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, 1998
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, 1998
-------------------------- -----------------------------
Common Stock, $1 par value 1.04 billion shares
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX
-----
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Balance Sheet
April 30, 1998 (Unaudited) and October 31, 1997 2
Consolidated Condensed Statement of Earnings
Three and six months ended April 30, 1998
and 1997 (Unaudited) 3
Consolidated Condensed Statement of Cash Flows
Six months ended April 30, 1998 and 1997 (Unaudited) 4
Notes to Consolidated Condensed Financial Statements
(Unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition, Results of Operations and Factors That May
Affect Future Results (Unaudited) 7-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 2. Changes in Securities 13-14
Item 6. Exhibits and Reports on Form 8-K. 14
Signature 15
Exhibit Index 16
1
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
1998 1997
----------- ----------
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 4,387 $ 3,072
Short-term investments 650 1,497
Accounts and notes receivable 8,366 8,173
Inventories:
Finished goods 4,229 4,136
Purchased parts and fabricated assemblies 2,471 2,627
Other current assets 1,558 1,442
------- -------
Total current assets 21,661 20,947
------- -------
Property, plant and equipment (less accumulated
depreciation: April 30, 1998 - $5,767;
October 31, 1997 - $5,464) 6,396 6,312
Long-term investments and other assets 4,730 4,490
------- -------
$32,787 $31,749
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Notes payable and short-term borrowings $ 1,154 $ 1,226
Accounts payable 3,084 3,185
Employee compensation and benefits 1,945 1,723
Taxes on earnings 1,796 1,515
Deferred revenues 1,325 1,152
Other accrued liabilities 2,540 2,418
------- -------
Total current liabilities 11,844 11,219
------- -------
Long-term debt 2,448 3,158
Other liabilities 1,276 1,217
Shareholders' equity:
Preferred stock, $1 par value; 300,000,000
shares authorized; none issued
Common stock and capital in excess of $1 par
value; 2,400,000,000 shares authorized;
1,039,457,000 and 1,041,042,000 shares
issued and outstanding at April 30, 1998
and October 31, 1997, respectively 1,184 1,187
Retained earnings 16,035 14,968
------- -------
Total shareholders' equity 17,219 16,155
------- -------
$32,787 $31,749
======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
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
------------------ ----------------
1998 1997 1998 1997
Net revenue:
Products $10,338 $ 8,833 $20,496 $17,658
Services 1,702 1,507 3,360 2,977
------- ------- ------- -------
12,040 10,340 23,856 20,635
------- ------- ------- -------
Costs and expenses:
Cost of products sold and
services 8,224 6,743 16,061 13,437
Research and development 880 744 1,683 1,443
Selling, general and
administrative 2,064 1,751 3,936 3,372
------- ------- ------- -------
11,168 9,238 21,680 18,252
------- ------- ------- -------
Earnings from operations 872 1,102 2,176 2,383
Interest income and other, net 134 69 224 145
Interest expense 59 51 126 105
------- ------- ------- -------
Earnings before taxes 947 1,120 2,274 2,423
Provision for taxes 262 336 660 727
------- ------- ------- -------
Net earnings $ 685 $ 784 $ 1,614 $ 1,696
======= ======= ======= =======
Net earnings per share:
Basic $ 0.66 $ 0.77 $ 1.55 $ 1.67
======= ======= ======= =======
Diluted $ 0.65 $ 0.75 $ 1.51 $ 1.62
======= ======= ======= =======
Cash dividends declared
per share $ -- $ -- $ .28 $ .24
======= ======= ======= =======
Average shares used in
computing basic net
earnings per share 1,039 1,017 1,039 1,017
======= ======= ======= =======
Average shares and equivalents
used in computing diluted net
earnings per share 1,078 1,046 1,077 1,047
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
(Millions)
Six months ended
April 30
-----------------
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 1,614 $ 1,696
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 869 697
Deferred taxes on earnings (160) (314)
Changes in assets and liabilities:
Accounts and notes receivable (117) 251
Inventories 72 146
Accounts payable (118) 98
Taxes on earnings 278 372
Other current assets and liabilities 500 323
Other, net (89) (93)
------- -------
Net cash provided by operating activities 2,849 3,176
------- -------
Cash flows from investing activities:
Investment in property, plant and equipment (986) (1,040)
Disposition of property, plant and equipment 202 183
Purchase of short-term investments (1,962) (1,338)
Maturities of short-term investments 2,829 1,631
Other, net (7) 17
------- -------
Net cash provided by (used in)
investing activities 76 (547)
------- -------
Cash flows from financing activities:
Change in notes payable and short-term borrowings (378) (1,871)
Issuance of long-term debt 150 40
Payment of long-term debt (539) (107)
Issuance of common stock under employee stock plans 242 209
Repurchase of common stock (778) (440)
Dividends (291) (244)
Other, net (16) (2)
------- -------
Net cash (used in) financing activities (1,610) (2,415)
------- -------
Increase in cash and cash equivalents 1,315 214
Cash and cash equivalents at beginning of period 3,072 2,885
------- -------
Cash and cash equivalents at end of period $ 4,387 $ 3,099
======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
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, 1998 and October
31, 1997, the results of operations for the three and six months ended
April 30, 1998 and 1997, and the cash flows for the six months ended
April 30, 1998 and 1997.
The results of operations for the three and six months ended April 30,
1998 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 1997 Form 10-K.
2. The Company adopted Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings per Share," in the first quarter of fiscal
1998. Under SFAS 128, the Company presents two earnings per share
(EPS) amounts. 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. All prior period EPS amounts have been presented
to conform to the provisions of the statement.
Three Months Ended Six Months Ended
April 30 April 30
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions except
per share data)
Numerator:
Net earnings $ 685 $ 784 $1,614 $1,696
Adjustment for interest
expense, net of income
tax effect 6 - 12 -
------ ------ ----- ------
Net earnings, adjusted 691 784 1,626 1,696
Denominator:
Weighted-average shares
outstanding 1,039 1,017 1,039 1,017
Effect of dilutive
securities:
Dilutive options 29 29 28 30
Convertible zero-coupon
notes due 2017 10 - 10 -
------ ------ ------ -----
5
Dilutive potential
common shares 39 29 38 30
Weighted-average shares
and dilutive potential
common shares 1,078 1,046 1,077 1,047
Basic earnings per share $0.66 $0.77 $1.55 $1.67
Diluted earnings per share $0.65 $0.75 $1.51 $1.62
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
due to variations in the tax rates on foreign income.
4. The Company paid interest of $127 million and $152 million during the
six months ended April 30, 1998 and 1997, respectively. During the
same periods, the Company paid income taxes of $439 million and $600
million, respectively. The effect of foreign currency exchange rate
fluctuations on cash balances held in foreign currencies was not
material.
5. Effective May 20, 1998, the Company changed its state of incorporation
from California to Delaware. As a result of the change, the par value
of the Company's stock was decreased from $1.00 to $0.01 per share.
There was no impact on the Company's financial condition or results
of operations as a result of the reincorporation. The reincorporation
proposal had been approved by the Company's shareholders at the
Company's annual meeting of shareholders. An increase in the number
of authorized shares of the Company's stock from 2,400,000,000 to
4,800,000,000 was also approved by the shareholders.
6. On May 18, 1998, the Company's Board of Directors declared a quarterly
dividend on the Company's common stock for the third quarter of fiscal
1998 in the amount of 16 cents per share. This reflects a 14 percent
increase compared to the 14 cents per share paid for each of the first
and second quarters of the fiscal year. The third quarter dividend
will be paid to shareholders of record as of June 24, 1998 and is
payable on July 15, 1998.
6
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
---------------------
Net Revenue - Net revenue for the second quarter ended April 30, 1998 was
$12.0 billion, an increase of 16 percent from the same period of fiscal
1997. Product sales increased 17 percent and service revenue grew 13
percent over the corresponding period of fiscal 1997. Net revenue grew
14 percent to $6.7 billion internationally and 20 percent to $5.3 billion
in the U.S.
Strong growth continued in unit shipments of the Company's computers and
peripherals, especially in home and desktop PCs, personal and business
inkjets, and LaserJet printers and supplies, driven primarily by increased
market penetration and new product introductions in the first half of 1998.
In the second quarter and first half of fiscal 1998, competitive actions
designed to increase or maintain market share against intense competition
contributed to declines in the average selling prices for many of these
products, especially PCs, resulting in unit volume growth outpacing revenue
growth. Revenue growth was further constrained by continuing weakness in
the Asian markets. In particular, the test and measurement business was
impacted significantly by market slowing and unfavorable fluctuations in
foreign currency exchange rates for the first half of fiscal 1998. Without
the unfavorable impact of currency, the Company's net revenue growth would
have been approximately 22 percent in the first half of 1998.
Costs and Expenses - Cost of products sold and services as a percentage
of net revenue was 68.3 percent for the second quarter and 67.3 percent
for the first half of fiscal 1998, compared to 65.2 percent for the
second quarter and 65.1 percent for the first half of fiscal 1997. The
increase in the ratio over the second quarter and first half of fiscal
1997 was due primarily to intensifying pricing pressures leading to
declines in the average selling prices in the PC and printer businesses
without a corresponding reduction in the costs. To a lesser extent, cost
of sales was impacted by a charge for the consolidation of inkjet
manufacturing operations in the second quarter of fiscal 1998 and the
Company expects to incur additional charges related to the consolidation
in the third quarter. The Company expects continued variability in the
cost of sales trend over time, as competitive pricing pressures and mix
shifts continue.
Operating Expenses - Operating expenses as a percentage of net revenue
were 24.5 percent for the second quarter and 23.6 percent for the first
half of fiscal 1998, compared to 24.1 percent for the second quarter and
23.4 percent for the first half of fiscal 1997. Year-over-year growth in
operating expenses was 18 percent for the second quarter and 17 percent
for the first half of 1998. This growth, which outpaced the Company's
revenue growth for each period, resulted primarily from increased
7
marketing expenses incurred to support new product introductions such
as the modular ink delivery system for inkjets, several new LaserJet
products and next-generation workstations, and investment in research
and development. Increased employment to support growth in selected
businesses also contributed to the rise in operating expenses. In
addition, operating expenses were impacted by additional compensation
expense recorded on stock appreciation rights, resulting from rises in
the Company's stock price during the second quarter of fiscal 1998, and
a one-time charge for the write-off of in-process research and development
related to an acquisition. The Company remains focused on and committed
to controlling operating expenses and has taken measures designed to
reduce these ratios.
Provision for Taxes - The provision for taxes as a percentage of earnings
before taxes was 28 percent for the second quarter and 29 percent for the
first half of fiscal 1998 compared to 30 percent for the second quarter
and first half of fiscal 1997. The annual effective tax rate decreased
to 29 percent in the second quarter of fiscal 1998 due to resolution of
certain issues related to tax returns filed in previous years and changes
in the geographic mix of the Company's earnings.
Net Earnings - Net earnings for the second quarter of fiscal 1998 were
$685 million compared to net earnings of $784 million for the second
quarter of fiscal 1997. For the six months ended April 30, 1998, net
earnings were $1.6 billion compared to net earnings of $1.7 billion for
the first half of 1997. Earnings per share for the second quarter and
first half of fiscal 1998 on a diluted basis were 65 cents and $1.51
per share, respectively, on 1.08 billion weighted average shares and
equivalents, compared to 75 cents and $1.62 per share on 1.05 billion
weighted average shares for the second quarter and first half of fiscal
1997.
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, 1998, compared with $4.6 billion at October
31, 1997. 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 $2.8 billion during the first
six months of fiscal 1998, compared to $3.2 billion for the corresponding
period of fiscal 1997. The decrease in cash flows from operating
activities in fiscal 1998 was attributable primarily to increases in
accounts receivable and decreases in accounts payable, offset by
decreases in inventory levels during fiscal 1998. Inventory as a
percentage of net revenue declined to 14.5 percent at April 30, 1998 from
15.7 percent in the corresponding prior period. The decline in the ratio
is attributable to continued progress in supply-chain management. Accounts
and notes receivable increased 22 percent during the first six months of
fiscal 1998 compared to a decrease of 2 percent in the same period of
fiscal 1997. Growth in the Company's leasing business contributed to this
increase. This resulted in an increase in accounts and notes receivable
as a percentage of net revenue, from 17.2 percent in the prior period to
18.1 percent as of April 30, 1998.
8
Capital expenditures for the first six months of fiscal 1998 were $986
million, compared to $1.04 billion for the corresponding period in fiscal
1997.
The changes in short-term investment and borrowing activities during the
first six months of fiscal 1998 compared to the same period in fiscal
1997 resulted from a program of repatriation of short-term investments
from Puerto Rico in 1997 due to changes in tax laws. Cash from the
liquidation of those investments was used to pay down notes payable and
short-term borrowings in 1997. In 1998, net receipts from maturities of
short-term investments have been 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 the six months ended April 30, 1998, the Company
purchased and retired approximately 12.4 million shares for an aggregate
price of $778 million. During the six months ended April 30, 1997, the
Company purchased and retired approximately 8.3 million shares for an
aggregate price of $440 million.
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 customers'
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.
9
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 commercial
and retail 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
10
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 noncancelable 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 commercial and
retail distribution channels, and the Company's continuing relationships
with them, 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. For example, weakness in the Asian markets adversely affected
the Company's financial results as described above under "Results of
Operations -- Net Revenue."
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 portfolios. As more
fully described in the notes to the Company's 1997 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, 1998, the analysis indicated that such market movements would
11
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.
12
Year 2000. Many computer systems experience problems handling dates
beyond the year 1999. Therefore, some computer hardware and software
will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the readiness of its internal
computer systems and the compliance of its computer products and software
sold to customers for handling the year 2000. The Company expects to
implement successfully the systems and programming changes necessary to
address year 2000 issues, and does not believe that the cost of such
actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however,
that there will not be a delay in, or increased costs associated with,
the implementation of such changes, and the Company's inability to
implement such changes could have an adverse effect on future results of
operations or financial condition.
Certain hardware and software products currently installed at customer
sites will require upgrade or other remediation to become year 2000
compliant. The Company believes that it is not legally responsible for
costs incurred by its customers to achieve their year 2000 compliance.
However, the Company is taking steps to identify affected customers,
raise customer awareness related to non-compliance of the Company's older
products, and assist the customer base to assess their risks. The
Company may see increasing customer satisfaction costs related to these
actions over the next few years. Since customer satisfaction programs
are ongoing, year 2000 complications are not fully known, and potential
liability issues in certain countries are unclear, the potential impact
on the Company's financial condition and results of operations is not
known at this time.
The Company is also assessing and addressing the possible effects on the
Company's operations of the year 2000 readiness of key suppliers and
subcontractors. The Company's reliance on suppliers and subcontractors,
and therefore, on the proper functioning of their information systems and
software, means that failure to address year 2000 issues could have a
material impact on the Company's operations and financial results.
However, the potential impact and related costs are not known at this
time.
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.
13
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 2. Effective May 20, 1998, the Company changed its state of
incorporation from California to Delaware. The reincorporation
was accomplished through a merger (the "Merger") of Hewlett-
Packard Company, a California corporation ("HP California"), into
its wholly owned Delaware subsidiary of the same name ("HP
Delaware"). As a result of the Merger, each outstanding share of
HP California Common Stock, par value $1.00 per share, was
automatically converted into one share of HP Delaware Common
Stock, par value $0.01 per share. The reincorporation proposal
was approved by the Company's shareholders at the Company's
annual meeting of shareholders on February 24, 1998. See also
Item 6(b)(ii) below.
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 16 of this report.
(b) Reports on Form 8-K:
(i) Report on Form 8-K filed May 20, 1998, containing Hewlett-
Packard Company's news releases dated May 13 and May 15,
1998 with respect to its earning release for the second
quarter of fiscal 1998.
(ii) Report on Form 8-K filed May 20, 1998 with respect to
Hewlett-Packard Company's change in state of incorporation.
14
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 2, 1998 By:/s/ Robert P. Wayman
--------------------------
Robert P. Wayman
Executive Vice President,
Finance and Administration
(Chief Financial Officer)
15
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
-------------
Exhibits:
1. Not applicable.
2. None.
3(a). Certificate of Reincorporation.
3(b). By-Laws.
4. None.
5-9. Not applicable.
10. None.
11. Statement re computation of per share earnings.
12. Statement re ratio of earnings to fixed charges.
13-14. 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.
16