated june 30 2000 10tt registrants 1987 director option plan appears exhibit 4 registrants form s8 filed august 31 1989 registration 3330769 exhibit incorporated herein reference 10uu stock option agreement registrants 2000 stock plan amended 1995 incentive stock plan amended compaq 2001 stock option plan amended compaq 1998 stock option plan amended compaq 1995 equity incentive plan amended compaq 1989 equity incentive plan amended 10vv stock option agreement registrants 1990 incentive stock option plan amended appears exhibit 10e registrants form 10k filed fiscal year ended october 31 1999 exhibit incorporated herein reference 10ww stock option agreement registrants 1985 incentive compensation plan amended appears exhibit 10b registrants form 10k filed fiscal year ended october 31 1999 exhibit incorporated herein reference 10xx common stock payment agreement option agreement registrants 1997 director stock plan amended 10yy stock option agreement registrants 1987 director option plan 10zz stock option agreement compaq 1985 stock option plan amended 10a1 stock option agreement compaq 1985 nonqualified stock option plan amended applicable statement computation ratios 1314 applicable none 1617 applicable 1820 none subsidiaries registrant december 31 2002 none consent independent auditors power attorney see signature page annual report form 10k incorporated herein reference 2526 applicable 991 certification chief executive officer chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers registrant agrees furnish commission upon request copy instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis breports form 8k september 13 2002 hp filed report form 8k reported items 5 7 issuance sworn statements carleton fiorina chairman chief executive officer robert p wayman executive vice president chief financial officer compliance order 4460 june 27 2002 commission published statement commission staff july 29 2002 statements filed exhibits november 14 2002 hp filed report form 8k reported item 5 november 11 2002 michael capellas resigned president hp member hp board directors pursue career opportunities november 13 2002 board directors hp met accepted resignation connection mr capellas resignation board approved amendments hps bylaws reducing board size 11 president position filled operating executives hp previously reported mr capellas report directly carly fiorina hp chairman chief executive officer november 20 2002 hp filed report form 8k reported items 5 7 issuance press release containing financial information fourth quarter fiscal 2002 outlook first quarter fiscal 2003 filed exhibit december 11 2002 hp filed report form 8k reported item 5 certain documents pertaining offering time 1500000000 aggregate principal amount hps mediumterm notes series b due nine months date issue report also filed form fixed rate note form floating rate note agency agreement dated december 6 2002 entered hp salomon smith barney inc banc america securities llc bnp paribas securities corp credit suisse first boston corporation deutsche bank securities inc goldman sachs co hsbc securities usa inc jp morgan securities inc merrill lynch pierce fenner smith incorporated scotia capital usa inc williams capital group lp january 21 2003 hp filed report form 8k reported item 5 issuance press release regarding amendment preferred stock rights agreement dated august 31 2001 rights agreement hp computershare investor services llc accelerate final expiration date preferred share purchase rights issued thereunder close business tuesday january 21 2003 terminate rights agreement upon expiration rights schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date january 21 2003 hewlettpackard company charles n charnas charles n charnas vice president deputy general counsel assistant secretary know persons presents person whose signature appears constitutes appoints ann baskins charles n charnas either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date carleton fiorina carleton fiorina chairman chief executive officer principal executive officer january 21 2003 robert p wayman robert p wayman executive vice president chief financial officer principal financial officer january 21 2003 jon e flaxman jon e flaxman senior vice president controller principal accounting officer january 21 2003 lawrence babbio jr lawrence babbio jr director january 21 2003 philip condit philip condit director january 21 2003 patricia c dunn patricia c dunn director january 21 2003 sam ginn sam ginn director january 21 2003 richard hackborn richard hackborn director january 21 2003 george keyworth ii george keyworth ii director january 21 2003 robert e knowling jr robert e knowling jr director january 21 2003 sanford litvack sanford litvack director january 21 2003 thomas j perkins thomas j perkins director january 21 2003 lucille salhany lucille salhany director january 21 2003 hewlettpackard company subsidiaries exhibit index exhibit number description applicable 2a master separation distribution agreement hewlettpackard company agilent technologies inc effective august 12 1999 appears exhibit 2 registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 2b agreement plan reorganization among hewlettpackard company heloise merger corporation compaq computer corporation dated september 4 2001 appears exhibit 21 registrants form 8k dated august 31 2001 exhibit incorporated herein reference 3a registrants certificate incorporation appears exhibit 3a registrants quarterly report form 10q fiscal quarter ended april 30 1998 exhibit incorporated herein reference 3b registrants amendment certificate incorporation appears exhibit 3b registrants quarterly report form 10q fiscal quarter ended january 31 2001 exhibit incorporated herein reference 3c registrants amended restated bylaws adopted november 22 2002 3d registrants certificate designation rights preferences privileges series participating preferred stock appears exhibit 34 registrants form 8a dated september 4 2001 exhibit incorporated herein reference 4a indenture dated october 14 1997 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 42 registrants registration statement form s3 registration 33344113 exhibit incorporated herein reference 4b supplemental indenture dated march 16 2000 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 4b registrants quarterly report form 10q fiscal quarter ended july 31 2000 exhibit incorporated herein reference 4c form registrants 715 global notes due june 15 2005 related officers certificate appear exhibits 41 43 registrants form 8k filed june 15 2000 exhibits incorporated herein reference 4d senior indenture appears exhibit 41 registrants registration statement form s3 dated february 18 2000 amended amendment 1 thereto dated march 17 2000 registration 33330786 exhibit incorporated herein reference 4e form registrants fixed rate note floating rate note related officers certificate appear exhibits 41 42 44 registrants form 8k filed may 24 2001 exhibits incorporated herein reference 4f preferred stock rights agreement dated august 31 2001 hewlettpackard company computershare investor services llc appears exhibit 41 registrants form 8k dated august 31 2001 exhibit incorporated herein reference 4g underwriting agreement dated december 3 2001 hewlettpackard company credit suisse first boston corporation salomon smith barney inc representatives several underwriters named therein appears exhibit 11 registrants form 8k dated december 7 2001 exhibit incorporated herein reference 4h form 575 global note due december 15 2006 officers certificate appear exhibits 41 42 registrants form 8k dated december 7 2001 exhibits incorporated herein reference 4i form 550 global note due july 1 2007 form related officers certificate appear exhibits 41 43 registrants form 8k dated june 26 2002 exhibits incorporated herein reference 4j form registrants 650 global note due july 1 2012 form related officers certificate appear exhibits 42 43 registrants form 8k filed june 26 2002 exhibits incorporated herein reference 4k form registrants fixed rate note form floating rate note appear exhibits 41 42 registrants form 8k dated december 11 2002 exhibits incorporated herein reference 58 applicable none 10a registrants 2000 stock plan amended restated effective november 21 2002 10b registrants 1997 director stock plan amended restated effective july 18 2002 appears exhibit 10h registrants quarterly report form 10q fiscal quarter ended july 31 2002 exhibit incorporated herein reference 10c registrants 1995 incentive stock plan amended restated effective november 21 2002 10d registrants 1990 incentive stock plan amended restated effective november 21 2002 10e registrants 1985 incentive compensation plan amended restated effective november 21 2002 10f compaq computer corporation 2001 stock option plan amended restated effective november 21 2002 10g compaq computer corporation 1998 stock option plan amended restated effective november 21 2002 10h compaq computer corporation 1995 equity incentive plan amended restated effective november 21 2002 10i compaq computer corporation 1989 equity incentive plan amended restated effective november 21 2002 10j form restricted stock grant notice1989 equity incentive plan appears exhibit 10ww registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10k compaq computer corporation 1985 stock option plan amended restated effective november 21 2002 10l compaq computer corporation 1985 executive key employee stock option plan amended restated effective november 21 2002 10m compaq computer corporation 1985 nonqualified stock option plan amended restated effective november 21 2002 10n compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 105 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10o amendment compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 1011 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10p compaq computer corporation 1998 former nonemployee replacement option plan appears exhibit 109 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10q storageapps inc 2000 stock incentive plan amended restated effective november 21 2002 10r flexible stock incentive plan indigo nv amended restated effective november 21 2002 10s indigo nv 1996 international flexible stock incentive plan amended restated november 21 2002 10t verifone inc amended restated 1992 nonemployee directors stock option plan appears exhibit 991 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10u verifone inc amended restated 1987 supplemental stock option plan amended restated effective november 21 2002 10v verifone inc amended restated incentive stock option plan form agreement appears exhibit 992 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10w 1995 convex stock option conversion plan amended restated effective november 21 2002 10x 1993 metrix stock option conversion plan amended restated effective november 21 2002 10y registrants 2000 employee stock purchase plan amended march 29 2001 appears exhibit 10v registrants form 10k fiscal year ended october 31 2001 exhibit incorporated herein reference 10z registrants 1998 subsidiary employee stock purchase plan subscription agreement appear appendices e e1 registrants proxy statement dated january 12 1998 respectively appendices incorporated herein reference 10aa registrants excess benefit retirement plan amended restated november 1 1999 appears exhibit 10c registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 10bb first amendment registrants excess benefit retirement plan amended restated november 1 1999 10cc compaq computer corporation cash account pension restoration plan 10dd compaq computer corporation 401k investment plan appears exhibit 41 registrants form s8 registration statement registration 33387742 dated may 7 2002 exhibit incorporated herein reference 10ee compaq computer corporation deferred compensation supplemental savings plan appears exhibit 42 registrants form s8 registration statement registration 33387742 dated may 7 2002 exhibit incorporated herein reference 10ff registrants balance score card plan amended restated may 1 2002 10gg registrants executive deferred compensation plan amended restated effective october 1 2002 10hh registrants 2001 executive transition program appears exhibit 10z registrants form 10k fiscal year ended october 31 2001 exhibit incorporated herein reference 10ii employment agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10gg registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10jj incentive stock plan stock option agreement nonqualified dated july 17 1999 registrant carleton fiorina appears exhibit 10ii registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10kk restricted stock agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10jj registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10ll restricted stock unit agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10kk registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10mm form executive severance agreement appears exhibit 10uu registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10nn form executive officers severance agreement appears exhibit 10vv registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10oo form indemnity agreement compaq executive officers appears exhibit 10xx registrants form 10q filed june 13 2002 exhibit incorporated herein reference 10pp general waiver release agreement executed michael capellas attached benefits summary upon termination dated november 11 2002 10qq registrants service anniversary stock plan amended restated effective november 21 2002 10rr registrants foreign employees stock appreciation rights plan amended restated november 21 2002 10ss registrants employee stock purchase plan amended restated june 30 2000 10tt registrants 1987 director option plan appears exhibit 4 registrants form s8 filed august 31 1989 registration 3330769 exhibit incorporated herein reference 10uu stock option agreement registrants 2000 stock plan amended 1995 incentive stock plan amended compaq 2001 stock option plan amended compaq 1998 stock option plan amended compaq 1995 equity incentive plan amended compaq 1989 equity incentive plan amended 10vv stock option agreement registrants 1990 incentive stock option plan amended appears exhibit 10e registrants form 10k filed fiscal year ended october 31 1999 exhibit incorporated herein reference 10ww stock option agreement registrants 1985 incentive compensation plan amended appears exhibit 10b registrants form 10k filed fiscal year ended october 31 1999 exhibit incorporated herein reference 10xx common stock payment agreement option agreement registrants 1997 director stock plan amended 10yy stock option agreement registrants 1987 director option plan 10zz stock option agreement compaq 1985 stock option plan amended 10a1 stock option agreement compaq 1985 nonqualified stock option plan amended applicable statement computation ratios 1314 applicable none 1617 applicable 1820 none subsidiaries registrant december 31 2002 none consent independent auditors power attorney see signature page annual report form 10k incorporated herein reference 2526 applicable 991 certification chief executive officer chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers registrant agrees furnish commission upon request copy instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis certification carleton fiorina certify 1i reviewed annual report form 10k hewlettpackard company 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date january 21 2003 carleton fiorina carleton fiorina chairman chief executive officer principal executive officer robert p wayman certify 1i reviewed annual report form 10k hewlettpackard company 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date january 21 2003 robert p wayman robert p wayman executive vice president chief financial officer principal financial officer part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common stock related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent auditors statement management responsibility hewlettpackard company subsidiaries consolidated statement earnings hewlettpackard company subsidiaries consolidated balance sheet hewlettpackard company subsidiaries consolidated statement cash flows hewlettpackard company subsidiaries consolidated statement stockholders equity hewlettpackard company subsidiaries notes consolidated financial statements hewlettpackard company subsidiaries quarterly summary1 unaudited item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 controls procedures part iv item 15 exhibits financial statement schedules reports form 8k schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures hewlettpackard company subsidiaries exhibit index certificationitem 15 exhibits financial statement schedules reports form 8k athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2003 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits following exhibits filed herewith incorporated reference exhibits previously filed sec hp shall furnish copies exhibits reasonable fee covering expense furnishing copies upon request exhibit number description applicable 2a master separation distribution agreement hewlettpackard company agilent technologies inc effective august 12 1999 appears exhibit 2 registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 2b agreement plan reorganization among hewlettpackard company heloise merger corporation compaq computer corporation dated september 4 2001 appears exhibit 21 registrants form 8k dated august 31 2001 exhibit incorporated herein reference 3a registrants certificate incorporation appears exhibit 3a registrants quarterly report form 10q fiscal quarter ended april 30 1998 exhibit incorporated herein reference 3b registrants amendment certificate incorporation appears exhibit 3b registrants quarterly report form 10q fiscal quarter ended january 31 2001 exhibit incorporated herein reference 3c registrants amended restated bylaws adopted november 22 2002 appears exhibit 3c registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 3d registrants certificate designation rights preferences privileges series participating preferred stock appears exhibit 34 registrants form 8a dated september 4 2001 exhibit incorporated herein reference 3e registrants certificate eliminating series participating preferred stock appears exhibit 3e registrants quarterly report form 10q fiscal quarter ended january 31 2003 exhibit incorporated herein reference 4a indenture dated october 14 1997 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 42 registrants registration statement form s3 registration 33344113 exhibit incorporated herein reference 4b supplemental indenture dated march 16 2000 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 4b registrants quarterly report form 10q fiscal quarter ended july 31 2000 exhibit incorporated herein reference 4c form registrants 715 global notes due june 15 2005 related officers certificate appear exhibits 41 43 registrants form 8k filed june 15 2000 exhibits incorporated herein reference 4d senior indenture appears exhibit 41 registrants registration statement form s3 dated february 18 2000 amended amendment 1 thereto dated march 17 2000 registration 33330786 exhibit incorporated herein reference 4e form registrants fixed rate note floating rate note related officers certificate appear exhibits 41 42 44 registrants form 8k filed may 24 2001 exhibits incorporated herein reference 4f form 575 global note due december 15 2006 related officers certificate appear exhibits 41 42 registrants form 8k dated december 7 2001 exhibits incorporated herein reference 4g form 550 global note due july 1 2007 form related officers certificate appear exhibits 41 43 registrants form 8k dated june 26 2002 exhibits incorporated herein reference 4h form registrants 650 global note due july 1 2012 form related officers certificate appear exhibits 42 43 registrants form 8k filed june 26 2002 exhibits incorporated herein reference 4i form registrants fixed rate note form floating rate note appear exhibits 41 42 registrants form 8k dated december 11 2002 exhibits incorporated herein reference 4j form 3625 global note due march 15 2008 related officers certificate appear exhibits 41 42 registrants form 8k dated march 14 2003 exhibits incorporated herein reference 59 applicable 10a registrants 2000 stock plan amended restated effective november 21 2002 appears exhibit 10a registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10b registrants 1997 director stock plan amended restated effective july 18 2002 appears exhibit 10h registrants quarterly report form 10q fiscal quarter ended july 31 2002 exhibit incorporated herein reference 10c registrants 1995 incentive stock plan amended restated effective november 21 2002 appears exhibit 10c registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10d registrants 1990 incentive stock plan amended restated effective november 21 2002 appears exhibit 10d registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10e registrants 1985 incentive compensation plan amended restated effective november 21 2002 appears exhibit 10e registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10f compaq computer corporation 2001 stock option plan amended restated effective november 21 2002 appears exhibit 10f registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10g compaq computer corporation 1998 stock option plan amended restated effective november 21 2002 appears exhibit 10g registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10h compaq computer corporation 1995 equity incentive plan amended restated effective november 21 2002 appears exhibit 10h registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10i compaq computer corporation 1989 equity incentive plan amended restated effective november 21 2002 appears exhibit 10i registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10j form restricted stock grant notice1989 equity incentive plan appears exhibit 10ww registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10k compaq computer corporation 1985 stock option plan amended restated effective november 21 2002 appears exhibit 10k registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10l compaq computer corporation 1985 executive key employee stock option plan amended restated effective november 21 2002 appears exhibit 10l registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10m compaq computer corporation 1985 nonqualified stock option plan amended restated effective november 21 2002 appears exhibit 10m registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10n compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 105 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10o amendment compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 1011 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10p compaq computer corporation 1998 former nonemployee replacement option plan appears exhibit 109 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10q storageapps inc 2000 stock incentive plan amended restated effective november 21 2002 appears exhibit 10q registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10r flexible stock incentive plan indigo nv amended restated effective november 21 2002 appears exhibit 10r registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10s indigo nv 1996 international flexible stock incentive plan amended restated november 21 2002 appears exhibit 10s registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10t verifone inc amended restated 1992 nonemployee directors stock option plan appears exhibit 991 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10u verifone inc amended restated 1987 supplemental stock option plan amended restated effective november 21 2002 appears exhibit 10u registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10v verifone inc amended restated incentive stock option plan form agreement appears exhibit 992 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10w 1995 convex stock option conversion plan amended restated effective november 21 2002 appears exhibit 10w registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10x 1993 metrix stock option conversion plan amended restated effective november 21 2002 appears exhibit 10x registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10y registrants 2000 employee stock purchase plan amended restated effective november 1 2000 appears exhibit 10y registrants quarterly report form 10q fiscal quarter ended january 31 2003 exhibit incorporated herein reference 10z registrants excess benefit retirement plan amended restated november 1 1999 appears exhibit 10c registrants quarterly report form 10q fiscal quarter ended july 31 2000 exhibit incorporated herein reference 10aa first amendment registrants excess benefit retirement plan amended restated november 1 1999 appears exhibit 10bb registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10bb hewlettpackard company cash account pension restoration plan appears exhibit 10cc registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10cc registrants executive payforresults plan amended restated effective november 1 2002 appears exhibit 10ee registrants quarterly report form 10q fiscal quarter ended january 31 2003 exhibit incorporated herein reference 10dd registrants executive deferred compensation plan amended restated effective october 1 2003 appears exhibit 10ee registrants quarterly report form 10q fiscal quarter ended july 31 2003 exhibit incorporated herein reference 10ee registrants 2001 executive transition program appears exhibit 10z registrants annual report form 10k fiscal year ended october 31 2001 exhibit incorporated herein reference 10ff employment agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10gg registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10gg incentive stock plan stock option agreement nonqualified dated july 17 1999 registrant carleton fiorina appears exhibit 10ii registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10hh restricted stock agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10jj registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10ii restricted stock unit agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10kk registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10jj form executive severance agreement appears exhibit 10uu registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10kk form executive officers severance agreement appears exhibit 10vv registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10ll form letter dated march 6 2003 amending severance agreement certain employees compaq prior acquisition hp appears exhibit 10mm registrants quarterly report form 10q fiscal quarter ended april 30 2003 exhibit incorporated herein reference 10mm form indemnity agreement compaq executive officers appears exhibit 10xx registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10nn general waiver release agreement executed michael capellas attached benefits summary upon termination dated november 11 2002 appears exhibit 10pp registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10oo registrants service anniversary stock plan amended restated effective july 17 2003 appears exhibit 10pp registrants quarterly report form 10q fiscal quarter ended july 31 2003 exhibit incorporated herein reference 10pp registrants employee stock purchase plan amended restated june 30 2000 appears exhibit 10ss registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10qq registrants 1987 director option plan appears exhibit 4 registrants form s8 filed august 31 1989 registration 3330769 exhibit incorporated herein reference 10rr stock option agreement registrants 2000 stock plan amended 1995 incentive stock plan amended compaq 2001 stock option plan amended compaq 1998 stock option plan amended compaq 1995 equity incentive plan amended compaq 1989 equity incentive plan amended appears exhibit 10zz registrants quarterly report form 10q fiscal quarter ended april 30 2003 exhibit incorporated herein reference 10ss stock option agreement registrants 1990 incentive stock option plan amended appears exhibit 10e registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 10tt stock option agreement registrants 1985 incentive compensation plan amended appears exhibit 10b registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 10uu common stock payment agreement option agreement registrants 1997 director stock plan amended appears exhibit 10xx registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10vv stock option agreement registrants 1987 director option plan appears exhibit 10yy registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10ww stock option agreement compaq 1985 stock option plan amended appears exhibit 10zz registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10xx stock option agreement compaq 1985 nonqualified stock option plan amended appears exhibit 10a1 registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10yy form cash award agreement performance based registrants 2000 stock plan amended appears exhibit 10a1 registrants quarterly report form 10q fiscal quarter ended april 30 2003 exhibit incorporated herein reference 10zz severance plan executive officers hewlettpackard company applicable statement computation ratio earnings fixed charges 1315 applicable none applicable none 1920 applicable subsidiaries registrant october 31 2003 none consent independent auditors power attorney see signature page annual report form 10k incorporated herein reference 2526 applicable 311 certification chief executive officer pursuant rule 13a14a rule 15d14a securities exchange act amended 312 certification chief financial officer pursuant rule 13a14a rule 15d14a securities exchange act amended certification chief executive officer chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers registrant agrees furnish commission upon request copy instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis reports form 8k august 19 2003 hp filed report form 8k dated august 19 2003 relating results third fiscal quarter ended july 31 2003 form 8k hp furnished filed pursuant item 12 item 7 press release entitled hp reports third quarter 2003 results relating results third fiscal quarter ended july 31 2003 well related nongaap financial information filed gaap financial statements quarter exhibit item 7 november 19 2003 hp filed report form 8k dated november 19 2003 relating results fourth fiscal quarter ended october 31 2003 form 8k hp furnished filed pursuant item 12 item 7 press release entitled hp reports fourth quarter 2003 results relating results fourth fiscal quarter ended october 31 2003 well related nongaap financial information filed gaap financial statements quarter exhibit item 7 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts acertain reclassifications made prior fiscal year balances order conform current fiscal year presentation signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date january 16 2004 hewlettpackard company charles n charnas charles n charnas vice president deputy general counsel assistant secretary know persons presents person whose signature appears constitutes appoints ann baskins charles n charnas either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date carleton fiorina carleton fiorina chairman chief executive officer principal executive officer january 16 2004 robert p wayman robert p wayman executive vice president chief financial officer principal financial officer january 16 2004 jon e flaxman jon e flaxman senior vice president controller principal accounting officer january 16 2004 lawrence babbio jr lawrence babbio jr director january 16 2004 philip condit philip condit director january 16 2004 patricia c dunn patricia c dunn director january 16 2004 sam ginn sam ginn director january 16 2004 richard hackborn richard hackborn director january 16 2004 george keyworth ii george keyworth ii director january 16 2004 robert e knowling jr robert e knowling jr director january 16 2004 sanford litvack sanford litvack director january 16 2004 thomas j perkins thomas j perkins director january 16 2004 lucille salhany lucille salhany director january 16 2004 hewlettpackard company subsidiaries exhibit index exhibit number description applicable 2a master separation distribution agreement hewlettpackard company agilent technologies inc effective august 12 1999 appears exhibit 2 registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 2b agreement plan reorganization among hewlettpackard company heloise merger corporation compaq computer corporation dated september 4 2001 appears exhibit 21 registrants form 8k dated august 31 2001 exhibit incorporated herein reference 3a registrants certificate incorporation appears exhibit 3a registrants quarterly report form 10q fiscal quarter ended april 30 1998 exhibit incorporated herein reference 3b registrants amendment certificate incorporation appears exhibit 3b registrants quarterly report form 10q fiscal quarter ended january 31 2001 exhibit incorporated herein reference 3c registrants amended restated bylaws adopted november 22 2002 appears exhibit 3c registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 3d registrants certificate designation rights preferences privileges series participating preferred stock appears exhibit 34 registrants form 8a dated september 4 2001 exhibit incorporated herein reference 3e registrants certificate eliminating series participating preferred stock appears exhibit 3e registrants quarterly report form 10q fiscal quarter ended january 31 2003 exhibit incorporated herein reference 4a indenture dated october 14 1997 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 42 registrants registration statement form s3 registration 33344113 exhibit incorporated herein reference 4b supplemental indenture dated march 16 2000 among registrant chase trust company california regarding liquid yield option notes due 2017 appears exhibit 4b registrants quarterly report form 10q fiscal quarter ended july 31 2000 exhibit incorporated herein reference 4c form registrants 715 global notes due june 15 2005 related officers certificate appear exhibits 41 43 registrants form 8k filed june 15 2000 exhibits incorporated herein reference 4d senior indenture appears exhibit 41 registrants registration statement form s3 dated february 18 2000 amended amendment 1 thereto dated march 17 2000 registration 33330786 exhibit incorporated herein reference 4e form registrants fixed rate note floating rate note related officers certificate appear exhibits 41 42 44 registrants form 8k filed may 24 2001 exhibits incorporated herein reference 4f form 575 global note due december 15 2006 related officers certificate appear exhibits 41 42 registrants form 8k dated december 7 2001 exhibits incorporated herein reference 4g form 550 global note due july 1 2007 form related officers certificate appear exhibits 41 43 registrants form 8k dated june 26 2002 exhibits incorporated herein reference 4h form registrants 650 global note due july 1 2012 form related officers certificate appear exhibits 42 43 registrants form 8k filed june 26 2002 exhibits incorporated herein reference 4i form registrants fixed rate note form floating rate note appear exhibits 41 42 registrants form 8k dated december 11 2002 exhibits incorporated herein reference 4j form 3625 global note due march 15 2008 related officers certificate appear exhibits 41 42 registrants form 8k dated march 14 2003 exhibits incorporated herein reference 59 applicable 10a registrants 2000 stock plan amended restated effective november 21 2002 appears exhibit 10a registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10b registrants 1997 director stock plan amended restated effective july 18 2002 appears exhibit 10h registrants quarterly report form 10q fiscal quarter ended july 31 2002 exhibit incorporated herein reference 10c registrants 1995 incentive stock plan amended restated effective november 21 2002 appears exhibit 10c registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10d registrants 1990 incentive stock plan amended restated effective november 21 2002 appears exhibit 10d registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10e registrants 1985 incentive compensation plan amended restated effective november 21 2002 appears exhibit 10e registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10f compaq computer corporation 2001 stock option plan amended restated effective november 21 2002 appears exhibit 10f registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10g compaq computer corporation 1998 stock option plan amended restated effective november 21 2002 appears exhibit 10g registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10h compaq computer corporation 1995 equity incentive plan amended restated effective november 21 2002 appears exhibit 10h registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10i compaq computer corporation 1989 equity incentive plan amended restated effective november 21 2002 appears exhibit 10i registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10j form restricted stock grant notice1989 equity incentive plan appears exhibit 10ww registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10k compaq computer corporation 1985 stock option plan amended restated effective november 21 2002 appears exhibit 10k registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10l compaq computer corporation 1985 executive key employee stock option plan amended restated effective november 21 2002 appears exhibit 10l registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10m compaq computer corporation 1985 nonqualified stock option plan amended restated effective november 21 2002 appears exhibit 10m registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10n compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 105 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10o amendment compaq computer corporation nonqualified stock option plan nonemployee directors appears exhibit 1011 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10p compaq computer corporation 1998 former nonemployee replacement option plan appears exhibit 109 amendment 1 registrants form s3 registration statement registration 33386378 dated april 18 2002 exhibit incorporated herein reference 10q storageapps inc 2000 stock incentive plan amended restated effective november 21 2002 appears exhibit 10q registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10r flexible stock incentive plan indigo nv amended restated effective november 21 2002 appears exhibit 10r registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10s indigo nv 1996 international flexible stock incentive plan amended restated november 21 2002 appears exhibit 10s registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10t verifone inc amended restated 1992 nonemployee directors stock option plan appears exhibit 991 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10u verifone inc amended restated 1987 supplemental stock option plan amended restated effective november 21 2002 appears exhibit 10u registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10v verifone inc amended restated incentive stock option plan form agreement appears exhibit 992 registrants form s8 filed july 1 1997 exhibit incorporated herein reference 10w 1995 convex stock option conversion plan amended restated effective november 21 2002 appears exhibit 10w registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10x 1993 metrix stock option conversion plan amended restated effective november 21 2002 appears exhibit 10x registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10y registrants 2000 employee stock purchase plan amended restated effective november 1 2000 appears exhibit 10y registrants quarterly report form 10q fiscal quarter ended january 31 2003 exhibit incorporated herein reference 10z registrants excess benefit retirement plan amended restated november 1 1999 appears exhibit 10c registrants quarterly report form 10q fiscal quarter ended july 31 2000 exhibit incorporated herein reference 10aa first amendment registrants excess benefit retirement plan amended restated november 1 1999 appears exhibit 10bb registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10bb hewlettpackard company cash account pension restoration plan appears exhibit 10cc registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10cc registrants executive payforresults plan amended restated effective november 1 2002 appears exhibit 10ee registrants quarterly report form 10q fiscal quarter ended january 31 2003 exhibit incorporated herein reference 10dd registrants executive deferred compensation plan amended restated effective october 1 2003 appears exhibit 10ee registrants quarterly report form 10q fiscal quarter ended july 31 2003 exhibit incorporated herein reference 10ee registrants 2001 executive transition program appears exhibit 10z registrants annual report form 10k fiscal year ended october 31 2001 exhibit incorporated herein reference 10ff employment agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10gg registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10gg incentive stock plan stock option agreement nonqualified dated july 17 1999 registrant carleton fiorina appears exhibit 10ii registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10hh restricted stock agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10jj registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10ii restricted stock unit agreement dated july 17 1999 registrant carleton fiorina appears exhibit 10kk registrants quarterly report form 10q fiscal quarter ended july 31 1999 exhibit incorporated herein reference 10jj form executive severance agreement appears exhibit 10uu registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10kk form executive officers severance agreement appears exhibit 10vv registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10ll form letter dated march 6 2003 amending severance agreement certain employees compaq prior acquisition hp appears exhibit 10mm registrants quarterly report form 10q fiscal quarter ended april 30 2003 exhibit incorporated herein reference 10mm form indemnity agreement compaq executive officers appears exhibit 10xx registrants quarterly report form 10q fiscal quarter ended april 30 2002 exhibit incorporated herein reference 10nn general waiver release agreement executed michael capellas attached benefits summary upon termination dated november 11 2002 appears exhibit 10pp registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10oo registrants service anniversary stock plan amended restated effective july 17 2003 appears exhibit 10pp registrants quarterly report form 10q fiscal quarter ended july 31 2003 exhibit incorporated herein reference 10pp registrants employee stock purchase plan amended restated june 30 2000 appears exhibit 10ss registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10qq registrants 1987 director option plan appears exhibit 4 registrants form s8 filed august 31 1989 registration 3330769 exhibit incorporated herein reference 10rr stock option agreement registrants 2000 stock plan amended 1995 incentive stock plan amended compaq 2001 stock option plan amended compaq 1998 stock option plan amended compaq 1995 equity incentive plan amended compaq 1989 equity incentive plan amended appears exhibit 10zz registrants quarterly report form 10q fiscal quarter ended april 30 2003 exhibit incorporated herein reference 10ss stock option agreement registrants 1990 incentive stock option plan amended appears exhibit 10e registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 10tt stock option agreement registrants 1985 incentive compensation plan amended appears exhibit 10b registrants annual report form 10k fiscal year ended october 31 1999 exhibit incorporated herein reference 10uu common stock payment agreement option agreement registrants 1997 director stock plan amended appears exhibit 10xx registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10vv stock option agreement registrants 1987 director option plan appears exhibit 10yy registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10ww stock option agreement compaq 1985 stock option plan amended appears exhibit 10zz registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10xx stock option agreement compaq 1985 nonqualified stock option plan amended appears exhibit 10a1 registrants annual report form 10k fiscal year ended october 31 2002 exhibit incorporated herein reference 10yy form cash award agreement performance based registrants 2000 stock plan amended appears exhibit 10a1 registrants quarterly report form 10q fiscal quarter ended april 30 2003 exhibit incorporated herein reference 10zz severance plan executive officers hewlettpackard company applicable statement computation ratio earnings fixed charges 1315 applicable none applicable none 1920 applicable subsidiaries registrant october 31 2003 none consent independent auditors power attorney see signature page annual report form 10k incorporated herein reference 2526 applicable 311 certification chief executive officer pursuant rule 13a14a rule 15d14a securities exchange act amended 312 certification chief financial officer pursuant rule 13a14a rule 15d14a securities exchange act amended certification chief executive officer chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement exhibit numbers may correspond cases numbers item 601 regulation sk special requirements applicable edgar filers registrant agrees furnish commission upon request copy instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common stock related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent auditors statement management responsibility hewlettpackard company subsidiaries consolidated statement operations hewlettpackard company subsidiaries consolidated balance sheet hewlettpackard company subsidiaries consolidated statement cash flows hewlettpackard company subsidiaries consolidated statement stockholders equity hewlettpackard company subsidiaries notes consolidated financial statements hewlettpackard company subsidiaries quarterly summary1 unaudited item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 principal auditor fees services part iv item 15 exhibits financial statement schedules reports form 8k schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures hewlettpackard company subsidiaries exhibit indexitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2004 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided exhibit index page 156 report hp shall furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date january 14 2005 hewlettpackard company charles n charnas charles n charnas vice president deputy general counsel assistant secretary know persons presents person whose signature appears constitutes appoints ann baskins charles n charnas either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date carleton fiorina carleton fiorina chairman chief executive officer principal executive officer january 14 2005 robert p wayman robert p wayman executive vice president chief financial officer principal financial officer january 14 2005 jon e flaxman jon e flaxman senior vice president controller principal accounting officer january 14 2005 lawrence babbio jr lawrence babbio jr director january 14 2005 patricia c dunn patricia c dunn director january 14 2005 richard hackborn richard hackborn director january 14 2005 george keyworth ii george keyworth ii director january 14 2005 robert e knowling jr robert e knowling jr director january 14 2005 sanford litvack sanford litvack director january 14 2005 robert l ryan robert l ryan director january 14 2005 lucille salhany lucille salhany director january 14 2005 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent registered public accounting firm statement management responsibility hewlettpackard company subsidiaries consolidated statements operations hewlettpackard company subsidiaries consolidated balance sheets hewlettpackard company subsidiaries consolidated statements cash flows hewlettpackard company subsidiaries consolidated statements stockholders equity hewlettpackard company subsidiaries notes consolidated financial statements hewlettpackard company subsidiaries quarterly summary unaudited item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures item 9b information part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures hewlettpackard company subsidiaries exhibit indexitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2005 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided exhibit index page 142 report hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 20 2005 hewlettpackard company charles n charnas charles n charnas vice president deputy general counsel assistant secretary know persons presents person whose signature appears constitutes appoints ann baskins charles n charnas either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date mark v hurd mark v hurd chief executive officer president principal executive officer december 20 2005 robert p wayman robert p wayman executive vice president chief financial officer principal financial officer december 20 2005 jon e flaxman jon e flaxman senior vice president controller principal accounting officer december 20 2005 lawrence babbio jr lawrence babbio jr director december 20 2005 patricia c dunn patricia c dunn director december 20 2005 richard hackborn richard hackborn director december 20 2005 john h hammergren john h hammergren director december 20 2005 george keyworth ii george keyworth ii director december 20 2005 tom perkins tom perkins director december 20 2005 robert l ryan robert l ryan director december 20 2005 lucille salhany lucille salhany director december 20 2005 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth hewlettpackard company form 10k fiscal year ended october 31 2005 part item 1 business item 1a risk factors item 1b unresolved staff comments item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent registered public accounting firm report independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary unaudited item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures item 9b information part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules schedule ii signatures exhibit indexitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2006 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided exhibit index page 148 report hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 22 2006 hewlettpackard company charles n charnas charles n charnas acting general counsel vice president assistant secretary power attorney know persons presents person whose signature appears constitutes appoints charles n charnas jon e flaxman either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date mark v hurd mark v hurd chairman chief executive officer president principal executive officer december 22 2006 robert p wayman robert p wayman executive vice president chief financial officer principal financial officer december 22 2006 jon e flaxman jon e flaxman senior vice president controller principal accounting officer december 22 2006 lawrence babbio jr lawrence babbio jr director december 22 2006 sari baldauf sari baldauf director december 22 2006 richard hackborn richard hackborn director december 22 2006 john h hammergren john h hammergren director december 22 2006 robert l ryan robert l ryan director december 22 2006 lucille salhany lucille salhany director december 22 2006 g kennedy thompson g kennedy thompson director december 22 2006 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth hewlettpackard company form 10k fiscal year ended october 31 2006 part item 1 business item 1a risk factors item 1b unresolved staff comments item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent registered public accounting firm report independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary unaudited item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures item 9b information part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules schedule ii signatures power attorney exhibit indexitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2007 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided exhibit index page 158 report hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 18 2007 hewlettpackard company charles n charnas charles n charnas vice president deputy general counsel assistant secretary power attorney know persons presents person whose signature appears constitutes appoints charles n charnas catherine lesjak either attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date mark v hurd mark v hurd chairman chief executive officer president principal executive officer december 18 2007 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 18 2007 james murrin james murrin senior vice president controller principal accounting officer december 18 2007 lawrence babbio jr lawrence babbio jr director december 18 2007 sari baldauf sari baldauf director december 18 2007 richard hackborn richard hackborn director december 18 2007 john h hammergren john h hammergren director december 18 2007 joel z hyatt joel z hyatt director december 18 2007 john r joyce john r joyce director december 18 2007 robert l ryan robert l ryan director december 18 2007 lucille salhany lucille salhany director december 18 2007 g kennedy thompson g kennedy thompson director december 18 2007 hewlettpackard company subsidiaries exhibit index 4j form registrants floating rate global note due march 1 2012 form 525 global note due march 1 2012 form 540 global note due march 1 2017 8k 00104423 41 42 43 february 28 2007 4k form registrants floating rate global note due june 15 2009 floating rate global note due june 15 2010 10q 00104423 4l september 7 2007 4l specimen certificate registrants common stock 8aa 00104423 41 june 23 2006 none 10a registrants 2004 stock incentive plan s8 333114253 41 april 7 2004 10b registrants 2000 stock plan amended restated effective november 21 2002 10k 00104423 10a january 21 2003 10c registrants 1997 director stock plan amended restated effective november 1 2005 8k 00104423 994 november 23 2005 10d registrants 1995 incentive stock plan amended restated effective november 21 2002 10k 00104423 10c january 21 2003 10e registrants 1990 incentive stock plan amended restated effective november 21 2002 10k 00104423 10d january 21 2003 10f compaq computer corporation 2001 stock option plan amended restated effective november 21 2002 10k 00104423 10f january 21 2003 10g compaq computer corporation 1998 stock option plan amended restated effective november 21 2002 10k 00104423 10g january 21 2003 10h compaq computer corporation 1995 equity incentive plan amended restated effective november 21 2002 10k 00104423 10h january 21 2003 10i compaq computer corporation 1989 equity incentive plan amended restated effective november 21 2002 10k 00104423 10i january 21 2003 10j compaq computer corporation 1985 nonqualified stock option plan nonemployee directors s3 33386378 105 april 18 2002 10k amendment compaq computer corporation nonqualified stock option plan nonemployee directors effective september 3 2001 s3 33386378 1011 april 18 2002 10l compaq computer corporation 1998 former nonemployee replacement option plan s3 33386378 109 april 18 2002 10m registrants excess benefit retirement plan amended restated january 1 2006 8k 00104423 102 september 21 2006 10n hewlettpackard company cash account restoration plan amended restated january 1 2005 8k 00104423 993 november 23 2005 10o registrants 2005 payforresults plan 8k 00104423 995 november 23 2005 10p registrants 2005 executive deferred compensation plan amended restated effective october 1 2006 8k 00104423 101 september 21 2006 10q first amendment registrants 2005 executive deferred compensation plan amended restated effective october 1 2006 10q 00104423 10q june 8 2007 10r employment agreement dated march 29 2005 registrant mark v hurd 8k 00104423 991 march 30 2005 10s employment agreement dated june 9 2005 registrant r todd bradley 10q 00104423 10x september 8 2005 10t employment agreement dated july 11 2005 registrant randall mott 10q 00104423 10y september 8 2005 10u registrants amended restated severance plan executive officers 8k 00104423 991 july 27 2005 10v form letter participants registrants payforresults plan fiscal year 2006 10q 00104423 10w march 10 2006 10w registrants executive severance agreement 10q 00104423 10uu june 13 2002 10x registrants executive officers severance agreement 10q 00104423 10vv june 13 2002 10y form letter regarding severance offset restricted stock restricted units 8k 00104423 102 march 22 2005 10z form indemnity agreement compaq computer corporation executive officers 10q 00104423 10xx june 13 2002 10aa form stock option agreement registrants 2004 stock incentive plan registrants 2000 stock plan amended registrants 1995 incentive stock plan amended compaq computer corporation 2001 stock option plan amended compaq computer corporation 1998 stock option plan amended compaq computer corporation 1995 equity incentive plan amended compaq computer corporation 1989 equity incentive plan amended 10q 00104423 10aa june 8 2007 10bb form restricted stock agreement registrants 2004 stock incentive plan registrants 2000 stock plan amended registrants 1995 incentive stock plan amended 10q 00104423 10bb june 8 2007 10cc form restricted stock unit agreement registrants 2004 stock incentive plan 10q 00104423 10cc june 8 2007 10dd form stock option agreement registrants 1990 incentive stock plan amended 10k 00104423 10e january 27 2000 10ee form common stock payment agreement option agreement registrants 1997 director stock plan amended 10q 00104423 10jj march 11 2005 10ff form restricted stock grant notice compaq computer corporation 1989 equity incentive plan 10q 00104423 10ww june 13 2002 10gg forms stock option notice compaq computer corporation nonqualified stock option plan nonemployee directors amended 10k 00104423 10rr january 14 2005 10hh form longterm performance cash award agreement registrants 2004 stock incentive plan registrants 2000 stock plan amended 10k 00104423 10tt january 14 2005 10ii amendment one longterm performance cash award agreement 2004 program 10q 00104423 10qq september 8 2005 10jj form longterm performance cash award agreement 2005 program 10q 00104423 10rr september 8 2005 10kk form longterm performance cash award agreement 10q 00104423 10oo march 10 2006 10ll second amendment registrants 2005 executive deferred compensation plan amended restated effective october 1 2006 none statement computation ratio earnings fixed charges 1314 none subsidiaries registrant october 31 2007 none consent independent registered public accounting firm power attorney included signature page 311 certification chief executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 312 certification chief financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended certification chief executive officer chief financial officer pursuant 18 usc 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2008 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided exhibit index page 167 report hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 18 2008 hewlettpackard company catherine lesjak catherine lesjak executive vice president chief financial officer power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak michael j holston paul porrini attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date mark v hurd mark v hurd chairman chief executive officer president principal executive officer december 18 2008 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 18 2008 james murrin james murrin senior vice president controller principal accounting officer december 18 2008 lawrence babbio jr lawrence babbio jr director december 18 2008 sari baldauf sari baldauf director december 18 2008 richard hackborn richard hackborn director december 18 2008 john h hammergren john h hammergren director december 18 2008 signature titles date joel z hyatt joel z hyatt director december 18 2008 john r joyce john r joyce director december 18 2008 robert l ryan robert l ryan director december 18 2008 lucille salhany lucille salhany director december 18 2008 g kennedy thompson g kennedy thompson director december 18 2008 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2009 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 17 2009 hewlettpackard company catherine lesjak catherine lesjak executive vice president chief financial officer power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak michael j holston paul porrini attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date mark v hurd mark v hurd chairman chief executive officer president principal executive officer december 17 2009 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 17 2009 james murrin james murrin senior vice president controller principal accounting officer december 17 2009 marc l andreessen marc l andreessen director december 17 2009 lawrence babbio jr lawrence babbio jr director december 17 2009 sari baldauf sari baldauf director december 17 2009 rajiv l gupta rajiv l gupta director december 17 2009 signature titles date john h hammergren john h hammergren director december 17 2009 joel z hyatt joel z hyatt director december 17 2009 john r joyce john r joyce director december 17 2009 robert l ryan robert l ryan director december 17 2009 lucille salhany lucille salhany director december 17 2009 g kennedy thompson g kennedy thompson director december 17 2009 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith §furnished herewith accordance rule 406t regulation st information exhibits shall deemed filed purposes section 18 exchange act otherwise subject liability section shall incorporated reference registration statement document filed securities act 1933 amended except expressly set forth specific reference filing registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated statements comprehensive income consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished annual report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 27 2013 hewlettpackard company catherine lesjak catherine lesjak executive vice president chief financial officer power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak john f schultz rishi varma attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date margaret c whitman margaret c whitman president chief executive officer director principal executive officer december 27 2013 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 27 2013 jeff ricci jeff ricci vice president controller principal accounting officer december 27 2013 marc l andreessen marc l andreessen director december 27 2013 shumeet banerji shumeet banerji director december 27 2013 robert r bennett robert r bennett director december 27 2013 rajiv l gupta rajiv l gupta director december 27 2013 signature titles date raymond j lane raymond j lane director december 27 2013 ann livermore ann livermore director december 27 2013 raymond e ozzie raymond e ozzie director december 27 2013 gary reiner gary reiner director december 27 2013 patricia f russo patricia f russo director december 27 2013 james skinner james skinner director december 27 2013 ralph v whitworth ralph v whitworth nonexecutive chairman december 27 2013 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated statements comprehensive income consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished annual report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 17 2014 hewlettpackard company catherine lesjak catherine lesjak executive vice president chief financial officer power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak john f schultz rishi varma attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date margaret c whitman margaret c whitman chairman president chief executive officer principal executive officer december 17 2014 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 17 2014 jeff ricci jeff ricci senior vice president controller principal accounting officer december 17 2014 marc l andreessen marc l andreessen director december 17 2014 shumeet banerji shumeet banerji director december 17 2014 robert r bennett robert r bennett director december 17 2014 rajiv l gupta rajiv l gupta director december 17 2014 signature titles date klaus kleinfeld klaus kleinfeld director december 17 2014 raymond j lane raymond j lane director december 17 2014 ann livermore ann livermore director december 17 2014 raymond e ozzie raymond e ozzie director december 17 2014 gary reiner gary reiner director december 17 2014 patricia f russo patricia f russo director december 17 2014 james skinner james skinner director december 17 2014 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated statements comprehensive income consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished annual report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hp inc attn investor relations 1501 page mill road palo alto ca 94304 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak kim rivera ruairidh ross attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date dion j weisler dion j weisler president chief executive officer principal executive officer december 16 2015 catherine lesjak catherine lesjak chief financial officer principal financial officer december 16 2015 marie e myers marie e myers global controller head finance services principal accounting officer december 16 2015 shumeet banerji shumeet banerji director december 16 2015 carl bass carl bass director december 16 2015 robert r bennett robert r bennett director december 16 2015 charles v bergh charles v bergh director december 16 2015 signature titles date stacy brownphilpot stacy brownphilpot director december 16 2015 stephanie burns stephanie burns director december 16 2015 mary anne citrino mary anne citrino director december 16 2015 rajiv l gupta rajiv l gupta director december 16 2015 stacey mobley stacey mobley director december 16 2015 subra suresh subra suresh director december 16 2015 margaret c whitman margaret c whitman director december 16 2015 hp inc subsidiaries exhibit index indicates management contract compensatory plan contract arrangement certain schedules exhibits agreement omitted pursuant item 601b2 registration sk copy omitted schedule andor exhibit furnished supplementally sec upon request filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules following documents filed part report 1all financial statements following financial statements filed part report item 8 “financial statements supplementary data” 2 financial statement schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished annual report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hp inc attn investor relations 1501 page mill road palo alto ca 94304 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak kim rivera ruairidh ross attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated hp inc subsidiaries exhibit index exhibit number exhibit description form file exhibits filing date exhibit number exhibit description form file exhibits filing date 101def xbrl taxonomy extension definition linkbase document† 101lab xbrl taxonomy extension label linkbase document† 101pre xbrl taxonomy extension presentation linkbase document† indicates management contract compensatory plan contract arrangement certain schedules exhibits agreement omitted pursuant item 601b2 registration sk copy omitted schedule andor exhibit furnished supplementally sec upon request † filed herewith † furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules following documents filed part report 1all financial statements following financial statements filed part report item 8 “financial statements supplementary data” 2 financial statement schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 3exhibits hp inc subsidiaries exhibit index indicates management contract compensatory plan contract arrangement certain schedules exhibits agreement omitted pursuant item 601b2 registration sk copy omitted schedule andor exhibit furnished supplementally sec upon request † filed herewith †† furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak kim rivera ruairidh ross attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated item 16 form 10k summary noneitem 15 exhibits financial statement schedules following documents filed part report 1all financial statements following financial statements filed part report item 8 “financial statements supplementary data” 2 financial statement schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 3exhibits indicates management contract compensatory plan contract arrangement certain schedules exhibits agreement omitted pursuant item 601b2 registration sk copy omitted schedule andor exhibit furnished supplementally sec upon request † filed herewith †† furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints steve fieler kim rivera ruairidh ross attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated item 16 form 10k summary noneitem 15 exhibits financial statement schedules following documents filed part report 1all financial statements following financial statements filed part report item 8 “financial statements supplementary data” 2 financial statement schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 3exhibits indicates management contract compensatory plan contract arrangement certain schedules exhibits agreement omitted pursuant item 601a5 registration sk copy omitted schedule andor exhibit furnished supplementally sec upon request † filed herewith †† furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints steve fieler kim rivera ruairidh ross attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated item 16 form 10k summary noneitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 “financial statements supplementary data” 2financial statement schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 3exhibits indicates management contract compensatory plan contract arrangement certain schedules exhibits agreement omitted pursuant item 601a5 registration sk copy omitted schedule andor exhibit furnished supplementally sec upon request † filed herewith †† furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 total assets registrant subsidiaries consolidated basis 2 omitted schedules material agreements set forth item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized power attorney know persons presents person whose signature appears constitutes appoints marie myers kim rivera ruairidh ross attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2010 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 15 2010 hewlettpackard company catherine lesjak catherine lesjak executive vice president chief financial officer power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak michael j holston paul porrini attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date léo apotheker léo apotheker president chief executive officer director principal executive officer december 15 2010 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 15 2010 james murrin james murrin senior vice president controller principal accounting officer december 15 2010 marc l andreessen marc l andreessen director december 15 2010 lawrence babbio jr lawrence babbio jr director december 15 2010 sari baldauf sari baldauf director december 15 2010 signature titles date rajiv l gupta rajiv l gupta director december 15 2010 john h hammergren john h hammergren director december 15 2010 joel z hyatt joel z hyatt director december 15 2010 john r joyce john r joyce director december 15 2010 raymond j lane raymond j lane director december 15 2010 robert l ryan robert l ryan director december 15 2010 lucille salhany lucille salhany director december 15 2010 g kennedy thompson g kennedy thompson director december 15 2010 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith §furnished herewith accordance rule 406t regulation st information exhibits shall deemed filed purposes section 18 exchange act otherwise subject liability section shall incorporated reference registration statement document filed securities act 1933 amended except expressly set forth specific reference filing registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth abovenannannanitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2011 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 866 gethpq1 866 4384771 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 14 2011 hewlettpackard company catherine lesjak catherine lesjak executive vice president chief financial officer power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak michael j holston paul porrini attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date margaret c whitman margaret c whitman president chief executive officer director principal executive officer december 14 2011 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 14 2011 james murrin james murrin senior vice president controller principal accounting officer december 14 2011 marc l andreessen marc l andreessen director december 14 2011 lawrence babbio jr lawrence babbio jr director december 14 2011 sari baldauf sari baldauf director december 14 2011 shumeet banerji shumeet banerji director december 14 2011 signature titles date rajiv l gupta rajiv l gupta director december 14 2011 john h hammergren john h hammergren director december 14 2011 raymond j lane raymond j lane executive chairman december 14 2011 ann livermore ann livermore director december 14 2011 gary reiner gary reiner director december 14 2011 patricia f russo patricia f russo director december 14 2011 dominique senequier director g kennedy thompson g kennedy thompson director december 14 2011 ralph w whitworth ralph w whitworth director december 14 2011 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth aboveitem 15 exhibits financial statement schedules athe following documents filed part report 1all financial statements following financial statements filed part report item 8 financial statements supplementary data reports independent registered public accounting firm managements report internal control financial reporting consolidated statements earnings consolidated statements comprehensive income consolidated balance sheets consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements quarterly summary 2financial statement schedules schedule iivaluation qualifying accounts three fiscal years ended october 31 2012 schedules omitted required information inapplicable information presented consolidated financial statements notes thereto item 8 3exhibits list exhibits filed furnished report form 10k incorporated reference exhibits previously filed furnished hp provided accompanying exhibit index hp furnish copies exhibits reasonable fee covering expense furnishing copies upon request stockholders may request exhibits copies contacting hewlettpackard company attn investor relations 3000 hanover street palo alto ca 94304 schedule ii hewlettpackard company subsidiaries valuation qualifying accounts signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date december 27 2012 hewlettpackard company catherine lesjak catherine lesjak executive vice president chief financial officer power attorney know persons presents person whose signature appears constitutes appoints catherine lesjak john f schultz david k ritenour attorneysinfact person capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming either said attorneysinfact substitute substitutes may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature titles date margaret c whitman margaret c whitman president chief executive officer director principal executive officer december 27 2012 catherine lesjak catherine lesjak executive vice president chief financial officer principal financial officer december 27 2012 marc levine marc levine senior vice president controller principal accounting officer december 27 2012 marc l andreessen marc l andreessen director december 27 2012 shumeet banerji shumeet banerji director december 27 2012 rajiv l gupta rajiv l gupta director december 27 2012 john h hammergren john h hammergren director december 27 2012 signature titles date raymond j lane raymond j lane executive chairman december 27 2012 ann livermore ann livermore director december 27 2012 gary reiner gary reiner director december 27 2012 patricia f russo patricia f russo director december 27 2012 g kennedy thompson g kennedy thompson director december 27 2012 ralph w whitworth ralph w whitworth director december 27 2012 hewlettpackard company subsidiaries exhibit index indicates management contract compensatory plan contract arrangement filed herewith furnished herewith registrant agrees furnish commission supplementally upon request copy 1 instrument respect longterm debt filed herewith total amount securities authorized thereunder exceed 10 percent total assets registrant subsidiaries consolidated basis 2 omitted schedules material plan acquisition disposition reorganization set forth