HP 2006 Annual Report Download - page 53

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
portfolios. Partially offsetting these losses were gains attributable to the sale of investments. Net gains
in fiscal 2004 were attributable mainly to the realization of a contingent gain associated with a prior
period divestiture and realized gains from the sale of investments in excess of impairment charges.
Dispute Settlement
In fiscal 2005, we recorded a net total of $106 million in dispute settlement charges. We reached a
legal settlement of $141 million in our patent infringement case with Intergraph Hardware Technologies
Company (‘‘Intergraph’’) and recorded a charge of $116 million related to a cross-license agreement
with Intergraph for products shipped in prior years. Partially offsetting this amount was a $10 million
recovery from an individual related to a prior period settlement with the Government of Canada.
During fiscal 2004, we recorded $70 million in settlement costs from a dispute with the Government of
Canada. For other settlement matters, see Note 17 to the Consolidated Financial Statements in Item 8,
which is incorporated herein by reference.
Provision for Taxes
Our effective tax rate was 13.8%, 32.3% and 16.7% in fiscal 2006, 2005 and 2004, respectively.
The decrease in the overall tax rate in fiscal 2006 from fiscal 2005 was related in part to other
income tax adjustments of $599 million in fiscal 2006. This included net favorable tax adjustments of
$565 million to income tax accruals as a result of the settlement of IRS examinations of our U.S.
income tax returns for fiscal years 1993 to 1998. The reductions to the net income tax accruals for
these years related primarily to the resolution of issues with respect to Puerto Rico manufacturing tax
incentives and export tax incentives, and other issues involving our non-U.S. operations. In addition,
the decrease in the overall tax rate in 2006 from fiscal 2005 was attributable in part to $697 million of
income tax expense related to items unique to fiscal 2005. The tax expense was the result primarily of
$792 million associated with the repatriation of $14.5 billion under the American Jobs Creation Act of
2004 (‘‘Jobs Act’’) and $76 million related to additional distributions received from foreign subsidiaries.
These tax expenses were offset in part by tax benefits of $177 million resulting from agreements with
the IRS and other governmental authorities.
The increase in the overall tax rate in fiscal 2005 from fiscal 2004 was related primarily to tax
expense associated with the repatriation of $14.5 billion under the provisions of the Jobs Act which was
partially offset by the increase in the tax benefit derived from lower rates in other jurisdictions. The
Jobs Act, enacted on October 22, 2004, provided for a temporary 85% dividend received deduction on
certain foreign earnings repatriated during a one-year period. The deduction resulted in an
approximate 5.25% federal tax rate on the repatriated earnings.
In fiscal 2004, our tax rate benefited from net favorable adjustments to previously estimated tax
liabilities of $207 million, which decreased the provision for taxes. The most significant favorable
adjustments related to the resolution of a California state income tax audit, a net favorable revision to
estimated tax accruals upon filing the 2003 U.S. income tax return and a reduction in taxes on foreign
earnings due to a change in regulatory policy. These favorable adjustments were offset in part by the
net effect of smaller adjustments to income tax liabilities in various jurisdictions.
For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and
further explanation of our provision for taxes, see Note 13 to the Consolidated Financial Statements in
Item 8, which is incorporated herein by reference.
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