Corporate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
|
|
2014
|
|
2013
|
|
% Change
|
|
|
|
Dollars in millions
|
|
Net revenue
|
|
$
|
6
|
|
$
|
10
|
|
|
(40
|
)%
|
Loss from operations
|
|
$
|
(98
|
)
|
$
|
(75
|
)
|
|
31
|
%
|
Loss from operations as a % of net revenue
|
|
|
NM
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30
|
|
|
|
2014
|
|
2013
|
|
% Change
|
|
|
|
Dollars in millions
|
|
Net revenue
|
|
$
|
294
|
|
$
|
14
|
|
|
NM
|
|
Earnings (loss) from operations
|
|
$
|
23
|
|
$
|
(148
|
)
|
|
NM
|
|
Loss from operations as a % of net revenue
|
|
|
7.8
|
%
|
|
NM
|
|
|
NM
|
|
Net
revenue in Corporate Investments decreased for the three months ended April 30, 2014 due to lower residual activity from the webOS device business. The revenue increase for
the six months ended April 30, 2014 was due primarily to the sale of IP related to the Palm acquisition in the first quarter of fiscal 2014.
The
increase in loss from operations in Corporate Investments for the three months ended April 30, 2014 was due primarily to the expenses associated with certain incubation
projects, HP Labs, corporate strategy and global alliances. The decrease in the loss from operations for the six months ended April 30, 2014 was due primarily to the sale of IP, the benefits of
which were partially offset by other costs and expenses resulting from activities in HP Labs, certain incubation projects, corporate strategy and global alliances.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows are generally
sufficient to support our operating businesses, capital expenditures, restructuring activities, maturing debt, income tax payments and the payment of stockholder dividends, in addition to
discretionary investments and share repurchases. We are able to supplement this short-term liquidity, if necessary, with broad access to capital markets and credit facilities made available by various
domestic and foreign financial institutions. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions; however,
our use of a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to capital resources under all such conditions.
Our
cash balances are held in numerous locations throughout the world, with substantially all of those amounts held outside of the United States. We utilize a variety of planning and
financing
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strategies
in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position remains strong, and we expect that our cash balances, anticipated cash flow
generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
Amounts
held outside of the U.S. are generally utilized to support non-U.S. liquidity needs, although a portion of those amounts may from time to time be subject to short-term
intercompany loans into the U.S. Most of the amounts held outside of the U.S. could be repatriated to the U.S. but, under current law, would be subject to U.S. federal income taxes, less applicable
foreign tax credits. Repatriation of some foreign balances is restricted by local law. Except for foreign earnings that are considered indefinitely reinvested outside of the U.S., we have provided for
the U.S. federal tax liability on these earnings for financial statement purposes. Repatriation could result in additional income tax payments in future years. Where local restrictions prevent an
efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the U.S. and we would meet liquidity needs through ongoing cash flows, external borrowings, or both.
We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of
operations.
Financial Condition (Sources and Uses of Cash)
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|
|
|
|
|
|
|
|
|
Six months ended
April 30
|
|
|
|
2014
|
|
2013
|
|
|
|
In millions
|
|
Net cash provided by operating activities
|
|
$
|
5,985
|
|
$
|
6,118
|
|
Net cash used in investing activities
|
|
|
(1,194
|
)
|
|
(1,198
|
)
|
Net cash used in financing activities
|
|
|
(1,858
|
)
|
|
(2,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
2,933
|
|
$
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Compared to the corresponding period in 2013, net cash provided by operating activities decreased by $0.1 billion for the six
months ended April 30, 2014. The decrease was due primarily to higher restructuring payments, partially offset by improvements in working capital management.
Our
working capital management depends upon effectively managing the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of
inventory to the collection of cash from our customers. Our key working capital metrics are as follows:
|
|
|
|
|
|
|
|
|
|
Three months
ended April 30
|
|
|
|
2014
|
|
2013
|
|
Days of sales outstanding in accounts receivable
|
|
|
47
|
|
|
48
|
|
Days of supply in inventory
|
|
|
25
|
|
|
26
|
|
Days of purchases outstanding in accounts payable.
|
|
|
(59
|
)
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
13
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
of sales outstanding in accounts receivable ("DSO") measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable,
net of allowance for doubtful accounts, by a 90-day average net revenue. Our accounts receivable balance was
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$14.3 billion
as of April 30, 2014. The decrease in DSO was due primarily to the expansion of our factoring programs which we estimate improved DSO by approximately one to
two days.
Days
of supply in inventory ("DOS") measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average cost
of goods sold. Our inventory balance was $5.8 billion as of April 30, 2014. The decrease in DOS was due to lower inventory balances, relative to the rate of decline in cost of goods
sold, in most segments.
Days
of purchases outstanding in accounts payable ("DPO") measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts
payable by a 90-day average cost of goods sold. Our accounts payable balance was $13.5 billion as of April 30, 2014. The increase in DPO was primarily driven by improved payment terms
and favorable business mix and purchasing linearity.
The
cash conversion cycle is the sum of DSO and DOS less DPO. The cash conversion cycle for the second quarter of fiscal 2014 is below what we expect to be a long-term sustainable rate.
Items which may cause the cash conversion cycle in a particular period to differ from a long-term sustainable rate include, but are not limited to, changes in business mix, changes in payment terms,
extent of receivables factoring, seasonal trends and the timing of inventory purchases within the period.
Investing Activities
Compared to the corresponding period in 2013, net cash used in investing activities was flat for the six months ended April 30,
2014, as increased sales of property, plant and equipment and lower payments made for business acquisitions offset an increase in purchases of property, plant and equipment.
Financing Activities
Compared to the corresponding period in 2013, net cash used in financing activities decreased by $1.1 billion for the six months
ended April 30, 2014, due primarily to $2.0 billion in proceeds from the issuance of U.S. Dollar Global Notes in January 2014, partially offset by higher debt repayments and higher cash
paid for repurchases of common stock. For more information on our share repurchase programs, see Note 13 to the Consolidated Condensed Financial Statements in Part I, Item 1, which is
incorporated herein by reference.
Capital Resources
Debt Levels
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash
requirements for operations, investment plans (including acquisitions), share repurchase activities, HP's overall cost of capital and our targeted capital structure. Outstanding borrowings were
$22.6 billion as of April 30, 2014 and October 31, 2013, bearing weighted-average interest rates of 2.7% and 3.0%, respectively. During the six months of fiscal 2014, we issued
$2.0 billion of U.S. Dollar Global Notes under the 2012 Shelf Registration Statement which mature in 2019 and repaid $2.0 billion of U.S. Dollar Global Notes in March 2014. We
also issued and repaid $1.4 billion of commercial paper in the first six months of fiscal 2014.
During
the next twelve months, $4.3 billion of U.S. Dollar Global Notes are scheduled to mature, of which $2.5 billion was repaid in May and June. For more information on
our borrowings, see Note 11 to the Consolidated Condensed Financial Statements in Part I, Item 1, which is incorporated herein by reference.
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Our
weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period and reflects the impact of interest rate swaps. For more information
on our interest rate swaps, see Note 8 to the Consolidated Condensed Financial Statements in Part I, Item 1, which is incorporated herein by reference.
Available Borrowing Resources
As of April 30, 2014, we had up to $17.4 billion in available borrowing resources. For more information on our available
borrowings resources, see Note 11 to the Consolidated Condensed Financial Statements in Part I, Item 1, which is incorporated herein by reference. The availability to obtain
short-term or long-term financings is as follows:
|
|
|
|
|
As of April 30, 2014
|
|
|
In millions
|
2012 Shelf Registration Statement
|
|
|
Unspecified
|
Commercial paper programs
|
|
$
|
16,151
|
Uncommitted lines of credit
|
|
$
|
1,288
|
Credit Ratings
Our credit risk is evaluated by major independent rating agencies based upon publicly available information as well as information
obtained in our ongoing discussions with them. Our credit ratings did not change during the first six months of fiscal 2014, and as of April 30, 2014 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard & Poor's
Ratings Services
|
|
Moody's Investors
Service
|
|
Fitch Ratings
Services
|
|
Short-term debt ratings
|
|
|
A-2
|
|
|
Prime-2
|
|
|
F2
|
|
Long-term debt ratings
|
|
|
BBB+
|
|
|
Baa1
|
|
|
A-
|
|
In
November 2012, our credit ratings were assigned a negative outlook by Moody's Investors Service. While we do not have any rating downgrade triggers that would accelerate the maturity
of a material amount of our debt, previous downgrades have increased the cost of borrowing under our credit facilities, have reduced market capacity for our commercial paper and have required the
posting of additional collateral under some of our derivative contracts. In addition, any further downgrade in our credit ratings by any of these rating agencies may further impact us in a similar
manner, and, depending on the extent of the downgrade, could have a negative impact on our liquidity and capital position. We expect to rely on alternative sources of funding, including drawdowns
under our credit facilities or the issuance of debt or other securities under our existing 2012 Shelf Registration Statement, if necessary to offset potential reductions in the market capacity for our
commercial paper.
CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
For contractual obligations see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on
Form 10-K for the fiscal year ended October 31, 2013, which is incorporated herein by reference. Our contractual obligations have not changed materially since October 31, 2013,
except for the issuance of $2.0 billion of U.S. Dollar Global Notes in January 2014, which mature in 2019, and related interest, and the repayment of $2.0 billion of U.S. Dollar Global
Notes in March 2014.
Retirement and Post-Retirement Benefit Plan Funding
For the remainder of fiscal 2014, HP anticipates making contributions of approximately $397 million to its non-U.S. pension
plans, expects to pay approximately $20 million to cover benefit
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payments
to its U.S. non-qualified plan participants and expects to pay approximately $61 million to cover benefit claims under HP's post-retirement benefit plans. Our policy is to fund our
pension plans so that we meet at least the minimum contribution requirements, as established by local government, funding and taxing authorities. For more information on our retirement and
post-retirement benefit plans, see Note 14 to the Consolidated Condensed Financial Statements in Part I, Item 1, which is incorporated herein by reference.
Restructuring Plans
As of April 30, 2014, we expect future cash expenditures of approximately $1.2 billion in connection with our approved
restructuring plans which includes approximately $0.6 billion expected to be paid during the remainder of fiscal 2014. The remaining cash payments will be made through fiscal 2021.
On
May 22, 2014, HP announced that the previously estimated number of eliminated positions under the 2012 Plan is expected to increase by between 11,000 and 16,000. HP estimates it will
have an additional impact to cash flows of approximately $200 million in the second half of fiscal 2014 based on the low-end of the estimated headcount increase, and approximately
$300 million thereafter. For more information on our restructuring activities, see Note 6 to the Consolidated Condensed Financial Statements in Part I, Item 1, which is
incorporated herein by reference.
Uncertain Tax Positions
As of April 30, 2014, we had approximately $3.1 billion of recorded liabilities and related interest and penalties
pertaining to uncertain tax positions. These liabilities and related interest and penalties include $90 million expected to be paid within one year. For the remaining amount, we are unable to
make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from
settlements with taxing authorities. For more information on our uncertain tax positions, see Note 12 to the Consolidated Condensed Financial Statements in Part I, Item 1, which
is incorporated herein by reference.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
We
have third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. In the second quarter of fiscal 2014, we
expanded these financing arrangements, adding $1.6 billion of capacity. As a result, the total aggregate maximum capacity of the facilities was $3.0 billion as of April 30, 2014,
including an aggregate maximum capacity of $1.1 billion in non-recourse facilities and an aggregate of $1.9 billion in partial-recourse facilities. For more information on our
third-party revolving short-term financing arrangements, see Note 4 to the Consolidated Condensed Financial Statements in Part I, Item 1, which is incorporated herein by
reference.
FACTORS THAT COULD AFFECT FUTURE RESULTS
Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a
reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
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If we are unsuccessful at addressing our business challenges, our business and results of operations may be adversely affected and our ability to invest in and grow our
business could be limited.
We are in the process of addressing many challenges facing our business. One set of challenges relates to dynamic and accelerating
market trends, such as the decline in the PC market, the growth of multi-architecture devices running competing operating systems, the market shift towards tablets within mobility products, the market
shift to cloud-related infrastructure, software, and services, and the growth in software-as-a-service business models. Another set of challenges relates to changes in the competitive landscape. Our
major competitors are expanding their product and service offerings with integrated products and solutions; our business-specific competitors are exerting increased competitive pressure in targeted
areas and are going after new markets; our emerging competitors are introducing new technologies and business models; and our alliance partners in some businesses are increasingly becoming our
competitors in others. A third set of challenges relates to business model and go-to-market execution. In addition, we have faced and may continue to face a series of significant macroeconomic
challenges, including weakness across many geographic regions, particularly in the United States, emerging markets in Europe, the Middle East and Africa ("EMEA") and certain countries and businesses
in Asia. We may experience delays in the anticipated timing of activities related to these efforts and higher than expected or unanticipated execution costs. In addition, we are vulnerable to
increased risks associated with these efforts given our large portfolio of businesses,
the broad range of geographic regions in which we and our customers and partners operate, and the integration of acquired businesses. If we do not succeed in these efforts, or if these efforts are
more costly or time-consuming than expected, our business and results of operations may be adversely affected, which could limit our ability to invest in and grow our business.
In
May 2012, we adopted a multi-year, company-wide restructuring plan. The restructuring plan includes both voluntary early retirement programs and non-voluntary workforce reductions.
Significant risks associated with these actions that may impair our ability to achieve anticipated cost reductions or that may otherwise harm our business include delays in implementation of
anticipated workforce reductions in highly regulated locations outside of the United States, particularly in Europe and Asia, decreases in employee morale and the failure to meet operational targets
due to the loss of employees. In addition, our ability to achieve the anticipated cost savings and other benefits from these actions within the expected time frame is subject to many estimates and
assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are
incorrect, if we experience delays, or if other unforeseen events occur, our business and financial results could be adversely affected.
Competitive pressures could harm our revenue, gross margin and prospects.
We encounter aggressive competition from numerous and varied competitors in all areas of our business, and our competitors may target
our key market segments. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our
products, account relationships, customer training, service and support, security, availability of application software, and internet infrastructure offerings. If our products, services, support and
cost structure do not enable us to compete successfully based on any of those criteria, our results of operations and prospects could be harmed.
We
have a large portfolio of businesses and must allocate resources across all of those businesses while competing with companies that have much smaller portfolios or specialize in one
or more of these product lines. As a result, we may invest less in certain areas of our businesses than our competitors do, and these competitors may have greater financial, technical and marketing
resources available to them than our businesses that compete against them. Industry consolidation also may affect competition by creating larger, more homogeneous and potentially stronger competitors
in the markets
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in
which we compete, and our competitors also may affect our business by entering into exclusive arrangements with existing or potential customers or suppliers.
Companies
with whom we have alliances in some areas may be competitors in other areas. In addition, companies with whom we have alliances also may acquire or form alliances with our
competitors, which could reduce their business with us. If we are unable to effectively manage these complicated relationships with alliance partners, our cash flows and results of operations could be
adversely affected.
We
face aggressive price competition for our products and services and, as a result, we may have to continue lowering the price of many of our products and services to be competitive,
while at the same time trying to maintain or improve revenue and gross margin. In addition, competitors who have a greater presence in some of the lower-cost markets in which we compete may be able to
offer lower prices than we are able to offer. Our cash flows, results of operations and financial condition may be adversely affected by these and other industry-wide pricing pressures.
Because
our business model is based on providing innovative and high-quality products, we may spend a proportionately greater amount on research and development than some of our
competitors. In addition, if we cannot proportionately decrease our cost structure on a timely basis in response to competitive price pressures, our gross margin and, therefore, our profitability
could be adversely affected. In addition, if our pricing and other factors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in
certain areas, which could adversely affect our revenue and prospects.
Even
if we are able to maintain or increase market share for a particular product, revenue could decline because the product is in a maturing industry or market segment or contains
technology that is becoming obsolete. For example, our Storage business unit is experiencing the effects of a market transition towards converged products and solutions, which has led to a decline in
demand for our traditional storage products. In addition, the performance of our Business Critical Systems business unit has been adversely affected by the decline in demand for UNIX servers and
concerns about the development of new versions of software to support our Itanium-based products. Revenue and margins also could decline due to increased competition from other types of products. For
example, growing demand for an increasing array of mobile computing devices and the development of cloud-based solutions has reduced demand for some of our existing hardware products. In addition,
refill and remanufactured alternatives for some of HP's LaserJet toner and inkjet cartridges compete with our printing supplies business.
If we cannot successfully execute our strategy and continue to develop, manufacture and market products, services and solutions that meet customer requirements for
innovation and quality, our revenue and gross margin may suffer.
Our long-term strategy is focused on leveraging our portfolio of hardware, software and services as we adapt to a changing and hybrid
model of IT delivery and consumption driven by the growing adoption of cloud computing and increased demand for integrated IT solutions. To successfully execute this strategy, we need to continue
evolving our focus towards the delivery of integrated IT solutions for our customers and to continue to invest and expand into cloud computing, security, big data and mobility. Any failure to
successfully execute this strategy, including any failure to invest sufficiently in strategic growth areas, could adversely affect our business, results of operations and financial results.
The
process of developing new high-technology products, software, services and solutions and enhancing existing hardware and software products, services and solutions is complex, costly
and uncertain, and any failure by us to anticipate customers' changing needs and emerging technological trends accurately could significantly harm our market share and results of operations. For
example, as the transition to an environment characterized by cloud-based computing and software being delivered
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as
a service progresses, we must continue to successfully develop and deploy cloud-based solutions for our customers. We must make long-term investments, develop or obtain, and protect, appropriate
intellectual property, and commit significant research and development and other resources before knowing whether our predictions will accurately reflect customer demand for our products, software,
services and solutions. In addition, after we develop a product, we must be able to manufacture appropriate volumes quickly while also managing costs and preserving margins. To accomplish this, we
must accurately forecast volumes, mixes of products and configurations that meet customer requirements, and we may not succeed at doing so within a given product's life cycle or at all. Any delay in
the development, production or marketing of a new product, software, service or solution could result in us not being among the first to market, which could further harm our competitive position.
In
the course of conducting our business, we must adequately address quality issues associated with our products, software, services and solutions, including defects in our engineering,
design and manufacturing processes and unsatisfactory performance under service contracts, as well as defects in third-party components included in our products and unsatisfactory performance or even
malicious acts by third-party contractors or subcontractors or the employees of those contractors or subcontractors. In order to address quality issues, we work extensively with our customers and
suppliers and engage in product testing to determine the causes of problems and to develop and implement appropriate solutions. However, the products, software, services and solutions that we offer
are complex, and our
regular testing and quality control efforts may not be effective in controlling or detecting all quality issues or errata, particularly with respect to faulty components manufactured by third-parties.
If we are unable to determine the cause, find an appropriate solution or offer a temporary fix (or "patch") to address quality issues with our products, we may delay shipment to customers, which would
delay revenue recognition and could adversely affect our revenue and reported results. Addressing quality issues can be expensive and may result in additional warranty, replacement and other costs,
adversely affecting our profits. If new or existing customers have difficulty operating our products or are dissatisfied with our services or solutions, our results of operations could be adversely
affected, and we could face possible claims if we fail to meet our customers' expectations. In addition, quality issues can impair our relationships with new or existing customers and adversely affect
our brand and reputation, which could, in turn, adversely affect our results of operations.
Economic weakness and uncertainty could adversely affect our revenue, gross margin, expenses and cash flows.
Our revenue and gross margin depend significantly on worldwide economic conditions and the demand for technology hardware, software and
services in the markets in which we compete. Economic weakness and uncertainty have resulted, and may result in the future, in decreased revenue, gross margin, earnings or growth rates and in
increased expenses and difficulty in managing inventory levels. For example, we have experienced and may continue to experience macroeconomic weakness across many geographic regions, particularly in
EMEA, China and other high-growth markets. Economic weakness and uncertainty may adversely affect demand for our products, services and solutions, may result in increased expenses due to higher
allowances for doubtful accounts and potential goodwill and asset impairment charges, and may make it more difficult for us to make accurate forecasts of revenue, gross margin, expenses and cash
flows.
We
also have experienced, and may experience in the future, gross margin declines in certain businesses, reflecting the effect of items such as competitive pricing pressures and
increases in component and manufacturing costs resulting from higher labor and material costs borne by our manufacturers and suppliers that, as a result of competitive pricing pressures or other
factors, we are unable to pass on to our customers. In addition, our business may be disrupted if we are unable to obtain equipment, parts or components from our suppliersand our
suppliers from their suppliersdue to the insolvency of key suppliers or the inability of key suppliers to obtain credit.
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Economic
weakness and uncertainty could cause our expenses to vary materially from our expectations. Any financial turmoil affecting the banking system and financial markets or any
significant financial services institution failures could negatively impact our treasury operations, as the financial condition of
such parties may deteriorate rapidly and without notice in times of market volatility and disruption. Poor financial performance of financial markets combined with lower interest rates and the adverse
effects of fluctuating currency exchange rates could lead to higher pension and post-retirement benefit expenses. Interest and other expenses could vary materially from expectations depending on
changes in interest rates, borrowing costs, currency exchange rates, costs of hedging activities and the fair value of derivative instruments. Economic downturns also may lead to restructuring actions
and associated expenses.
The revenue and profitability of our operations have historically varied, which makes our future financial results less predictable.
Our revenue, gross margin and profit vary among our products and services, customer groups and geographic markets and therefore will
likely be different in future periods than our current results. Our revenue depends on the overall demand for our products and services. Delays or reductions in IT spending could have a material
adverse effect on demand for our products and services, which could result in a significant decline in revenue. In addition, revenue declines in some of our businesses, particularly our services
businesses, may affect revenue in our other businesses as we may lose cross-selling opportunities. Overall gross margins and profitability in any given period are dependent partially on the product,
service, customer and geographic mix reflected in that period's net revenue. Competition, lawsuits, investigations and other risks affecting those businesses therefore may have a significant impact on
our overall gross margin and profitability. Certain segments have a higher fixed cost structure and more variation in gross margins across their business units and product portfolios than others and
may therefore experience significant operating profit volatility on a quarterly basis. In addition, newer geographic markets may be relatively less profitable due to investments associated with
entering those markets and local pricing pressures, and we may have difficulty establishing and maintaining the operating infrastructure necessary to support the high growth rate associated with some
of those markets. Market trends, industry shifts, competitive pressures, commoditization of products, seasonal rebates, increased component or shipping costs, regulatory impacts and other factors may
result in reductions in revenue or pressure on gross margins of certain segments in a given period, which may lead to adjustments to our operations. Moreover, our efforts to address the challenges
facing our business could increase the level of variability in our financial results because the rate at which we are able to realize the benefits from those efforts may vary from period to period.
If we do not effectively manage our product and services transitions, our revenue, gross margin and profitability may suffer.
Many of the markets in which we compete are characterized by rapid technological advances in hardware performance and software features
and functionality, frequent introduction of new products, short product life cycles, and continual improvement in product price characteristics relative to product performance. To maintain our
competitive position in these markets, we must successfully develop and introduce new products and services. Among the risks associated with the introduction of new products and services are: delays
in development or manufacturing, variations in costs, delays in customer purchases or reductions in the price of existing products in anticipation of
new introductions, difficulty in predicting customer demand for the new offerings and challenges of effectively managing inventory levels to align with anticipated demand; risks associated with new
products meeting customer qualifications and customer evaluation of new products; and the risk that new products may have quality or other defects or may not be supported adequately by application
software. If we do not make an effective transition from existing products and services to future offerings, our revenue and gross margins may decline and our profitability may be harmed.
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Our
revenue and gross margin also may suffer as a result of the timing of product or service introductions by our suppliers and competitors. This is especially challenging when a product
has a short life cycle or a competitor introduces a similar product just before our own new product introduction. Furthermore, sales of our new products and services may replace sales or result in
discounting of some of our current offerings, offsetting the benefit of even a successful introduction. There also may be overlaps in our current products and services, including portfolios we have
acquired through mergers and acquisitions, that we must manage. In addition, it may be difficult to ensure performance of new customer contracts in accordance with our revenue, margin and cost
estimates and to achieve operational efficiencies embedded in our estimates. Given the competitive nature of our industry, if any of these risks materializes, future demand for our products and
services and our results of operations may suffer.
If we fail to manage the distribution of our products and services properly, our revenue, gross margin and profitability could suffer.
We use a variety of distribution methods to sell our products and services, including third-party resellers and distributors and both
direct and indirect sales to enterprise accounts and consumers. Successfully managing the interaction of our direct and indirect channel efforts to reach various potential customer segments for our
products and services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model
for our products and services could adversely affect our revenue and gross margins and therefore our profitability. Other distribution risks are described below.
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Our financial results could be materially adversely affected due to channel conflicts or if the financial conditions of
our channel partners were to weaken.
Our
results of operations may be adversely affected by any conflicts that might arise between our various sales channels, the loss or deterioration of any alliance or distribution arrangement or the
loss of retail shelf space. Moreover, some of our wholesale and retail distributors may have insufficient financial resources and may not be able to withstand changes in business conditions, including
economic weakness and industry consolidation. Many of our significant distributors operate on narrow gross margins and have been negatively affected by business pressures. Considerable trade
receivables that are not covered by collateral or credit insurance are outstanding with our distribution and retail channel partners. Revenue from indirect sales could suffer, and we could experience
disruptions in distribution, if our distributors' financial conditions, abilities to borrow funds in the credit markets or operations weaken.
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Our inventory management is complex as we continue to sell a significant mix of products through distributors.
We
must manage inventory effectively, particularly with respect to sales to distributors, which involves forecasting demand and pricing issues. Distributors may increase orders during periods of
product shortages, cancel orders if their inventory is too high or delay orders in anticipation of new products. Distributors also may adjust their orders in response to the supply of our products and
the products of our competitors and seasonal fluctuations in end-user demand. Our reliance upon indirect distribution methods may reduce visibility to demand and pricing issues, and therefore make
forecasting more difficult. If we have excess or obsolete inventory, we may have to reduce our prices and write down inventory. Moreover, our use of indirect distribution channels may limit our
willingness or ability to adjust prices quickly and otherwise to respond to pricing changes by competitors. We also may have limited ability to estimate future product rebate redemptions in order to
price our products effectively.
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We depend on third-party suppliers, and our financial results could suffer if we fail to manage suppliers properly.
Our operations depend on our ability to anticipate our needs for components, products and services, as well as our suppliers' ability
to deliver sufficient quantities of quality components, products and services at reasonable prices and in time for us to meet critical schedules. Given the wide variety of systems, products and
services that we offer, the large number of our suppliers and contract manufacturers that are located around the world, and the long lead times required to manufacture, assemble and deliver certain
components and products, problems could arise in production, planning, and inventory management that could seriously harm us. In addition, our ongoing efforts to optimize the efficiency of our supply
chain could cause supply disruptions and be
more expensive, time-consuming and resource intensive than expected. Other supplier problems that we could face include component shortages, excess supply, risks related to the terms of our contracts
with suppliers, risks associated with contingent workers, and risks related to our relationships with single source suppliers, as described below.
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Shortages.
Occasionally we may experience a shortage of,
or a delay in receiving, certain components as a result of strong demand, capacity constraints, supplier financial weaknesses, inability of suppliers to borrow funds in the credit markets, disputes
with suppliers (some of whom are also customers), disruptions in the operations of component suppliers, other problems experienced by suppliers or problems faced during the transition to new
suppliers. For example, our PC business relies heavily upon outsourced manufacturers ("OMs") to manufacture its products and is therefore dependent upon the continuing operations of those
OMs to fulfill demand for our PC products. We represent a substantial portion of the business of some of these OMs, and any changes to the nature or volume of business transacted by us with a
particular OM could adversely affect the operations and financial condition of the OM and lead to shortages or delays in receiving products from that OM. If shortages or delays persist, the price of
certain components may increase, and we may be exposed to quality issues or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of
acceptable quality to build products or provide services in a timely manner in the quantities or according to the specifications needed. Accordingly, our revenue and gross margin could suffer as we
could lose time-sensitive sales, incur additional freight costs or be unable to pass on price increases to our customers. If we cannot adequately address supply issues, we might have to reengineer
some products or services offerings, which could result in further costs and delays.
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Oversupply.
In order to secure components for the
provision of products or services, at times we may make advance payments to suppliers or enter into non-cancelable commitments with vendors. In addition, we may purchase components strategically in
advance of demand to take advantage of favorable pricing or to address concerns about the availability of future components. If we fail to anticipate customer demand properly, a temporary oversupply
could result in excess or obsolete components, which could adversely affect our gross margin.
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Contractual terms.
As a result of binding price or
purchase commitments with vendors, we may be obligated to purchase components or services at prices that are higher than those available in the current market and be limited in our ability to respond
to changing market conditions. If we commit to purchasing components or services for prices in excess of the then-current market price, we may be at a disadvantage to competitors who have access to
components or services at lower prices, our gross margin could suffer, and we could incur additional charges relating to inventory obsolescence. In addition, many of our competitors obtain products or
components from the same OMs and suppliers that we utilize. Our competitors may obtain better pricing, more favorable contractual terms and conditions, and more favorable allocations of
products and components during periods of limited supply, and our ability to engage in relationships with
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certain
OMs and suppliers could be limited. The practice employed by our PC business of purchasing product components and transferring those components to its OMs may create large
supplier receivables with the OMs that, depending on the financial condition of the OMs, may create collectibility risks. In addition, certain of our OMs and suppliers may decide to
discontinue conducting business with us. Any of these actions by our competitors, OMs or suppliers could adversely affect our future results of operations and financial condition.
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Contingent workers.
We also rely on third-party suppliers
for the provision of contingent workers, and our failure to manage our use of such workers effectively could adversely affect our results of operations. We have been exposed to various legal claims
relating to the status of contingent workers in the past and could face similar claims in the future. We may be subject to shortages, oversupply or fixed contractual terms relating to contingent
workers. Our ability to manage the size of, and costs associated with, the contingent workforce may be subject to additional constraints imposed by local laws.
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Single source suppliers.
Our use of single source
suppliers for certain components could exacerbate any supplier issues. We obtain a significant number of components from single sources due to technology, availability, price, quality or other
considerations. For example, we rely on Intel to provide us with a sufficient supply of processors for many of our PCs, workstations and servers and AMD to provide us with a sufficient supply of
processors for other products. Some of those processors are customized for our products. New products that we introduce may utilize custom components obtained from only one source initially until we
have evaluated whether there is a need for additional suppliers. Replacing a single source supplier could delay production of some products as replacement suppliers may be subject to capacity
constraints or other output limitations. For some components, such as customized components and some of the processors that we obtain from Intel, alternative sources either may not exist or may be
unable to produce the quantities of those components necessary to satisfy our production requirements. In addition, we sometimes purchase components from single source suppliers under short-term
agreements that contain favorable pricing and other terms but that may be unilaterally modified or terminated by the supplier with limited notice and with little or no penalty. The performance of such
single source suppliers under those agreements (and the renewal or extension of those agreements upon similar terms) may affect the quality, quantity and price of components to HP. The loss of a
single source supplier, the deterioration of our relationship with a single source supplier, or any unilateral modification to the contractual terms under which we are supplied components by a single
source supplier could adversely affect our revenue, gross margin and cash flows.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our worldwide operations could be disrupted by earthquakes, telecommunications failures, power or water shortages, tsunamis, floods,
hurricanes, typhoons, fires, extreme weather conditions, medical epidemics or pandemics and other natural or manmade disasters or catastrophic events, for which we are predominantly self-insured. The
occurrence of any of these business disruptions could result in significant losses, seriously harm our revenue, profitability and financial condition, adversely affect our competitive position,
increase our costs and expenses and require substantial expenditures and recovery time in order to fully resume operations. Our corporate headquarters and a portion of our research and development
activities are located in California, and other critical business operations and some of our suppliers are located in California and Asia, near major earthquake faults known for seismic activity. In
addition, six of our principal worldwide IT data centers are located in the southern United States, making our operations more vulnerable to natural disasters or other business disruptions occurring
in that geographical area. The manufacture of product components, the final assembly of our products and other critical operations are concentrated in certain geographic locations, including China,
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Singapore
and India. We also rely on major logistics hubs primarily in Asia to manufacture and distribute our products and in the southwestern United States to import products into the Americas
region. Our operations could be adversely affected if manufacturing, logistics or other operations in these locations are disrupted for any reason, including natural disasters, information technology
system failures, military actions or economic, business, labor, environmental, public health, regulatory or political issues. The ultimate impact on us, our significant suppliers and our general
infrastructure of being located near locations more vulnerable to the occurrence of the aforementioned business disruptions, such as near major earthquake faults, and being consolidated in certain
geographical areas is unknown and remains uncertain.
Our sales cycle makes planning and inventory management difficult and future financial results less predictable.
In some of our segments, our quarterly sales often reflect a pattern in which a disproportionate percentage of each quarter's total
sales occurs towards the end of such quarter. This uneven sales pattern makes predicting revenue, earnings, cash flow from operations and working capital for each financial period difficult, increases
the risk of unanticipated variations in quarterly results and financial condition and places pressure on our inventory management and logistics systems. If predicted demand is substantially greater
than orders, there may be excess inventory.
Alternatively, if orders substantially exceed predicted demand, we may not be able to fulfill all of the orders received in the last few weeks of each quarter. Depending on when they occur in a
quarter, developments such as a systems failure, component price movements, component shortages or global logistics disruptions could adversely impact inventory levels and results of operations in a
manner that is disproportionate to the number of days in the quarter affected.
We
experience some seasonal trends in the sale of our products that also may produce variations in quarterly results and financial condition. For example, sales to governments
(particularly sales to the U.S. government) are often stronger in the third calendar quarter, consumer sales are often stronger in the fourth calendar quarter, and many customers whose fiscal and
calendar years are the same spend their remaining capital budget authorizations in the fourth calendar quarter prior to new budget constraints in the first calendar quarter of the following year.
European sales are often weaker during the summer months. Demand during the spring and early summer also may be adversely impacted by market anticipation of seasonal trends. Moreover, to the extent
that we introduce new products in anticipation of seasonal demand trends, our discounting of existing products may adversely affect our gross margin prior to or shortly after such product launches.
Typically, our third fiscal quarter is our weakest and our fourth fiscal quarter is our strongest. Many of the factors that create and affect seasonal trends are beyond our control.
Due to the international nature of our business, political or economic changes or other factors could harm our future revenue, costs and expenses, and financial condition.
For the second quarter of fiscal 2014, sales outside the United States made up approximately 66% of our net revenue. In addition, an
increasing portion of our business activity is being conducted in emerging markets, including Brazil, Russia, India and China. Our future revenue, gross margin, expenses and financial condition could
suffer due to a variety of international factors, including:
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ongoing instability or changes in a country's or region's economic or political conditions, including inflation,
recession, interest rate fluctuations and actual or anticipated military or political conflicts;
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longer collection cycles and financial instability among customers;
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trade regulations and procedures and actions affecting production, pricing and marketing of products;
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local labor conditions and regulations, including local labor issues faced by specific HP suppliers and OMs;
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managing a geographically dispersed workforce;
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changes in the regulatory or legal environment;
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differing technology standards or customer requirements;
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import, export or other business licensing requirements or requirements relating to making foreign direct investments,
which could increase our cost of doing business in certain jurisdictions, prevent us from shipping products to particular countries or markets, affect our ability to obtain favorable terms for
components, increase our operating costs or lead to penalties or restrictions;
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difficulties associated with repatriating earnings generated or held abroad in a tax-efficient manner and changes in tax
laws; and
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fluctuations in freight costs, limitations on shipping and receiving capacity, and other disruptions in the transportation
and shipping infrastructure at important geographic points of exit and entry for our products.
The
factors described above also could disrupt our product and component manufacturing and key suppliers located outside of the United States. For example, we rely on manufacturers in
Taiwan for the production of notebook computers and other suppliers in Asia for product assembly and manufacture.
Currencies
other than the U.S. dollar, including the euro, the British pound, Chinese yuan renminbi and the Japanese Yen, can have an impact on our results (expressed in U.S. dollars).
Currency variations also contribute to variations in sales of products and services in impacted jurisdictions. For example, in the event that one or more European countries were to replace the euro
with another currency, our sales into such countries, or into Europe generally, would likely be adversely affected until stable exchange rates are established. Accordingly, fluctuations in foreign
currency rates, most notably the strengthening of the dollar against the euro, could adversely affect our revenue growth in future periods. In addition, currency variations can adversely affect
margins on sales of our products in countries outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States. We use
a combination of forward contracts and options designated as cash flow hedges to protect against foreign currency exchange rate risks. The effectiveness of our hedges depends on our ability to
accurately forecast future cash flows, which is particularly difficult during periods of uncertain demand for our products and services and highly volatile exchange rates. We may incur significant
losses from our hedging activities due to factors such as volatility and currency variations. In addition, our hedging activities may be ineffective or may not offset any or more than a portion of the
adverse financial impact resulting from currency variations. Losses associated with hedging activities also may impact our revenue and to a lesser extent our cost of sales and financial condition.
In
many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us,
such as the FCPA. For example, as discussed in Note 15 to the Consolidated Condensed Financial Statements in Part I, Item 1 of this report, in April 2014, we announced a
resolution of an investigation conducted by the U.S. Department of Justice and the Securities and Exchange Commission into allegations that certain current and former employees of HP engaged in
bribery, embezzlement and tax evasion. In addition, the Polish Central Anti-Corruption Bureau is conducting an investigation into potential corruption violations by a former employee of an HP
subsidiary in connection with certain public-sector transactions in Poland. Although we implement policies and procedures designed to facilitate compliance with these laws, our employees, contractors
and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. A
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violation,
even if prohibited by our policies, could result in restrictions or prohibitions on our business activities and have an adverse effect on our business and reputation.
Any failure by us to identify, manage, complete and integrate acquisitions, divestitures and other significant transactions successfully could harm our financial results,
business and prospects, and the costs, expenses and other financial and operational effects associated with managing, completing and integrating acquisitions may result in financial results that are
different than expected.
As part of our business strategy, we may acquire companies or businesses, divest businesses or assets, enter into strategic alliances
and joint ventures and make investments to further our business (collectively, "business combination and investment transactions"). In order to pursue this strategy successfully, we must identify
candidates for, and successfully complete, business combination and investment transactions, some of which may be large or complex, and manage post-closing issues such as the integration of acquired
businesses, products, services or employees. Risks associated with business combination and investment transactions include the following, any of which could adversely affect our revenue, gross
margin, profitability and financial results:
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Managing business combination and investment transactions requires varying levels of management resources, which may
divert our attention from other business operations.
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We may not fully realize all of the anticipated benefits of any business combination and investment transaction, and the
timeframe for realizing benefits of a business combination and investment transaction may depend partially upon the actions of employees, advisors, suppliers or other third parties.
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Business combination and investment transactions have resulted, and in the future may result, in significant costs and
expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, goodwill and asset impairment charges, charges from the elimination of
duplicative facilities and contracts, inventory adjustments, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and
key employees under retention plans.
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Any increased or unexpected costs, unanticipated delays or failure to meet contractual obligations could make business
combination and investment transactions less profitable or unprofitable.
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Our ability to conduct due diligence with respect to business combination and investment transactions, and our ability to
evaluate the results of such due diligence, is dependent upon the veracity and completeness of statements and disclosures made or actions taken by third-parties or their representatives.
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Our due diligence process may fail to identify significant issues with the acquired company's product quality, financial
disclosures, accounting practices or internal controls.
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The pricing and other terms of our contracts for business combination and investment transactions require us to make
estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate accurately our costs,
timing and other matters or we may incur costs if a business combination is not consummated.
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In order to complete a business combination and investment transaction, we may issue common stock, potentially creating
dilution for existing stockholders.
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We may borrow to finance business combination and investment transactions, and the amount and terms of any potential
future acquisition-related or other borrowings, as well as other factors, could affect our liquidity and financial condition.
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Our effective tax rate on an ongoing basis is uncertain, and business combination and investment transactions could
adversely impact our effective tax rate.
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An announced business combination and investment transaction may not close timely or at all, which may cause our financial
results to differ from expectations in a given quarter.
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Business combination and investment transactions may lead to litigation.
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If we fail to identify and successfully complete and integrate business combination and investment transactions that
further our strategic objectives, we may be required to expend resources to develop products, services and technology internally, which may put us at a competitive disadvantage.
We
have incurred and will incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with business combination and investment
transactions, and, to the extent that the carrying amount of goodwill or intangible assets acquired in connection with a business combination and investment transaction becomes impaired, we may be
required to incur additional material charges relating to the impairment of those assets. For example, in our third fiscal quarter of 2012, we recorded an $8.0 billion impairment charge
relating to the goodwill associated with our enterprise services reporting unit within our former Services segment and a $1.2 billion impairment charge as a result of an asset impairment
analysis of the "Compaq" trade name acquired in 2002. In addition, in our fourth fiscal quarter of 2012, we recorded an $8.8 billion impairment charge relating to the goodwill and intangible
assets associated with Autonomy. If there are future decreases in our stock price or significant changes in the business climate or results of operations of our reporting units, we may incur
additional charges, which may include goodwill or intangible asset impairment charges.
Integration
issues are often complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business and the acquired business.
The challenges involved in integration include:
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combining product and service offerings and entering or expanding into markets in which we are not experienced or are
developing expertise;
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convincing customers and distributors that the transaction will not diminish client service standards or business focus,
persuading customers and distributors to not defer purchasing decisions or switch to other suppliers (which could result in our incurring additional obligations in order to address customer
uncertainty), minimizing sales force attrition and expanding and coordinating sales, marketing and distribution efforts;
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consolidating and rationalizing corporate IT infrastructure, which may include multiple legacy systems from various
acquisitions and integrating software code and business processes;
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minimizing the diversion of management attention from ongoing business concerns;
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persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees,
engaging with employee works councils representing an acquired company's non-U.S. employees, integrating employees into HP, correctly estimating employee benefit costs and implementing restructuring
programs;
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coordinating and combining administrative, manufacturing, research and development and other operations, subsidiaries,
facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures;
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achieving savings from supply chain integration; and
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managing integration issues shortly after or pending the completion of other independent transactions.
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While
we do not currently plan to divest any of our major businesses, we do regularly evaluate the potential disposition of assets and businesses that may no longer help us meet our
objectives. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the
achievement of our strategic objectives. We may also dispose of a business at a price or on terms that are less desirable than we had anticipated. In addition, we may experience greater dis-synergies
than expected, and the impact of the divestiture on our revenue growth may be larger than projected. After reaching an agreement with a buyer or seller for the acquisition or disposition of a
business, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals on acceptable terms, which, if not satisfied or obtained, may prevent
us from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or
other financial obligations. Under these arrangements,
performance by the divested businesses or other conditions outside of our control could affect our future financial results.
Our revenue, cost of sales, and expenses may suffer if we cannot continue to license or enforce the intellectual property rights on which our businesses depend or if third
parties assert that we violate their intellectual property rights.
We rely upon patent, copyright, trademark and trade secret laws in the United States, similar laws in other countries, and agreements
with our employees, customers, suppliers and other parties, to establish and maintain intellectual property rights in the products and services we sell, provide or otherwise use in our operations.
However, any of our intellectual property rights could be challenged, invalidated, infringed or circumvented, or such intellectual property rights may not be sufficient to permit us to take advantage
of current market trends or to otherwise provide competitive advantages, either of which could result in costly product redesign efforts, discontinuance of certain product offerings or other harm to
our competitive position. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions we may be
unable to protect our proprietary technology adequately against unauthorized third-party copying or use; this, too, could adversely affect our competitive position.
Because
of the rapid pace of technological change in the information technology industry, much of our business and many of our products rely on key technologies developed or licensed by
third parties. We may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may demand cross-licenses to
our intellectual property. In addition, it is possible that as a consequence of a merger or acquisition, third parties may obtain licenses to some of our intellectual property rights or our business
may be subject to certain restrictions that were not in place prior to the transaction. Consequently, we may lose a competitive advantage with respect to these intellectual property rights or we may
be required to enter into costly arrangements in order to terminate or limit these rights.
Third
parties also may claim that we or customers indemnified by us are infringing upon their intellectual property rights. For example, individuals and groups may purchase intellectual
property assets for the purpose of asserting claims of infringement and attempting to extract settlements from companies such as HP and its customers. The number of these claims has increased in
recent periods and may continue to increase in the future. If we cannot or do not license infringed intellectual property at all or on reasonable terms, or if we are required to substitute similar
technology from another source, our operations could be adversely affected. Even if we believe that intellectual property claims are without merit, they can be time-consuming and costly to defend
against and may divert management's attention and resources away from our business. Claims of intellectual property infringement also might require us to redesign affected products, enter into costly
settlement or license agreements, pay costly damage awards, or face a temporary or permanent injunction prohibiting us
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from
importing, marketing or selling certain of our products. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable or unwilling to uphold its
contractual obligations to us.
Finally,
our results of operations and cash flows have been and could continue to be affected in certain periods and on an ongoing basis by the imposition, accrual and payment of
copyright levies or similar fees. In certain countries (primarily in Europe), proceedings are ongoing or have been concluded involving HP in which groups representing copyright owners have sought or
are seeking to impose upon and collect from HP levies upon equipment (such as PCs, MFDs and printers) alleged to be copying devices under applicable laws. Other such groups have also sought to modify
existing levy schemes to increase the amount of the levies that can be collected from us. Other countries that have not imposed levies on these types of devices are expected to extend existing levy
schemes, and countries that do not currently have levy schemes may decide to impose copyright levies on these types of devices. The total amount of the copyright levies will depend on the types of
products determined to be subject to the levy, the number of units of those products sold during the period covered by the levy, and the per unit fee for each type of product, all of which are
affected by several factors, including the outcome of ongoing litigation involving us and other industry participants and possible action by the legislative bodies in the applicable countries, and
could be substantial. Consequently, the ultimate impact of these copyright levies or similar fees, and our ability to recover such amounts through increased prices, remains uncertain.
Our revenue and profitability could suffer if we do not manage the risks associated with our services business properly.
The risks that accompany our services business differ from those of our other businesses and include the
following:
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The success of our services business is to a significant degree dependent on our ability to retain our significant
services clients and maintain or increase the level of revenues from these clients. We may lose clients due to their merger or acquisition, business failure, contract expiration or their selection of
a competing service provider or decision to in-source services. In addition, we may not be able to retain or renew relationships with our significant clients. As a result of business downturns or for
other business reasons, we are also vulnerable to reduced processing volumes from our clients, which can reduce the scope of services provided and the prices for those services. We may not be able to
replace the revenue and earnings from any such lost clients or reductions in services. In addition, our contracts may allow a client to terminate the contract for convenience, and we may not be able
to fully recover our investments in such circumstances.
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The pricing and other terms of some of our IT services agreements, particularly our long-term IT outsourcing services
agreements, require us to make estimates and assumptions at the time we enter into these contracts that could differ from actual results. Any increased or unexpected costs or unanticipated delays in
connection with the performance of these engagements, including delays caused by factors outside our control, could make these agreements less profitable or unprofitable, which could have an adverse
effect on the profit margin of our IT services business.
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Some of our IT services agreements require significant investment in the early stages that is expected to be recovered
through billings over the life of the agreement. These agreements often involve the construction of new IT systems and communications networks and the development and deployment of new technologies.
Substantial performance risk exists in each agreement with these characteristics, and some or all elements of service delivery under these agreements are dependent upon successful completion of the
development, construction and
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deployment
phases. Any failure to perform satisfactorily under these agreements may expose us to legal liability, result in the loss of customers and harm our reputation, which could decrease the
revenues and profitability of our IT services business.
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Some of our outsourcing services agreements contain pricing provisions that permit a client to request a benchmark study
by a mutually acceptable third party. The benchmarking process typically compares the contractual price of our services against the price of similar services offered by other providers in a peer
comparison group, subject to agreed upon adjustment and normalization factors. Generally, if the benchmarking study shows that our pricing has a difference outside a specified range, and the
difference is not due to the unique requirements of the client, then the parties will negotiate in good faith any appropriate adjustments to the pricing. This may result in the reduction of our rates
for the benchmarked services performed after the implementation of those pricing adjustments, which could decrease the cash flows of our IT services business.
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If we do not hire, train, motivate and effectively utilize employees with the right mix of skills and experience in the
right geographic regions to meet the needs of our services clients, our profitably could suffer. For example, if our employee utilization rate is too low, our profitability and the level of engagement
of our employees could suffer. If that utilization rate is too high, it could have an adverse effect on employee engagement and attrition and the quality of the work performed, as well as our ability
to staff projects. If we are unable to hire and retain a sufficient number of employees with the skills or backgrounds to meet current demand, we might need to redeploy existing personnel, increase
our reliance on subcontractors or increase employee compensation levels, all of which could also negatively affect our profitability. In addition, if we have more employees than we need with certain
skill sets or in certain geographies, we may incur increased costs as we work to rebalance our supply of skills and resources with client demand in those geographies.
Failure to comply with our customer contracts or government contracting regulations could adversely affect our revenue and results of operations.
Our contracts with our customers may include unique and specialized performance requirements. In particular, our contracts with
federal, state, provincial and local governmental customers are subject to various procurement regulations, contract provisions and other requirements relating to their formation, administration and
performance. Any failure by us to comply with the specific provisions in our customer contracts or any violation of government contracting regulations could result in the imposition of various civil
and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments and, in the case of our government contracts, fines and suspension from future
government contracting. In addition, we have in the past been, and may in the future be, subject to qui tam litigation brought by private individuals on behalf of the government relating to our
government contracts, which could include claims for up to treble damages. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless of its
accuracy, may damage our business by affecting our ability to compete for new contracts. If our customer contracts are terminated, if we are suspended or disbarred from government work, or if our
ability to compete for new contracts is adversely affected, we could suffer a reduction in expected revenue.
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HP's stock price has historically fluctuated and may continue to fluctuate, which may make future prices of HP's stock difficult to predict.
HP's stock price, like that of other technology companies, can be volatile. Some of the factors that could affect our stock price
are:
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speculation, coverage or sentiment in the media or the investment community about, or actual changes in, our business,
strategic position, market share, organizational structure, operations, financial condition, financial reporting and results, effectiveness of cost-cutting efforts, value or liquidity of our
investments, exposure to market volatility, prospects, business combination or investment transactions, future stock price performance, HP's Board of Directors, executive team, our competitors or our
industry in general;
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the announcement of new, planned or contemplated products, services, technological innovations, acquisitions, divestitures
or other significant transactions by HP or its competitors;
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quarterly increases or decreases in revenue, gross margin, earnings or cash flows, changes in estimates by the investment
community or financial outlook provided by HP and variations between actual and estimated financial results;
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announcements of actual and anticipated financial results by HP's competitors and other companies in the IT industry;
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developments relating to pending investigations, claims and disputes; and
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the timing and amount of share repurchases by HP.
General
or industry specific market conditions or stock market performance or domestic or international macroeconomic and geopolitical factors unrelated to HP's performance also may
affect the price of HP stock. For these reasons, investors should not rely on recent or historical trends to predict future stock prices, financial condition, results of operations or cash flows. In
addition, as discussed in Note 15 to the Consolidated Condensed Financial Statements, we are involved in several securities class action litigation matters. Additional volatility in the price
of our securities could result in the filing of additional securities class action litigation matters, which could result in substantial costs and the diversion of management time and resources.
Failure to maintain our credit ratings could adversely affect our liquidity, capital position, borrowing costs and access to capital markets.
Our credit risk is evaluated by the major independent rating agencies. Two of those rating agencies, Moody's Investors Service and
Standard & Poor's Ratings Services, downgraded our ratings once during fiscal 2012, and a third rating agency, Fitch Ratings, downgraded our ratings twice during that fiscal year. In addition,
Moody's Investors Service downgraded our ratings again in November 2012. Our credit ratings remain under negative outlook by Moody's Investors Service. These downgrades have increased the cost of
borrowing under our credit facilities, have reduced market capacity for our commercial paper, and may require the posting of additional collateral under some of our derivative contracts. There can be
no assurance that we will be able to maintain our current credit ratings, and any additional actual or anticipated changes or downgrades in our credit ratings, including any announcement that our
ratings are under further review for a downgrade, may further impact us in a similar manner and may have a negative impact on our liquidity, capital position and access to capital markets.
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We make estimates and assumptions in connection with the preparation of HP's Consolidated Condensed Financial Statements, and any changes to those estimates and assumptions
could adversely affect our results of operations.
In connection with the preparation of HP's Consolidated Condensed Financial Statements, we use certain estimates and assumptions based
on historical experience and other factors. Our most critical accounting estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in
Part I, Item 2 of this report. In addition, as discussed in Note 1 and Note 15 to the Consolidated Condensed Financial Statements, we make certain estimates, including
decisions related to provisions for legal proceedings and other contingencies. While we believe that these estimates and assumptions are reasonable under the
circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could
adversely affect our results of operations.
Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability.
We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by
the amounts we charge in intercompany transactions for inventory, services, licenses, funding and other items. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may
disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. We regularly assess the likely outcomes of these audits in order to
determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of
audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In
addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates,
changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, the
carrying amount of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, there are
proposals for tax legislation that have been introduced or that are being considered that could have a significant adverse effect on our tax rate or the carrying amount of our deferred tax assets or
deferred tax liabilities. Any of these changes could affect our profitability.
In order to be successful, we must attract, retain, train, motivate, develop and transition key employees, and failure to do so could seriously harm us.
In order to be successful, we must attract, retain, train, motivate, develop and transition qualified executives and other key
employees, including those in managerial, technical, sales, marketing and IT support positions. Identifying, developing internally or hiring externally, training and retaining qualified executives,
engineers, skilled solutions providers in the IT support business and qualified sales representatives are critical to our future, and competition for experienced employees in the IT industry can be
intense. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and share-based
compensation. Our share-based incentive awards include stock options, restricted stock units, performance-adjusted restricted stock units and performance-based restricted units, some of which contain
conditions relating to HP's stock price performance and HP's long-term financial performance that make the future value of those awards uncertain. If the anticipated value of such share-based
incentive awards does not materialize, if our share-based compensation otherwise ceases to be viewed as a valuable benefit, if our total compensation package is not viewed as being competitive, or if
we do
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not
obtain the stockholder approval needed to continue granting share-based incentive awards in the amounts we believe are necessary, our ability to attract, retain, and motivate executives and key
employees could be weakened. The failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. Further,
changes in our management team may be disruptive to our business, and any failure to successfully transition and assimilate key new hires or promoted employees could adversely affect our business and
results of operations.
System security risks, data protection breaches, cyber attacks and systems integration issues could disrupt our internal operations or information technology services
provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our
confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other
malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and
applications that we produce or procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the
system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts
to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing,
distribution or other critical functions.
We
manage and store various proprietary information and sensitive or confidential data relating to our business. In addition, our outsourcing services business routinely processes,
stores and transmits large amounts of data for our clients, including sensitive and personally identifiable information. Breaches of our security measures or the accidental loss, inadvertent
disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our clients or our customers, including the potential loss or disclosure of such
information or data as a result of fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in
litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. We also could lose existing or potential customers of outsourcing services or other IT
solutions or incur significant expenses in connection with our customers' system failures or any actual or perceived security vulnerabilities in our products and services. In addition, the cost and
operational consequences of implementing further data protection measures could be significant.
Portions
of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes
place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive and
resource intensive. Such disruptions could adversely impact our ability to fulfill orders and respond to customer requests and interrupt other processes. Delayed sales, lower margins or lost customers
resulting from these disruptions could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
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Terrorist acts, conflicts, wars and geopolitical uncertainties may seriously harm our business and revenue, costs and expenses and financial condition and stock price.
Terrorist acts, conflicts or wars (wherever located around the world) may cause damage or disruption to our business, our employees,
facilities, partners, suppliers, distributors, resellers or customers or adversely affect our ability to manage logistics, operate our transportation and communication systems or conduct certain other
critical business operations. The potential for future attacks, the national and international responses to attacks or perceived threats to national security, and other actual or potential conflicts
or wars have created, and may create in the future, many economic and political uncertainties. In addition, as a major multinational company with headquarters and significant operations located in the
United States, actions against or by the United States may impact our business or employees. Although it is impossible to predict the occurrences or consequences of any such events, if they occur,
they could result in a decrease in demand for our products, make it difficult or impossible to provide services or deliver products to our customers or to receive components from our suppliers, create
delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions. We are predominantly uninsured for losses and interruptions caused by terrorist acts,
conflicts and wars.
Unforeseen environmental costs could adversely affect our business and results of operations.
We are subject to various federal, state, provincial, local and foreign laws and regulations concerning environmental protection,
including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our
products and the recycling, treatment and disposal of our products, including batteries. In particular, we face increasing complexity in our product design and procurement operations as we adjust to
new and future requirements relating to the chemical and
materials composition of our products, their safe use, the energy consumption associated with those products, climate change laws and regulations, and product take-back legislation. If we were to
violate or become liable under environmental laws or if our products become non-compliant with environmental laws, we could incur substantial costs or face other sanctions, which may include
restrictions on our products entering certain jurisdictions. Our potential exposure includes fines and civil or criminal sanctions, third-party property damage, personal injury claims and clean-up
costs. Further, liability under some environmental laws relating to contaminated sites can be imposed retroactively, on a joint and several basis, and without any finding of noncompliance or fault.
The amount and timing of costs to comply with environmental laws are difficult to predict.
Some anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
We have provisions in our certificate of incorporation and bylaws, each of which could have the effect of rendering more difficult or
discouraging an acquisition of HP deemed undesirable by HP's Board of Directors. These include provisions:
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authorizing blank check preferred stock, which we could issue with voting, liquidation, dividend and other rights superior
to our common stock;
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limiting the liability of, and providing indemnification to, our directors and officers;
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specifying that our stockholders may take action only at a duly called annual or special meeting of stockholders and
otherwise in accordance with our bylaws and limiting the ability of our stockholders to call special meetings;
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requiring advance notice of proposals by our stockholders for business to be conducted at stockholder meetings and for
nominations of candidates for election to HP's Board of Directors; and
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controlling the procedures for conduct of HP's Board of Directors and stockholder meetings and election, appointment and
removal of our directors.
These
provisions, alone or together, could deter or delay hostile takeovers, proxy contests and changes in control or management of HP. As a Delaware corporation, we are also subject to
provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders from engaging in certain business combinations without approval of
the holders of substantially all of our outstanding common stock.
Any
provision of our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control of HP could limit the opportunity for our
stockholders to receive a premium for their shares of HP stock and also could affect the price that some investors are willing to pay for HP stock.