Hewlett-Packard (HPQ)

FINANCIAL CONDITION (Sources and Uses of Cash)

Operating Activities

        Net cash provided by operating activities increased by approximately $1.3 billion for the three months ended January 31, 2010 as compared to the corresponding period in fiscal 2009. The increase was due primarily to a decrease in utilization of cash resources for payment of operating liabilities such as accounts payable and other current liabilities along with an increase in net earnings, the impact of which was partially offset by a decline in generation of cash resources through the utilization of operating assets such as other current assets and inventory.

        Our key working capital metrics are as follows:

        Days of sales outstanding in accounts receivable ("DSO") is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average net revenue.

        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.

        Days of purchases outstanding in accounts payable ("DPO") is calculated by dividing ending accounts payable by a 90-day average cost of goods sold.

        Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase of raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

        The decrease in DSO was due primarily to lower accounts receivable at January 31, 2010 as a result of improved linearity across the quarter. The increase in DOS was due to higher inventory levels at January 31, 2010. The decrease in DPO was due primarily to the timing of supplier purchases and payments in the first quarter.

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Investing Activities

        Net cash used in investing activities decreased by approximately $0.3 billion for the three months ended January 31, 2010 as compared to the corresponding period in fiscal 2009 due primarily to higher cash payments made in connection with fiscal 2009 acquisitions.

Financing Activities

        Net cash used in financing activities increased by approximately $2.3 billion for the three months ended January 31, 2010 as compared to the corresponding period in fiscal 2009. The increase was due primarily to a decline in the issuance of debt and increased repurchases of our common stock, the impact of which was partially offset by the cash received through more issuances of common stock under employee stock plans.

        For more information on our share repurchase programs, see Note 14 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

FINANCIAL CONDITION (Sources and Uses of Cash)

Operating Activities

        Net cash provided by operating activities decreased by approximately $1.9 billion for the six months ended April 30, 2009 as compared to the corresponding period in fiscal 2008. The decrease was due primarily to increased utilization of cash resources for payment of operating liabilities such as accounts payable and other current liabilities, partially offset by increased generation of cash resources through the utilization of operating assets such as inventory, accounts and financing receivables and other current assets.

Investing Activities

        Net cash used in investing activities decreased by $0.6 billion for the six months ended April 30, 2009 as compared to the corresponding period in fiscal 2008 due primarily to lower payments in relation to business acquisitions, the effect of which was partially offset by higher net investments in property, plant and equipment associated with growth in our leasing and outsourced services businesses.

Financing Activities

        Net cash used in financing activities decreased by approximately $3.7 billion for the six months ended April 30, 2009 as compared to the corresponding period in fiscal 2008 due primarily to lower share repurchases and higher proceeds from issuance of debt, partially offset by increased repayments of commercial paper and notes payable.

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Common Stock Repurchases

        We repurchase shares of our common stock under an ongoing program to manage the dilution created by shares issued under employee benefit plans as well as to repurchase shares opportunistically. This program authorizes repurchases in the open market or in private transactions. We completed share repurchases of 58 million shares for $2.0 billion in the first six months of fiscal 2009. We had completed share repurchases of 137 million shares for $6.2 billion in the first six months of fiscal 2008.

        As of April 30, 2009, we had remaining authorization of $7.1 billion for future share repurchases under the $8.0 billion repurchase authorization approved by our Board of Directors on September 19, 2008. For more information on our share repurchases, see Note 14 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

Key Performance Metrics

⁽¹⁾

In the second quarter of fiscal 2009, we reclassified certain activity within Other accrued liabilities to Accounts payable as this better represents the nature of the activity. All prior periods have been revised to conform to the current presentation.

        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. The accounts receivable balance was $13.6 billion as of April 30, 2008.

        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. The inventory balance was $7.7 billion as of April 30, 2008.

        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. The accounts payable balance was $13.1 billion as of April 30, 2008.

        Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase of raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

        The increase in DSO was due primarily to higher billings in the latter part of the current quarter as compared to the second quarter of fiscal 2008 and an increased number of enterprise accounts with longer repayment terms due to the addition of EDS. The decrease in DOS was due primarily to lower inventory levels driven primarily by improved inventory management, and higher Services revenue in the overall revenue mix as our services business has lower inventory levels than our product businesses. The decrease in DPO was due primarily to higher Services revenue in the overall revenue mix as Services has a higher salaries and wages component in cost of goods sold, which is not reflected in accounts payable. These changes contributed to the increase in the cash conversion cycle for the three

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months ended April 30, 2009 compared to the three months ended April 30, 2008. Without the impact of EDS, the cash conversion cycle improved by two days.

FINANCIAL CONDITION (Sources and Uses of Cash)

Operating Activities

        Net cash provided by operating activities decreased by approximately $2.1 billion for the three months ended January 31, 2009 as compared to the corresponding period in fiscal 2008. The decrease

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was due primarily to lower accounts payable, and higher accounts and financing receivables, partially offset by changes in current assets and liabilities.

Investing Activities

        Net cash used in investing activities increased by $274 million for the three months ended January 31, 2009 as compared to the corresponding period in fiscal 2008 due primarily to higher net investments in property, plant and equipment associated with growth in our leasing and outsourced services businesses.

Financing Activities

        Net cash provided by financing activities increased by approximately $4.8 billion for the three months ended January 31, 2009 as compared to the corresponding period in fiscal 2008 due primarily to the issuance of debt, commercial paper and notes payable, and lower share repurchases.

Common Stock Repurchases

        We repurchase shares of our common stock under an ongoing program to manage the dilution created by shares issued under employee benefit plans as well as to repurchase shares opportunistically. This program authorizes repurchases in the open market or in private transactions. We completed share repurchases of approximately 34 million shares for approximately $1.2 billion in the first three months of fiscal 2009. We had completed share repurchases of approximately 72 million shares for approximately $3.3 billion in the first three months of fiscal 2008.

        We intend to continue to repurchase shares as a means to manage dilution from the issuance of shares under employee benefit plans and to purchase shares opportunistically. As of January 31, 2009, we had remaining authorization of approximately $7.9 billion for future share repurchases under the $8.0 billion repurchase authorization approved by our Board of Directors on September 19, 2008. For more information on our share repurchases, see Note 13 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

Key Performance Metrics

        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.

        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.

        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 working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase

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of raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

        The slight increase in DSO was due primarily to lower net revenue, offset by lower billings in the latter part of the current quarter as compared to the fourth quarter of fiscal 2008. The increase in DOS was due primarily to lower cost of sales in the current quarter as compared to the fourth quarter of 2008 and strategic buys, partially offset by lower inventory levels. The decrease in DPO was due primarily to lower purchases in the latter part of the current quarter as compared to the fourth quarter of fiscal 2008 as indicated by lower inventory levels, partially offset by lower revenue and cost of sales in the current quarter as compared to the fourth quarter of fiscal 2008. These changes contributed to the increase in our current year cash conversion cycle compared to the prior year.

FINANCIAL CONDITION (Sources and Uses of Cash)

        Our total cash and cash equivalents declined approximately 10% to $10.2 billion at October 31, 2008 from $11.3 billion at October 31, 2007 due primarily to increased investment spending on acquisitions and increased borrowings, which were partially offset by positive operating cash flows. Our cash position remains strong, and we believe our cash balances are sufficient to cover cash outlays expected in fiscal 2009 associated with additional stock repurchases, acquisitions, company bonus payments, and other operating cash requirements.

Key Performance Metrics

        Days of sales outstanding in accounts receivable ("DSO") measures the average number of days our receivables are outstanding. DSO is calculated by dividing accounts receivable, net of allowance for doubtful accounts, by a 90-day average net revenue.

        Days of supply in inventory ("DOS") measures the average number of days from procurement to sale of our product. DOS is calculated by dividing inventory by a 90-day average cost of goods sold.

        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 accounts payable by a 90-day average cost of goods sold.

        Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase of raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

        The increase in DSO was due primarily to a higher accounts receivable balance during the fourth quarter of fiscal 2008 compared to the same period in fiscal 2007 and the effect of the EDS acquisition. The decrease in DOS was due primarily to more efficient inventory management, higher cost of goods sold during the fourth quarter of 2008 as a result of increased revenues and the effect of the EDS acquisition. The slight decrease in DPO was due primarily to purchasing linearity and improved

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Table of Contents

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

accounts payable management. These changes contributed to the decrease in our current year cash conversion cycle compared to the prior year.

FINANCIAL CONDITION (Sources and Uses of Cash)

        Our total cash and cash equivalents declined approximately 10% to $10.2 billion at October 31, 2008 from
$11.3 billion at October 31, 2007 due primarily to increased investment spending on acquisitions and increased borrowings, which were partially offset by positive operating cash flows.
Our cash position remains strong, and we believe our cash balances are sufficient to cover cash outlays expected in fiscal 2009 associated with additional stock repurchases, acquisitions, company
bonus payments, and other operating cash requirements.

Key Performance Metrics

        Days
of sales outstanding in accounts receivable ("DSO") measures the average number of days our receivables are outstanding. DSO is calculated by dividing accounts receivable, net of
allowance for doubtful accounts, by a 90-day average net revenue.

        Days
of supply in inventory ("DOS") measures the average number of days from procurement to sale of our product. DOS is calculated by dividing inventory by a 90-day average
cost of goods sold.

        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 accounts
payable by a 90-day average cost of goods sold.

        Our
working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for
the purchase of raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

        The
increase in DSO was due primarily to a higher accounts receivable balance during the fourth quarter of fiscal 2008 compared to the same period in fiscal 2007 and the effect of the
EDS acquisition. The decrease in DOS was due primarily to more efficient inventory management, higher cost of goods sold during the fourth quarter of 2008 as a result of increased revenues and the
effect of the EDS acquisition. The slight decrease in DPO was due primarily to purchasing linearity and improved

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HREF="#bg72001a_main_toc">Table of Contents

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

accounts
payable management. These changes contributed to the decrease in our current year cash conversion cycle compared to the prior year.

FINANCIAL CONDITION (Sources and Uses of Cash)

Operating Activities

        Net cash provided by operating activities increased by approximately $5.3 billion for the nine months ended July 31, 2008 as compared to the corresponding period in fiscal 2007. The increase was due primarily to higher net cash earnings and increased accounts payable and, to a lesser degree, improvements on a year-over-year basis, in accounts receivable and inventory.

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Investing Activities

        Net cash used in investing activities decreased by approximately $3.2 billion for the nine months ended July 31, 2008 as compared to the corresponding period in fiscal 2007 due primarily to lower cash paid for acquisitions.

Financing Activities

        Net cash used in financing activities increased by approximately $1.1 billion for the nine months ended July 31, 2008 as compared to the corresponding period in fiscal 2007 due primarily to lower issuances of debt and lower proceeds from our common stock issued under employee stock plans, the effect of which was partially offset by decreased repurchases of our common stock.

Common Stock Repurchases

        We repurchase shares of our common stock under an ongoing program to manage the dilution created by shares issued under employee benefit plans as well as to repurchase shares opportunistically. This program authorizes repurchases in the open market or in private transactions. We completed share repurchases of approximately 171 million shares for approximately $7.7 billion in the first nine months of fiscal 2008. We completed share repurchases of approximately 167 million shares for approximately $7.0 billion in the first nine months of fiscal 2007.

        In addition to the above transactions, we entered into an Accelerated Share Repurchase program (the "ASR Program") with a third-party investment bank during the second quarter of fiscal 2007. Pursuant to the terms of the ASR Program, we purchased 40 million shares of our common stock from a third-party investment bank for $1.8 billion (the "Purchase Price") on March 30, 2007 (the "Purchase Date"). We decreased our shares outstanding and reduced the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted EPS on the Purchase Date. The shares delivered to us included shares that the investment bank borrowed from third parties. The investment bank purchased an equivalent number of shares in the open market to cover its position with respect to the borrowed shares during a contractually specified averaging period that began on the Purchase Date and ended on June 6, 2007. At the end of the averaging period, the investment bank's total purchase cost based on the volume weighted-average purchase price of our shares during the averaging period was approximately $90 million less than the Purchase Price. In June 2007, we received approximately 2 million additional shares purchased by the investment bank in the open market with a value approximately equal to $90 million. We reduced our shares outstanding upon receipt of those shares.

        We intend to continue to repurchase shares as a means to manage dilution from the issuance of shares under employee benefit plans and to purchase shares opportunistically. On November 19, 2007, our Board of Directors authorized an additional $8.0 billion for future repurchases. As of July 31, 2008, we had remaining authorization of approximately $3.0 billion for future share repurchases. For more information on our share repurchases, see Note 12 to the Consolidated Condensed financial Statements in Item 1, which is incorporated herein by reference.

Key Performance Metrics

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        Days of sales outstanding in accounts receivable ("DSO") measures the average number of days our receivables are outstanding. DSO is calculated by dividing accounts receivable, net of allowance for doubtful accounts, by a 90-day average net revenue.

        Days of supply in inventory ("DOS") measures the average number of days from procurement to sale of our product. DOS is calculated by dividing net inventory by a 90-day average cost of goods sold.

        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 accounts payable by a 90-day average cost of goods sold.

        Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase of raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

        The slight increase in DSO was due primarily to a higher accounts receivable balance resulting from the timing of revenue during the three months ended July 31, 2008 compared to the three months ended October 31, 2007, and extended payment terms to certain customers. The slight increase in DOS in inventory was due primarily to a higher inventory balance as a result of strategic buys. The increase in DPO was due primarily to a higher accounts payable balance resulting from better accounts payable management and increased purchasing activity in the last month of the quarter. These changes contributed to the decrease in the cash conversion cycle for the third quarter ended July 31, 2008 compared to the fourth quarter ended October 31, 2007.