HP 2012 Annual Report Download - page 28

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 OMs to manufacture its products and is therefore
dependent upon the continuing operations of those OMs to fulfill demand for our PC products.
HP represents a substantial portion of the business of some of these OMs, and any changes to
the nature or volume of business transacted by HP 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, resulting in further costs and delays.
• 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.
• 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. In
the event that we become committed to purchase 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, and our gross margin could suffer. 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 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 in the future to discontinue conducting
business with us. Any of these actions by our competitors, OMs or suppliers could adversely
affect our future operating results and financial condition.
• 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.
• 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 some of those processors are customized for our products. New
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