-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C/gwLQ2X9Oyg3xK8wCXXYrkABxOxKcYqBJmk5V/VioamJeFyVzTHkUriafDMX6ZV bwo6C38yVcCcsJsZoCuN5g== 0000047217-99-000007.txt : 19990615 0000047217-99-000007.hdr.sgml : 19990615 ACCESSION NUMBER: 0000047217-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEWLETT PACKARD CO CENTRAL INDEX KEY: 0000047217 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 941081436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04423 FILM NUMBER: 99644735 BUSINESS ADDRESS: STREET 1: 3000 HANOVER ST CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4158571501 MAIL ADDRESS: STREET 1: 3000 HANOVER ST STREET 2: MS 20BQ CITY: PALO ALTO STATE: CA ZIP: 94304 10-Q 1 10-Q FILING FOR QUARTER ENDING APRIL 30, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) ___ | X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended April 30, 1999 OR ___ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ---------- ---------- Commission file number: 1-4423 HEWLETT-PACKARD COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 94-1081436 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3000 Hanover Street, Palo Alto, California 94304 ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (650) 857-1501 -------------- _______________________________________________________________________________ Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 1999 ----------------------------- ----------------------------- Common Stock, $0.01 par value 1.013 billion shares HEWLETT-PACKARD COMPANY AND SUBSIDIARIES INDEX ----- Page No. -------- Part I. Financial Information Item 1. Financial Statements. Consolidated Condensed Balance Sheet April 30, 1999 (Unaudited) and October 31, 1998 3 Consolidated Condensed Statement of Earnings Three and six months ended April 30, 1999 and 1998 (Unaudited) 4 Consolidated Condensed Statement of Cash Flows Six months ended April 30, 1999 and 1998 (Unaudited) 5 Notes to Consolidated Condensed Financial Statements (Unaudited) 6-8 Item 2. Management's Discussion and Analysis of Financial 8-20 Condition, Results of Operations and Factors That May Affect Future Results (Unaudited) Item 3. Quantitative and Qualitative Disclosures About Market 20 Risk Part II. Other Information 20 Item 6. Exhibits and Reports on Form 8-K. 20 Signature 21 Exhibit Index 22 Item 1. Financial Statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET ------------------------------------ (Millions except par value and number of shares) April 30 October 31 1999 1998 ------------ ------------ (Unaudited) Assets ------ Current assets: Cash and cash equivalents $ 4,894 $ 4,046 Short-term investments 101 21 Accounts receivable 5,919 6,232 Financing receivables 1,818 1,520 Inventory 6,310 6,184 Other current assets 3,187 3,581 ------- ------- Total current assets 22,229 21,584 ------- ------- Property, plant and equipment (less accumulated depreciation: April 30, 1999 - $6,622; October 31, 1998 - $6,212) 5,990 6,358 Long-term investments and other assets 5,800 5,731 ------- ------- $34,019 $33,673 ======= ======= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Notes payable and short-term borrowings $ 1,380 $ 1,245 Accounts payable 3,124 3,203 Employee compensation and benefits 1,789 1,768 Taxes on earnings 1,882 2,796 Deferred revenues 1,593 1,453 Other accrued liabilities 3,107 3,008 ------- ------- Total current liabilities 12,875 13,473 ------- ------- Long-term debt 1,730 2,063 Other liabilities 1,216 1,218 Shareholders' equity: Preferred stock, $0.01 par value; 300,000,000 shares authorized; none issued - - Common stock and capital in excess of $0.01 par value; 4,800,000,000 shares authorized; 1,013,404,000 and 1,015,403,000 shares issued and outstanding at April 30, 1999 and October 31, 1998, respectively 10 10 Retained earnings 18,188 16,909 ------- ------- Total shareholders' equity 18,198 16,919 ------- ------- $34,019 $33,673 ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF EARNINGS -------------------------------------------- (Unaudited) (Millions except per share amounts) Three months ended Six months ended April 30 April 30 ------------------- ----------------- 1999 1998 1999 1998 Net revenue: Products $10,557 $10,338 $20,673 $20,496 Services 1,862 1,702 3,683 3,360 ------- ------- ------- ------- 12,419 12,040 24,356 23,856 Costs and expenses: Cost of products sold and services 8,327 8,224 16,311 16,061 Research and development 873 880 1,672 1,683 Selling, general and administrative 2,110 2,064 4,065 3,936 ------- ------- ------- ------- 11,310 11,168 22,048 21,680 ------- ------- ------- ------- Earnings from operations 1,109 872 2,308 2,176 Interest income and other, net 193 134 356 224 Interest expense 44 59 91 126 ------- ------- ------- ------- Earnings before taxes 1,258 947 2,573 2,274 Provision for taxes 340 262 695 660 ------- ------- ------- ------- Net earnings $ 918 $ 685 $ 1,878 $ 1,614 ======= ======= ======= ======= Net earnings per share: Basic $ 0.91 $ 0.66 $ 1.86 $ 1.55 ======= ======= ======= ======= Diluted $ 0.88 $ 0.65 $ 1.80 $ 1.51 ======= ======= ======= ======= Cash dividends declared per share $ -- $ -- $ 0.32 $ 0.28 ======= ======= ======= ======= Average shares used in computing basic net earnings per share 1,010 1,039 1,010 1,039 ======= ======= ======= ======= Average shares and equivalents used in computing diluted net earnings per share 1,051 1,078 1,050 1,077 ======= ======= ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS ---------------------------------------------- (Unaudited) (Millions) Six months ended April 30 -------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net earnings $1,878 $1,614 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 856 869 Deferred taxes on earnings 263 (160) Change in assets and liabilities: Accounts and financing receivables (235) (225) Inventories (127) 72 Accounts payable (79) (118) Taxes on earnings (894) 278 Other current assets and liabilities 364 382 Other, net 17 137 ------- ------- Net cash provided by operating activities 2,043 2,849 ------- ------- Cash flows from investing activities: Investment in property, plant and equipment (626) (986) Disposition of property, plant and equipment 253 202 Purchase of short-term investments (713) (1,962) Maturities of short-term investments 726 2,829 Other, net 75 (7) ------- ------- Net cash provided by (used in) investing activities (285) 76 ------- ------- Cash flows from financing activities: Change in notes payable and short-term borrowings 173 (378) Issuance of long-term debt 227 150 Payment of long-term debt (531) (539) Issuance of common stock under employee stock plans 330 242 Repurchase of common stock (728) (778) Dividends (325) (291) Other, net (56) (16) ------- ------- Net cash used in financing activities (910) (1,610) ------ ------- Increase in cash and cash equivalents 848 1,315 Cash and cash equivalents at beginning of period 4,046 3,072 ------- ------- Cash and cash equivalents at end of period $4,894 $4,387 ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. In the opinion of the Company's management, the accompanying consolidated condensed financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position as of April 30, 1999 and October 31, 1998, the results of operations for the three and six months ended April 30, 1999 and 1998, and the cash flows for the six months ended April 30, 1999 and 1998. The results of operations for the three and six months ended April 30, 1999 are not necessarily indicative of the results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and the consolidated financial statements and notes thereto included in the Hewlett-Packard Company 1998 Form 10-K. 2. The Company's basic EPS is calculated based on net earnings available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding and the conversion of debt. Three months ended Six months ended April 30 April 30 ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in millions except per share data) Numerator: Net earnings $ 918 $ 685 $1,878 $1,614 Adjustment for interest expense, net of income tax effect 4 6 11 12 Net earnings, adjusted 922 691 1,889 1,626 Denominator: Weighted-average shares outstanding 1,010 1,039 1,010 1,039 Effect of dilutive securities: Dilutive options 30 29 29 28 Convertible zero-coupon notes due 2017 11 10 11 10 ----- ----- ----- ----- Dilutive potential common shares 41 39 40 38 Weighted-average shares and dilutive potential common shares 1,051 1,078 1,050 1,077 Basic earnings per share $0.91 $0.66 $1.86 $1.55 Diluted earnings per share $0.88 $0.65 $1.80 $1.51 3. Income tax provisions for interim periods are based on estimated effective annual income tax rates. The effective income tax rate varies from the U.S. federal statutory income tax rate primarily because of variations in the tax rates on foreign income. 4. Inventory (In Millions) April 30 October 31 1999 1998 ---- ---- Finished Goods $4,186 $4,170 Purchased parts and fabricated assemblies 2,124 2,014 ------ ------ $6,310 $6,184 ====== ====== 5. The Company paid interest of $121 million and $127 million during the six months ended April 30, 1999 and 1998, respectively. During the same periods, the Company paid income taxes of $1,102 million and $439 million, respectively. The effect of foreign currency exchange rate fluctuations on cash balances held in foreign currencies was not material. 6. In June 1998, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 1999. In May 1999, FASB approved a proposal to defer its effective date to fiscal years beginning after June 15, 2000. At this time, the Company is evaluating when to adopt the standard and is in the process of determining the impact that adoption will have on its consolidated financial statements. In July 1997, the Financial Accounting Standards Board (FASB) Emerging Issues Task force (EITF) reached a final consensus on Issue 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights." This consensus precludes investors from consolidating majority-owned investees when a minority shareholder or shareholders hold substantive participating rights, which, individually or in the aggregate, would allow such minority shareholders to participate in significant decisions made in the ordinary course of business. The Company has followed the guidance in EITF 96-16 with respect to all investments made after July 24, 1997. This standard has no impact on the Company's financial statements. In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." The statement changes standards for the way that public business enterprises identify and report operating segments in annual and interim financial statements. This statement requires selected information about an enterprise's operating segments and related disclosure about products and services, geographic areas and major customers. The Company expects to report multiple segments when it adopts the standard for fiscal year-end 1999. 7. On March 2, 1999, the Company announced its plans to launch a new company ("Newco") consisting of its test-and-measurement, semiconductor products, chemical-analysis and medical businesses. The Company is considering an initial public offering for approximately 15 percent of the shares in Newco. Subsequent to the initial public offering, the Company would distribute to its shareholders the remaining 85 percent of the shares of Newco's common stock held by the Company. The transaction is expected to be tax free to the Company and to its shareholders. The completion of the realignment is expected in fiscal 2000 and is contingent upon receiving certain tax and regulatory approvals and market conditions. The full impact of the realignment on the Company's financial position, results of operations and cash flows cannot be predicted at this time. However, certain incremental expenses are expected to be incurred in future periods as decisions are made regarding the realignment. 8. On May 20, 1999, the Company's Board of Directors authorized the future repurchase of an additional $1 billion of the Company's common stock under the systematic program used to manage the dilution created by shares issued under employee stock purchase plans. The Board of Directors also authorized the repurchase of an additional $1 billion of the Company's common stock in the open market or in private transactions under the Company's separate incremental plan. Including the additional authorizations, the remaining future repurchases in the systematic program and the separate incremental plan are $1.7 billion and $1.6 billion, respectively. Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations and Factors That May Affect Future Results (Unaudited). HEWLETT-PACKARD COMPANY AND SUBSIDIARIES RESULTS OF OPERATIONS --------------------- Realignment. On March 2, 1999, the Company announced its plans to launch a new company ("Newco") consisting of its test-and-measurement, semiconductor products, chemical-analysis and medical businesses. The Company is considering an initial public offering for approximately 15 percent of the shares in Newco. Subsequent to the initial public offering, the Company would distribute to its shareholders the remaining 85 percent of the shares of Newco's common stock held by the Company. The transaction is expected to be tax free to the Company and to its shareholders. The completion of the realignment is expected in fiscal 2000 and is contingent upon receiving certain tax and regulatory approvals and market conditions. The full impact of the realignment on the Company's financial position, results of operations and cash flows cannot be predicted at this time. However, certain incremental expenses are expected to be incurred in future periods as decisions are made regarding the realignment. Net Revenue. Net revenue for the second quarter ended April 30, 1999 was $12.4 billion, an increase of 3 percent from the same period of fiscal 1998. Product sales increased 2 percent and service revenue grew 9 percent over the corresponding period of fiscal 1998. Net revenue grew 4 percent to $7.0 billion internationally and 2 percent to $5.4 billion in the U.S. For the first half of 1999, net revenue was $24.4 billion, an increase of 2 percent over the first half of fiscal 1998. Product sales increased 1 percent and service revenue grew 10 percent over the corresponding period of fiscal 1998. Net revenue grew 4 percent to $13.8 billion internationally and was flat at $10.6 billion in the U.S. Currency had no significant impact on the Company's reported net revenue growth for the second quarter or the first half ended April 30, 1999. The second quarter's and the first half of 1999's net revenue growth was principally due to solid demand for the Company's LaserJet and inkjet printers, especially color LaserJets and personal inkjets, and related supplies. There was also strong demand for the Company's home personal computers, PC servers and information storage products. The strong growth in unit shipments of the Company's computers and printers was partially offset by competitive actions designed to increase or maintain market share which contributed to declines in the average selling prices for many of these products. Net service revenue growth was driven by strong growth in service and support revenue, primarily customer support, outsourcing and financing services. In addition, net revenue growth from products and services was further offset by declines in revenue growth in the Company's enterprise server products, test and measurement business and commercial personal computers. The decline in enterprise server products is primarily due to a major product transition in the midrange UNIX server product class. Test and measurement products experienced a 13% decrease in the first half of 1999. The decline in test and measurement net revenue in the first half of 1999 was impacted by economic weakness in Asia, declines in electronic general purpose instruments, as well as the worldwide semiconductor industry slowdown that began in mid-1998. The Company anticipates that the rate of revenue growth for the second half of 1999 will increase compared to the first half of 1999 reflecting the strong order growth in the second quarter and in comparison to a weak revenue base reported in the second half of 1998. Costs and Expenses. Cost of products sold and services as a percentage of net revenue was 67.1 percent for the second quarter and 67.0 percent for the first half of fiscal 1999, compared to 68.3 percent for the second quarter and 67.3 percent for the first half of fiscal 1998. Cost of sales for the second quarter of 1998 was impacted by special charges primarily for the consolidation of inkjet manufacturing operations. Without these charges, cost of sales for the second quarter and first half of 1998 would have been 67.6 percent and 67.0 percent, respectively. The small decrease in the cost of sales percentage for the second quarter and first half of 1999 was attributable to several factors. Operational efficiencies in personal computers and in some measurement products as well as increased volume in printer supplies resulted in a decrease to cost of sales. This decrease was offset by the overall continued shift in the Company's product sales mix to lower gross margin products. The Company expects continued variability in the cost of sales trend over time, with an overall upward trend over the long-term, as competitive pricing pressures and mix shifts continue. Operating Expenses. Operating expenses as a percentage of net revenue were 24.0 percent for the second quarter and 23.5 percent for the first half of fiscal 1999, compared to 24.5 percent for the second quarter and 23.6 percent for the first half of fiscal 1998. Year-over-year growth in operating expenses was 1 percent for the second quarter and 2 percent for the first half of 1999. The increase in operating expenses reflects the Company's increased marketing expenses incurred to support new product introductions in several businesses and promotions relating to e-services. Increased employment to generate growth in LaserJet and enterprise storage products also contributed to the increase. Fluctuations in foreign currency exchange rates had no significant impact on the operating growth rate for the second quarter or first half of 1999. The Company continues to focus on controlling the rate of growth of operating expense ratios and optimization of manufacturing processes in order to improve profitability. However, the Company anticipates that there will be upward pressure on operating expenses in the second half of 1999 related to normal operations. In addition, the Company expects to start incurring significant expense impacts from implementing and supporting the realignment, including costs to create two corporate infrastructures, additional incentive and retention costs, consulting, accounting and legal fees, and brand development costs for the new company. These incremental costs could exceed $200 million in the second half of the year. Provision for Taxes. The provision for taxes as a percentage of earnings before taxes was 27 percent for the second quarter and for the first half of fiscal 1999 compared to 28 percent for the second quarter and 29 percent for the first half of fiscal 1998. The annual effective tax rate decreased to 27 percent in the first quarter of fiscal 1999 as a result of changes in the expected geographic mix of the Company's earnings. Net Earnings. Net earnings for the second quarter of fiscal 1999 were $918 million compared to net earnings of $685 million for the second quarter of fiscal 1998. For the six months ended April 30, 1999, net earnings were $1.9 billion compared to net earnings of $1.6 billion for the first half of 1998. Earnings per share for the second quarter and first half of fiscal 1999 on a diluted basis were 88 cents and $1.80 per share, respectively, on 1.05 billion weighted average shares and equivalents, compared to 65 cents and $1.51 per share on 1.08 billion weighted average shares for the second quarter and first half of fiscal 1998. FINANCIAL CONDITION ------------------- Liquidity and Capital Resources. The Company's financial position remains strong, with cash and cash equivalents and short-term investments of $5.0 billion at April 30, 1999, compared with $4.1 billion at October 31, 1998. In addition, other long-term investments, relatively low levels of debt compared to assets, and a large equity base contribute to the Company's financial flexibility. Cash flows from operating activities were $2.0 billion during the first six months of fiscal 1999, compared to $2.8 billion for the corresponding period of fiscal 1998. The decrease in cash flows from operating activities in fiscal 1999 was attributable primarily to tax payments made in the first half of fiscal 1999, partially offset by increased net earnings and decreases in deferred taxes on earnings. Inventory as a percentage of net revenue declined to 13.3 percent at April 30, 1999 from 14.5 percent in the corresponding prior period. The decline in the ratio is attributable to continued progress in supply-chain management. Overall, there was a slight increase in accounts and financing receivables as a percentage of net revenue, from 15.9 percent in the prior period to 16.3 percent as of April 30, 1999. Financing receivables increased 20 percent during the first six months of fiscal 1999. Growth in the Company's sales-type leasing business contributed to this increase. Capital expenditures for the first six months of fiscal 1999 were $626 million, compared to $986 million for the corresponding period in fiscal 1998. The decrease in capital expenditures was due in part to a Company- wide emphasis on reducing non-essential expenditures combined with increased outsourcing of certain production processes and slowing capacity requirements. The changes in short-term borrowing activities during the first six months of fiscal 1999 compared to the same period in fiscal 1998 resulted from increases in the use of short-term borrowings in fiscal 1999. In 1998, net receipts from maturities of short-term investments were used to pay down both short- and long-term debt. Shares of the Company's common stock are repurchased under a systematic program to manage the dilution created by shares issued under employee stock plans. During July 1998, the Company's Board of Directors authorized an additional incremental repurchase program under which up to $2 billion of the Company's common stock can be repurchased in the open market or in private transactions. Under both these plans, during the six months ended April 30, 1999, the Company purchased and retired approximately 10.9 million shares for an aggregate price of $728 million. During the six months ended April 30, 1998, the Company purchased and retired approximately 12.4 million shares for an aggregate price of $778 million. On May 20, 1999, the Company's Board of Directors authorized the future repurchase of an additional $1 billion of the Company's common stock under the systematic program used to manage the dilution created by shares issued under employee stock purchase plans. The Board of Directors also authorized the repurchase of an additional $1 billion of the Company's common stock in the open market or in private transactions under the Company's separate incremental plan. Including the additional authorizations, the remaining future repurchases in the systematic program and the separate incremental plan are $1.7 billion and $1.6 billion, respectively. FACTORS THAT MAY AFFECT FUTURE RESULTS -------------------------------------- Competition. The Company encounters aggressive competition in all areas of its business activity. The Company's competitors are numerous, ranging from some of the world's largest corporations to many relatively small and highly specialized firms. The Company competes primarily on the basis of technology, performance, price, quality, reliability, distribution and customer service and support. Product life cycles are short, and, to remain competitive, the Company will be required to develop new products, periodically enhance its existing products and compete effectively on the basis of the factors described above. In particular, the Company anticipates that it will have to continue to adjust prices of many of its products to stay competitive and it will have to effectively manage financial returns with reduced gross margins. New Product Introductions. The Company's future operating results may be adversely affected if the Company is unable to continue to develop, manufacture and market innovative products and services rapidly that meet customer requirements for performance and reliability. The process of developing new high technology products and solutions is inherently complex and uncertain. It requires accurate anticipation of customer's changing needs and emerging technological trends. The Company consequently must make long-term investments and commit significant resources before knowing whether its predictions will eventually result in products that achieve market acceptance. After a product is developed, the Company must quickly manufacture sufficient volumes at acceptable costs. This is a process that requires accurate forecasting of volumes, mix of products and configurations. Moreover, the supply and timing of a new product or service must match customers' demand and timing for the particular product or service. Given the wide variety of systems, products and services the Company offers, the process of planning production and managing inventory levels becomes increasingly difficult. Inventory Management. Inventory management has become increasingly complex as the Company continues to sell a greater mix of products, especially printers and personal computers, through third-party distribution channels. Channel partners constantly adjust their ordering patterns in response to the Company's and its competitors' supply into the channel and the timing of their new product introductions and relative feature sets, as well as seasonal fluctuations in end-user demand such as the back-to-school and holiday selling periods. Channel partners may increase orders during times of shortages, cancel orders if the channel is filled with currently available products, or delay orders in anticipation of new products. Any excess supply could result in price reductions and inventory writedowns, which in turn could adversely affect the Company's gross margins. Short Product Life Cycles. The short life cycles of many of the Company's products pose a challenge for the effective management of the transition from existing products to new products and could adversely affect the Company's future operating results. Product development or manufacturing delays, variations in product costs, and delays in customer purchases of existing products in anticipation of new product introductions are among the factors that make a smooth transition from current products to new products difficult. In addition, the timing of introductions by suppliers and competitors of new products and services may negatively affect future operating results of the Company, especially when competitive product introductions coincide with periods leading up to the Company's own introduction of new or enhanced products. Furthermore, some of the Company's own new products may replace or compete with certain of the Company's current products. Intellectual Property. The Company generally relies upon patent, copyright, trademark and trade secret laws in the United States and in selected other countries to establish and maintain its proprietary rights in its technology and products. However, there can be no assurance that any of the Company's proprietary rights will not be challenged, invalidated or circumvented, or that any such rights will provide significant competitive advantages. Moreover, because of the rapid pace of technological change in the information technology industry, many of the Company's products rely on key technologies developed by others. There can be no assurance that the Company will be able to continue to obtain licenses to such technologies. In addition, from time to time, the Company receives notices from third parties regarding patent or copyright claims. Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources and cause the Company to incur significant expenses. In the event of a successful claim of infringement against the Company and failure or inability of the Company to license the infringed technology or to substitute similar non-infringing technology, the Company's business could be adversely affected. Reliance on Suppliers. Portions of the Company's manufacturing operations are dependent on the ability of suppliers to deliver quality components, subassemblies and completed products in time to meet critical manufacturing and distribution schedules. The Company periodically experiences constrained supply of certain component parts in some product lines as a result of strong demand in the industry for those parts. Such constraints, if persistent, may adversely affect the Company's operating results until alternate sourcing can be developed. In order to secure components for production and introduction of new products, the Company at times makes advance payments to certain suppliers, and often enters into noncancellable purchase commitments with vendors for such components. Volatility in the prices of these component parts, the possible inability of the Company to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations demanded or, conversely, a temporary oversupply of these parts, could adversely affect the Company's future operating results. Reliance on Third-Party Distribution Channels. The Company continues to expand into third-party distribution channels to accommodate changing customer preferences. As a result, the financial health of wholesale and retail distributors of the Company's products, and the Company's continuing relationships with such distributors, are becoming more important to the Company's success. Some of these companies are thinly capitalized and may be unable to withstand changes in business conditions. The Company's financial results could be adversely affected if the financial condition of certain of these third parties substantially weakens or if the Company's relationship with them deteriorates. International. Sales outside the United States make up more than half of the Company's revenues. In addition, a portion of the Company's product and component manufacturing, along with key suppliers, are located outside the United States. Accordingly, the Company's future results could be adversely affected by a variety of factors, including changes in a specific country's or region's political conditions or changes or continued weakness in economic conditions, trade protection measures, import or export licensing requirements, the overlap of different tax structures, unexpected changes in regulatory requirements and natural disasters. Derivative Financial Instruments. The Company is also exposed to foreign currency exchange rate risk inherent in its sales commitments, anticipated sales and assets and liabilities denominated in currencies other than the U.S. dollar, as well as interest rate risk inherent in the Company's debt, investment and finance receivable portfolio. As more fully described in the notes to the Company's 1998 annual report to shareholders, the Company's risk management strategy utilizes derivative financial instruments, including forwards, swaps and purchased options to hedge certain foreign currency and interest rate exposures, with the intent of offsetting gains and losses that occur on the underlying exposures with gains and losses on the derivative contracts hedging them. The Company does not enter into derivatives for trading purposes. The Company has performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates and interest rates applied to the hedging contracts and underlying exposures described above. As of April 30, 1999 and 1998, the analysis indicated that such market movements would not have a material effect on the Company's consolidated financial position, results of operations or cash flows. Actual gains and losses in the future may differ materially from that analysis, however, based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and the Company's actual exposures and hedges. Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. As a matter of course, the Company frequently engages in discussions with a variety of parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. Although consummation of any transaction is unlikely to have a material effect on the Company's results as a whole, the implementation or integration of a transaction may contribute to the Company's results differing from the investment community's expectation in a given quarter. Divestitures may result in the cancellation of orders and charges to earnings. Acquisitions and strategic alliances may require, among other things, integration or coordination with a different company culture, management team organization and business infrastructure. They may also require the development, manufacture and marketing of product offerings with the Company's products in a way that enhances the performance of the combined business or product line. Depending on the size and complexity of the transaction, successful integration depends on a variety of factors, including the hiring and retention of key employees, management of geographically separate facilities, and the integration or coordination of different research and development and product manufacturing facilities. All of these efforts require varying levels of management resources, which may temporarily adversely impact other business operations. Earthquake. A portion of the Company's research and development activities, its corporate headquarters, other critical business operations and certain of its suppliers are located near major earthquake faults. The ultimate impact on the Company, its significant suppliers and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. The Company is predominantly uninsured for losses and interruptions caused by earthquakes. Environmental. Certain of the Company's operations involve the use of substances regulated under various federal, state, and international laws governing the environment. It is the Company's policy to apply strict standards for environmental protection to sites inside and outside the U.S., even if not subject to regulations imposed by local governments. The liability for environmental remediation and related costs is accrued when it is considered probable and the costs can be reasonably estimated. Environmental costs are presently not material to the Company's operations or financial position. Profit Margin. The profit margins realized by the Company vary somewhat among its products, its customer segments and its geographic markets. Consequently, the overall profitability of the Company's operations in any given period is partially dependent on the product, customer and geographic mix reflected in that period's net sales. Year 2000. The information provided below constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure Act. The Year 2000 ("Y2K") problem arises from the use of a two-digit field to identify years in computer programs, e.g., 85=1985, and the assumption of a single century, the 1900s. Any program so created may read, or attempt to read, "00" as the year 1900. There are two other related issues which could also lead to incorrect calculations or failure, such as (i) some systems' programming assigns special meaning to certain dates, such as 9/9/99, and (ii) the year 2000 is a leap year. Accordingly, some computer hardware and software, including programs embedded within machinery and parts, will need to be modified prior to the year 2000 to remain functional. The Company's Y2K initiatives are focusing primarily on four areas of potential impact: internal information technology (IT) systems; internal non-IT systems and processes, including services and embedded chips (controllers); the Company's products and services, and the readiness of significant third parties with whom the Company has material business relationships. The Company established a Y2K Program Office in 1997 to coordinate these programs across the enterprise and to provide a single point of contact for information about the Company's Y2K programs. The Company's Y2K efforts in these areas are led by the Y2K General Manager who reports directly to the Company's senior management. The costs associated with the Company's IT internal readiness actions are a combination of incremental external spending and use of existing internal resources. The Company estimates that over the life of its IT internal readiness effort, it will have spent a total of approximately $250 million over a multi-year period. The Company expects to implement successfully the systems and programming changes necessary to address Y2K internal IT and non-IT readiness issues and material third party relationships, and based on current estimates, does not believe that the costs associated with such actions will have a material effect on the Company's results of operations or financial condition. However, the costs of such actions may vary from quarter to quarter. There can be no assurance, however, that there will not be a delay in, or increased costs associated with the implementation of such changes. In addition, failure to achieve Y2K readiness for the Company's internal systems could delay its ability to manufacture and ship products and deliver services, disrupt its customer service and technical support facilities, and interrupt customer access to its online products and services. The Company's inability to perform these functions could have an adverse effect on future results of operations or financial condition. Internal IT Systems. The Company has established a dedicated Y2K IT Internal Readiness Program Organization to oversee the Company's worldwide Y2K internal IT application and infrastructure readiness activities. The Internal Readiness IT Program Organization provides monthly progress reports to the Company's senior management. The Internal Readiness IT Program Organization is charged with raising awareness throughout the Company, developing tools and methodologies for addressing the Y2K issue, monitoring the development and implementation of business and infrastructure plans to bring non-compliant applications into compliance on a timely basis and identifying and assisting in resolving high-risk issues. The Company is approaching its Y2K IT internal readiness program in the following four phases: (1) assessment, (2) planning, (3) preparation and (4) implementation. The assessment phase involves taking an inventory of the Company's internal IT applications to prioritize risk, identifying failure dates, defining a solution strategy, estimating repair costs and communicating across and within business units regarding the magnitude of the problem and the need to address Y2K issues. The planning phase consists of identifying the tasks necessary to ensure readiness, scheduling remediation plans for applications and infrastructure, and determining resource requirements and allocations. The third phase, preparation, involves readying the development and testing environments, and piloting the remediation process. Implementation, the last phase, consists of executing the Company's plans to fix, test and implement critical applications and associated infrastructure, and putting in place contingency plans for processes that have a high impact on the Company's businesses. The Company is targeting its efforts to ensure that its critical IT applications will be Y2K compliant by July 31, 1999. The assessment, planning and preparation phases have been completed. As of April 30, 1999, the implementation phase is approximately 75 percent complete. Internal Non-IT Systems and Processes. Non-IT systems include, but are not limited to, those systems that are not commonly thought of as IT systems, such as telephone/PBX systems; fax machines; facilities systems regulating alarms, building access and sprinklers; manufacturing, assembly and distribution equipment; and other miscellaneous systems and processes. Y2K readiness for these internal non-IT systems is the responsibility of the Company's worldwide operating units and their respective functions and operations, e.g., facilities, research and development, manufacturing, distribution, logistics, sales and customer support. The Company's Y2K Program Office has developed a comprehensive process to assure all Company operations and global business units use a structured and standardized methodology to organize, plan and implement their Y2K readiness. The Company has also established a Year 2000 Council to coordinate its overall internal readiness and its business continuity planning efforts. It is composed of representatives from the major business units within the Company and the critical corporate and infrastructure functions that support them. The Council is chaired by the Company's Year 2000 General Manager and has initiated a comprehensive program to ensure timely and consistent business continuity planning by all of the Company's business units. The program objective is to assure that substantially all Y2K testing, internal mitigation and remediation activities, and business contingency plans are finalized by July 31, 1999. From July 31, 1999, until November 30, 1999, the company's Y2K internal readiness solutions, contingency plans, crisis management and recovery mechanisms will be further stress-tested to ensure full preparation. Product and Customer Readiness. The Company's newly introduced products are Y2K compliant. However, certain hardware and software products currently installed at customer sites will require upgrade or other remediation. Some of these products are used in critical applications where the impact of non-performance to these customers and other parties could be significant. While the Company believes its customers are responsible for the Y2K readiness of their IT and business environments, the Company is taking significant steps to enable customers to achieve their readiness goals, thereby preserving customer satisfaction and brand reputation. In 1997, the Company established a dedicated Y2K Product Compliance Program Office to coordinate the Company's worldwide Y2K product compliance activities. The Product Compliance Program Office is charged with developing and overseeing implementation of plans to identify all standard products delivered since January 1, 1995; to test those products for compliance; to identify an appropriate path to compliance for non-compliant standard products; and to communicate the status and necessary customer action for non-compliant standard products. The Company has an internet website dedicated to communicating Y2K issues to a broad customer base. This website includes a product compliance search page that allows customers to look up the status of the Company's products they have installed. In certain areas, the Company is taking additional steps to identify affected customers, raise customer awareness related to non-compliance of certain Company products and help customers to assess their risks. The Company is in the process of implementing plans to accommodate increased levels of customer assistance in the first half of fiscal 2000 and currently anticipates that a significant portion of the costs related to such actions would occur in the fourth quarter of fiscal 1999 and the first half of fiscal 2000. All of these efforts are coordinated by the HP Year 2000 Products and Customers Board of Directors ("Board"), which is composed of representatives for all of the Company's product and service business units, and which works in conjunction with the Product Compliance Program Office to develop and implement the Company's Year 2000 policies for products and services. The Company's Year 2000 General Manager chairs the Board. The costs of the readiness program for products are primarily costs of existing internal resources largely absorbed within existing engineering spending levels. These costs were incurred primarily in fiscal 1998 and earlier years and were not broken out from other product engineering costs. Historical Y2K customer satisfaction costs were not material. Future product readiness costs, including those for customer satisfaction, are not anticipated to be material. The Company is aware of the potential for legal claims against it and other companies for damages arising from products that are not Y2K compliant, management believes that reasonable communication and customer satisfaction steps are under way so that any such claims against the Company would be without merit or would not otherwise result in material liability for the Company. It is unknown how Y2K issues may affect customer spending patterns. As customers focus their attention and capital budgets in the near term on preparing their own businesses for the Year 2000, they may either delay or accelerate purchases of new applications, services and systems from the Company. Many of the Company's products run custom software or connect to other systems or peripheral products that may be adversely affected by operating system or hardware upgrades. Although it is possible that these factors may increase demand for certain of the Company's products and services, the increase may be offset by the softening in demand for other offerings. As a result, these events may affect the Company's future revenues and revenue patterns. Material Third-Party Relationships. The Company has developed a Y2K process for dealing with its key suppliers, contract manufacturers, distributors, vendors and partners. The process generally involves the following steps: (i) initial supplier survey, (ii) risk assessment and contingency planning, (iii) follow-up supplier reviews and escalation, if necessary, and where relevant, (iv) testing. To date, the Company has received formal responses from all of its critical suppliers. Most of them have responded that they expect to address all their significant Y2K issues on a timely basis. The Company regularly reviews and monitors the suppliers' Y2K readiness plans and performance. Based on the Company's risk assessment, selective on-site reviews have been performed. Risk analysis has been completed with the Company's base of suppliers and contingency plans are now being developed and tested. All critical surveys and testing efforts have been completed by June 1, 1999. In some cases, to meet Y2K readiness, the Company has replaced suppliers or eliminated suppliers from consideration for new business. Where efforts to work with critical suppliers have not been successful, contingency planning generally emphasizes the identification of substitute and second-source suppliers, or in certain situations includes a planned increase in the level of inventory held (e.g., in the case of sole sources). The Company has also contracted with multiple transportation companies to provide product delivery alternatives. The Company has also completed substantially all Electronic Data Interchange (EDI) migration and testing with its supply base. The Company is working to identify and analyze the most reasonably likely worst-case scenarios for third-party relationships affected by Y2K. These scenarios could include possible infrastructure collapse, the failure of power and water supplies, major transportation disruptions, unforeseen product shortages due to hoarding of products and sub-assemblies and failures of communications and financial systems. Any one of these scenarios could have a major and material effect on the Company's ability to build its products and deliver services to its customers. While the Company has contingency plans in place to address most issues under its control, an infrastructure problem outside of its control or some combination of several of these problems could result in a delay in product shipments depending on the nature and severity of the problems. The Company would expect that most utilities and service providers would be able to restore service within days although more pervasive system problems involving multiple providers could last two to four weeks or more depending on the complexity of the systems and the effectiveness of their contingency plans. Although the Company is dedicating substantial resources towards attaining Y2K readiness, there is no assurance it will be successful in its efforts to identify and address all Y2K issues. Even if the Company acts in a timely manner to complete all of its assessments; identifies, develops and implements remediation plans believed to be adequate; and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the Company. The discussion above regarding estimated completion dates, costs, risks and other forward-looking statements regarding Y2K is based on the Company's best estimates given information that is currently available and is subject to change. As the Company continues to progress with its Y2K initiatives, it may discover that actual results will differ materially from these estimates. Adoption of the Euro. In 1997, the Company established a dedicated task force to address the issues raised by the introduction of a European single currency (the Euro) for initial implementation as of January 1, 1999 and during the transition period through January 1, 2002. Since the beginning of the transition period, product prices in local currencies are being converted to Euros as required. At an appropriate point during the transition period, product prices in participating countries will be established and stored in Euros, and converted to local denominations. System changes were implemented to give multi-currency capability to the few internal applications that did not have it yet, or to ensure that external partners facing systems processing euro conversions be compliant with the European council regulations. The Company has developed plans to support display and printing of the Euro character by impacted Hewlett-Packard products. Substantially all products are currently able to perform these functions. Current information about the impact of the adoption of the Euro on the Company's products and businesses is available at the Hewlett-Packard Euro Web site. The Company does not presently expect that introduction and use of the Euro will materially affect the Company's foreign exchange and hedging activities or the Company's use of derivative instruments. Management does not expect that the introduction of the Euro will result in any material increase in costs to the Company and all costs associated with the introduction of the Euro will be expensed to operations as incurred. While the Company will continue to evaluate the impact of the Euro introduction over time, based on currently available information, management does not believe that the introduction of the Euro currency will have a material adverse impact on the Company's financial condition or overall trends in results of operations. Quarterly Fluctuations and Volatility of Stock Prices. Although the Company believes that it has the product offerings and resources needed for continuing success, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its operations, which could cause period-to-period fluctuations in operating results. The Company's stock price, like that of other technology companies, is subject to significant volatility. The announcement of new products, services or technological innovations by the Company or its competitors, quarterly variations in the Company's results of operations, changes in revenue or earnings estimates by the investment community and speculation in the press or investment community are among the factors affecting the Company's stock price. In addition, the stock price may be affected by general market conditions and domestic and international macroeconomic factors unrelated to the Company's performance. Because of the foregoing reasons, recent trends should not be considered reliable indicators of future stock prices or financial results. Item 3. Quantitative and Qualitative Disclosures About Market Risk. A discussion of the Company's exposure to, and management of, market risk appears in Item 2 of this Form 10-Q under the heading "Factors That May Affect Future Results." PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: A list of exhibits is set forth in the Exhibit Index found on page 21 of this report. (b) Reports on Form 8-K: Report on Form 8-K filed March 2, 1999 with respect to Hewlett- Packard Company's announcement that its Board of Directors approved plans to pursue a strategic realignment to create two independent companies. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEWLETT-PACKARD COMPANY (Registrant) Dated: June 11, 1999 By:/s/Robert P. Wayman -------------------------- Robert P. Wayman Executive Vice President, Finance and Administration (Chief Financial Officer) HEWLETT-PACKARD COMPANY AND SUBSIDIARIES EXHIBIT INDEX ------------- Exhibits: 1. Not applicable. 2-4 None. 5-9. Not applicable. 10. None 11. See Item 2 in Notes to Consolidated Condensed Financial Statement on Page 6. 12-14. Not applicable. 15. None. 16-17. Not applicable. 18-19. None. 20-21. Not applicable. 22-24. None. 25-26. Not applicable. 27. Financial Data Schedule. 28. Not applicable. 99. None. EX-27 2 ARTICLE 5 FDS FOR 2ND QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS OCT-31-1999 APR-30-1999 4,894 101 7,737 0 6,310 22,229 12,612 6,622 34,019 12,875 1,730 10 0 0 18,188 34,019 20,673 24,356 0 16,311 5,737 0 91 2,573 695 1,878 0 0 0 1,878 1.86 1.80
-----END PRIVACY-ENHANCED MESSAGE-----