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 July 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number: 1-4423
HEWLETT-PACKARD COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 94-1081436
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(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
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______________________________________________________________________________
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 July 31, 1999
- ----------------------------- ----------------------------
Common Stock, $0.01 par value 1.019 billion shares
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX
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Page No.
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Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Balance Sheet
July 31, 1999 (Unaudited) and October 31, 1998 3
Consolidated Condensed Statement of Earnings
Three and nine months ended July 31, 1999
and 1998 (Unaudited) 4
Consolidated Condensed Statement of Cash Flows
Nine months ended July 31, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements
(Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition, Results of Operations and Factors That May
Affect Future Results (Unaudited) 8-20
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21
Part II Other Information 21
Item 6. Exhibits and Reports on Form 8-K. 21
Signature 22
Exhibit Index 23
Item 1. Financial Statements.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
------------------------------------
(Millions except par value and number of shares)
July 31 October 31
1999 1998
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(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 6,052 $ 4,046
Short-term investments 54 21
Accounts receivable 4,880 5,104
Financing receivables 1,886 1,494
Inventory 5,040 4,699
Other current assets 2,773 3,143
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Total current assets 20,685 18,507
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Property, plant and equipment (less accumulated
depreciation: July 31, 1999 - $4,476;
October 31, 1998 - $4,160) 4,497 4,877
Long-term investments and other assets 5,466 5,240
Net assets of discontinued operations 3,422 3,084
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$ 34,070 $ 31,708
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable and short-term borrowings $ 2,366 $ 1,245
Accounts payable 2,986 2,768
Employee compensation and benefits 1,162 1,195
Taxes on earnings 1,425 2,796
Deferred revenues 1,409 1,248
Other accrued liabilities 3,001 2,622
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Total current liabilities 12,349 11,874
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Long-term debt 1,824 2,063
Other liabilities 888 852
Stockholders' equity:
Preferred stock, $0.01 par value; 300,000,000
shares authorized; none issued - -
Common stock, $0.01 par value;
4,800,000,000 shares authorized;
1,018,876,000 and 1,015,403,000 shares
issued and outstanding at July 31, 1999
and October 31, 1998, respectively 10 10
Common stock in excess of par value 284 -
Retained earnings 18,715 16,909
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Total stockholders' equity 19,009 16,919
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$ 34,070 $ 31,708
========== ==========
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 Nine months ended
July 31 July 31
---------------------- ----------------------
1999 1998 1999 1998
Net revenue:
Products $ 8,697 $ 7,717 $26,374 $24,879
Services 1,621 1,465 4,634 4,244
------- ------- ------- -------
10,318 9,182 31,008 29,123
Costs and expenses:
Cost of products sold and
services 7,251 6,507 21,618 20,506
Research and development 619 585 1,828 1,776
Selling, general and
administrative 1,661 1,417 4,783 4,369
------- ------- ------- -------
9,531 8,509 28,229 26,651
------- ------- ------- -------
Earnings from operations 787 673 2,779 2,472
Interest income and other, net 204 155 547 392
Interest expense 45 54 137 180
------- ------- ------- -------
Earnings from continuing
operations before taxes 946 774 3,189 2,684
Provision for taxes 250 220 845 765
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Net earnings from
continuing operations 696 554 2,344 1,919
------- ------- ------- -------
Discontinued Operations:
Earnings from discontinued
operations, net of taxes 157 67 387 316
------- ------- ------- -------
Net earnings $ 853 $ 621 $ 2,731 $ 2,235
======= ======= ======= =======
Basic net earnings per share:
Continuing operations $ 0.69 $ 0.53 $ 2.32 $ 1.84
Discontinued operations 0.15 0.07 0.38 0.31
------- ------- ------- -------
$ 0.84 $ 0.60 $ 2.70 $ 2.15
======= ======= ======= =======
Diluted net earnings per share:
Continuing operations $ 0.66 $ 0.52 $ 2.24 $ 1.79
Discontinued operations 0.15 0.06 0.37 0.30
------- ------- ------- -------
$ 0.81 $ 0.58 $ 2.61 $ 2.09
======= ======= ======= =======
Cash dividends declared
per share $ 0.32 $ 0.32 $ 0.64 $ 0.60
======= ======= ======= =======
Average shares used in
computing basic net
earnings per share 1,010 1,035 1,011 1,039
======= ======= ======= =======
Average shares and equivalents
used in computing diluted net
earnings per share 1,056 1,076 1,054 1,081
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
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(Unaudited)
(Millions)
Nine months ended
July 31
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1999 1998
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Cash flows from operating activities:
Net earnings from continuing operations $ 2,344 $ 1,919
Adjustments to reconcile net earnings from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 965 975
Deferred taxes on earnings 583 (173)
Change in assets and liabilities:
Accounts and financing receivables (467) (193)
Inventory (348) 180
Accounts payable 220 (264)
Taxes on earnings (1,333) 370
Other current assets and liabilities 162 108
Other, net 230 161
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Net cash provided by operating activities 2,356 3,083
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Cash flows from investing activities:
Investment in property, plant and equipment (757) (1,199)
Disposition of property, plant and equipment 307 216
Purchase of short-term investments (901) (2,750)
Maturities of short-term investments 965 4,086
Other, net (101) (65)
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Net cash provided by (used in) investing
activities (487) 288
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Cash flows from financing activities:
Increase in notes payable and short-term borrowings 1,528 290
Issuance of long-term debt 245 206
Payment of long-term debt (854) (569)
Issuance of common stock under employee stock plans 548 369
Repurchase of common stock (891) (1,121)
Dividends (488) (457)
Other, net - 1
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Net cash provided by (used in)
financing activities 88 (1,281)
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Net cash provided by discontinued operations 49 149
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Increase in cash and cash equivalents 2,006 2,239
Cash and cash equivalents at beginning of period 4,046 3,072
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Cash and cash equivalents at end of period $ 6,052 $ 5,311
========= =========
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 July 31, 1999 and October 31, 1998, the results of
operations for the three and nine months ended July 31, 1999 and 1998, and
the cash flows for the nine months ended July 31, 1999 and 1998.
The results of operations for the three and nine months ended July 31, 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 annual report on Form 10-K.
2. On March 2, 1999, the Company announced its intention, subject to certain
conditions, to launch a new company (which has been named Agilent
Technologies, Inc., "Agilent Technologies"), through a distribution of
Agilent Technologies' common stock to the Company's stockholders in the
form of a tax-free spin-off. Agilent Technologies is composed of the
Company's test-and-measurement, semiconductor products, chemical analysis
and healthcare solutions businesses. The spin-off is expected to be
completed by July 31, 2000, and will follow a planned initial public
offering of approximately 15 percent of Agilent Technologies' common stock.
Subsequent to the end of the fiscal third quarter, the Company's management
and Board of Directors completed the plan of disposition for Agilent
Technologies. In addition, the Company received a ruling from the
Internal Revenue Service that the spin-off would be tax-free to the Company
and its stockholders. Accordingly, because the disposition plans were
finalized before the Company's Form 10-Q was filed for the third quarter,
the Company's consolidated condensed financial statements and notes
included herein reflect Agilent Technologies' businesses as a discontinued
operation in accordance with Accounting Principles Board Opinion No. 30.
Net revenue and net earnings from Agilent Technologies' operations, which
include results through July 31, 1999, are summarized below. Net earnings
from Agilent Technologies' operations for the period from August 1, 1999
through the spin-off are expected to exceed the estimated costs to effect
the spin-off.
(In Millions) Three Months Ended Nine Months Ended
July 31 July 31
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1999 1998 1999 1998
--------- --------- --------- ---------
Net revenue, including revenue from Hewlett-Packard Co. $ 2,087 $ 1,875 $ 5,883 $ 5,965
--------- --------- --------- ---------
Earnings from discontinued operations before taxes $ 222 $ 99 $ 553 $ 464
Provision for taxes 65 32 166 148
--------- --------- --------- ---------
Earnings from discontinued
operations, net of taxes $ 157 $ 67 $ 387 $ 316
--------- --------- --------- ---------
Net assets of discontinued operations at July 31, 1999 and October 31, 1998 are
summarized below:
(In Millions) July 31 October 31
1999 1998
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Current assets $ 3,323 $ 3,075
Property, plant and equipment,
net 1,448 1,481
Other assets 481 493
Current liabilities (1,467) (1,599)
Other liabilities (363) (366)
--------- ----------
Net assets of discontinued
operations $ 3,422 $ 3,084
--------- ----------
3. The Company's basic EPS is calculated based on net earnings available to
common stockholders 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 Nine months ended
July 31 July 31
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1999 1998 1999 1998
--------- --------- --------- --------
(in millions except
per share data)
Numerator:
Net earnings from
continuing operations $ 696 $ 554 $ 2,344 $ 1,919
Adjustment for interest
expense, net of income
tax effect 5 6 16 19
--------- --------- --------- --------
Net earnings from
continuing operations,
adjusted 701 560 2,360 1,938
Net earnings from discontinued
operations 157 67 387 316
--------- --------- --------- --------
Net earnings, adjusted $ 858 $ 627 $ 2,747 $ 2,254
========= ========= ========= ========
Denominator:
Weighted-average shares
outstanding 1,010 1,035 1,011 1,039
Effect of dilutive securities:
Dilutive options 35 31 32 32
Convertible zero-coupon
notes due 2017 11 10 11 10
--------- --------- --------- --------
Dilutive potential
common shares 46 41 43 42
--------- --------- --------- --------
Weighted-average shares and
dilutive potential
common shares 1,056 1,076 1,054 1,081
========= ========= ========= ========
Basic earnings per share:
Continuing operations $ 0.69 $ 0.53 $ 2.32 $ 1.84
Discontinued operations 0.15 0.07 0.38 0.31
--------- --------- --------- --------
$ 0.84 $ 0.60 $ 2.70 $ 2.15
========= ========= ========= ========
Diluted earnings per share:
Continuing operations $ 0.66 $ 0.52 $ 2.24 $ 1.79
Discontinued operations 0.15 0.06 0.37 0.30
--------- --------- --------- --------
$ 0.81 $ 0.58 $ 2.61 $ 2.09
========= ========= ========= ========
4. 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.
5. Inventory
(In Millions)
July 31 October 31
1999 1998
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Finished goods $ 3,715 $ 3,553
Purchased parts and fabricated
assemblies 1,325 1,146
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$ 5,040 $ 4,699
======= =======
6. The Company paid interest of $163 million and $177 million during the nine
months ended July 31, 1999 and 1998, respectively. During the same periods,
the Company paid income taxes of $1,580 million and $728 million,
respectively. The effect of foreign currency exchange rate fluctuations on
cash balances held in foreign currencies was not material.
7. 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, as amended, is effective for
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, FASB's 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 Stockholder
or Stockholders Have Certain Approval or Veto Rights." This consensus
precludes investors from consolidating majority-owned investees when a
minority stockholder or stockholders hold substantive participating rights,
which, individually or in the aggregate, would allow such minority
stockholders to participate in significant decisions made in the ordinary
course of business. 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.
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 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 $1.6 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
On March 2, 1999, the Company announced its intention, subject to certain
conditions, to launch a new company (which has been named Agilent Technologies,
Inc., "Agilent Technologies"), through a distribution of Agilent Technologies'
common stock to the Company's stockholders in the form of a tax-free spin-off.
Agilent Technologies is composed of the Company's test-and-measurement,
semiconductor products, chemical analysis and healthcare solutions businesses.
The spin-off is expected to be completed by July 31, 2000, and will follow a
planned public offering of approximately 15 percent of Agilent Technologies'
common stock.
Subsequent to the end of the fiscal third quarter, the Company's management and
Board of Directors completed the plan of disposition for Agilent Technologies.
In addition, the Company received a ruling from the Internal Revenue
Service that the spin-off would be tax-free to the Company and its stockholders.
Accordingly, because the disposition plans were finalized before the Company's
Form 10-Q was filed for the third quarter, the Company's consolidated condensed
financial statements and notes included herein reflect Agilent Technologies'
businesses as a discontinued operation in accordance with Accounting Principles
Board Opinion No. 30.
Unless otherwise indicated, the following discussion is on a continuing
operations basis.
RESULTS OF OPERATIONS
- ---------------------
Net Revenue - Net revenue for the quarter ended July 31, 1999 was $10.3 billion,
an increase of 12 percent from the same period of fiscal 1998. Product sales
increased 13 percent and service revenue grew 11 percent over the corresponding
period of fiscal 1998. Net revenue grew 15 percent to $5.6 billion
internationally and 10 percent to $4.7 billion in the U.S.
Net revenue for the first nine months of fiscal 1999 was $31.0 billion, an
increase of 6 percent from the same period of fiscal 1998. Product sales
increased 6 percent and service revenue grew 9 percent over the corresponding
period of fiscal 1998. Net revenue grew 8 percent to $17.3 billion
internationally and 5 percent to $13.7 billion in the U.S.
Currency fluctuations did not have a material impact on the Company's net
revenue growth in either the third quarter or the first nine months of fiscal
1999.
Net revenue growth for the third quarter and first nine months of fiscal 1999
was primarily attributable to strong demand for the Company's home personal
computers, PC servers and information storage products, as well as color
LaserJet and home inkjet printers, scanners and related printer supplies. Solid
growth in service revenue, primarily in customer support, contributed to overall
net revenue growth. Net revenue growth in the third quarter also was bolstered
by a turnaround in several product areas including commercial desktop and
notebook PCs and midrange UNIX servers, fueled by the introduction
of the N-class server. The strong growth in the aforementioned product areas was
partially offset by weakness in enterprise storage, reflecting the Company's
transition to a new high-end storage strategy.
Costs of Products Sold and Services - Cost of products sold and services as a
percentage of net revenue was 70.3 percent for the third quarter and 69.7
percent for the first nine months of fiscal 1999, compared to 70.9 percent for
the third quarter and 70.4 percent for the first nine months of fiscal 1998. The
decrease in the ratio compared to the third quarter and first nine months of
fiscal 1998 was primarily attributable to a more stable pricing environment for
PCs and improvements in supply chain management. In addition, increased volume
in printer supplies had a favorable impact on the cost of sales ratio for the
first nine months of fiscal 1999. These decreases in the cost of sales ratios
were partially offset by higher costs on certain components purchased from
Japanese suppliers as a result of the strengthening Yen. The Company expects
continued variability in the cost of sales trend over time as competitive
pricing pressures and mix shifts to lower gross margin products continue.
Operating Expenses - Operating expenses as a percentage of net revenue were 22.1
percent for the third quarter and 21.3 percent for the first nine months of
fiscal 1999, compared to 21.8 percent for the third quarter and 21.1 percent for
the first nine months of fiscal 1998. Year-over-year growth in operating
expenses was 14 percent for the third quarter and 8 percent for the first nine
months of fiscal 1999. The growth in operating expenses reflected the Company's
increased marketing expenses incurred to support new product introductions in
several businesses, as well as promotions relating to e-services. In addition,
growth in selling, general and administrative expenses was impacted by costs
associated with the realignment of Hewlett-Packard Co. into two companies and
higher than normal compensation expense for stock appreciation rights, which
reflected the rise in the Company's stock price during the third quarter.
Excluding these additional costs and expenses, operating expenses would have
increased 9 percent and would have decreased approximately 0.6 percentage points
as a percentage of revenue when compared to the third quarter of fiscal 1998.
Reducing the rate of operating expense growth below the rate of net revenue
growth remains a major focus of the Company.
Provision for Taxes - The provision for taxes as a percentage of earnings before
taxes was 26.5 percent for the third quarter and first nine months of fiscal
1999 compared to 28.5 percent for the third quarter and first nine months of
fiscal 1998. The annual effective tax rate decreased to 26.5 percent in the
first quarter of fiscal 1999, primarily as a result of changes in the expected
geographic mix of the Company's earnings.
Net Earnings from Continuing Operations - Net earnings from continuing
operations for the third quarter of fiscal 1999 were $696 million compared to
net earnings of $554 million for the third quarter of fiscal 1998. For the nine
months ended July 31, 1999, net earnings were $2.3 billion compared to net
earnings of $1.9 billion for the first nine months of fiscal 1998. Earnings per
share for the third quarter and first nine months of fiscal 1999 on a diluted
basis were 66 cents and $2.24 per share, respectively, on 1.06 and 1.05 billion
weighted average shares and equivalents, compared to 52 cents and $1.79 per
share on 1.08 billion weighted average shares for the corresponding periods of
fiscal 1998.
Discontinued Operations - Net earnings from discontinued operations for the
third quarter of fiscal 1999 were $157 million compared to $67 million for the
third quarter of fiscal 1998. For the nine months ended July 31, 1999, net
earnings from discontinued operations were $387 million compared to $316 million
for the first nine months of fiscal 1998. Net earnings from discontinued
operations include the results of the businesses that comprise Agilent
Technologies. Refer to the Notes To Consolidated Condensed Financial Statements
for a summary of Agilent Technologies net revenue and net earnings for the
three and nine months ended July 31, 1999 and 1998, and net assets as of July
31, 1999, and October 31, 1998.
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources - The Company's financial position remains
strong, with cash and cash equivalents and short-term investments of $6.1
billion at July 31, 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 $2.4 billion during the first nine
months of fiscal 1999, compared to $3.1 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 during the first nine months of
fiscal 1999, partially offset by increased net earnings and a decrease in net
deferred tax assets. Inventory as a percentage of net revenue declined to 12.2
percent at July 31, 1999 from 13.3 percent in the corresponding prior period.
The decline in the ratio is attributable to continued progress in supply-chain
management. Overall, there was an increase in accounts and financing receivables
as a percentage of net revenue, from 15.2 percent in the prior-year period to
16.4 percent as of July 31, 1999. The change in this ratio reflected an increase
in sales-type lease financing receivables, which increased 26 percent during the
first nine months of fiscal 1999.
Property, plant and equipment as a percentage of net revenue declined to 10.9
percent at July 31, 1999 from 12.5 percent in the corresponding period. Capital
expenditures for the first nine months of fiscal 1999 were $757 million,
compared to $1.2 billion for the corresponding period in fiscal 1998. The
decrease in the fixed asset ratio and related capital expenditures in 1999 was
due in part to a Company-wide emphasis to reduce non-essential expenditures,
increase outsourcing of certain production processes and lease more facilities
to provide operational flexibility.
The change in short-term borrowing activities during the first nine 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 to maintain short-term
working capital requirements. In 1998, net receipts from maturities of short-
term investments were used to pay down both short- and long-term debt and to
repurchase stock.
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. In
May 1999, the Company's Board of Directors authorized the repurchase of an
additional $1 billion of the Company's common stock under the systematic
program. 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 a separate incremental plan. Under both these plans, during
the nine months ended July 31, 1999, the Company purchased and retired
approximately 12.7 million shares for an aggregate price of $891 million. During
the nine months ended July 31, 1998, the Company purchased and retired
approximately 18.2 million shares for an aggregate price of $1.1 billion. As of
July 31, 1999, the Company has remaining authorization from the Board of
Directors for future repurchases under both plans of approximately $3.2 billion.
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
supply of the Company and its competitors 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 stockholders, 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 July 31,
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. In
addition to the spin-off of Agilent Technologies, which is described above, the
Company, as a matter of course, 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 financial statements taken 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. Another related issue which could also lead to incorrect
calculations or failure, is the fact that 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 Year 2000 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 for those businesses that comprise its continuing operations, it will
have spent a total of approximately $160 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 approached its Y2K IT internal readiness program in the following
four phases: (1) assessment, (2) planning, (3) preparation and (4)
implementation. The assessment phase involved 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 consisted 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, involved 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 set July 31, 1999 as the target date by which its critical IT
applications would be Y2K compliant. The assessment, planning and preparation
phases have been completed. As of August 31, 1999, the implementation phase is
nearly 100 percent complete. For the handful of remaining applications, the work
is pending a third-party patch or upgrade to complete Y2K readiness. For each of
these cases, target completion dates in the near future are documented and there
are back-up plans to ensure Y2K readiness.
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.
Substantially all Y2K testing, internal mitigation and remediation activities,
and business contingency plans have been completed 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 are
being 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 evaluate 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 has plans to accommodate increased levels of customer assistance in the
last months of calendar 1999 and the first months of 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 significantly Y2K issues may affect customer spending
patterns. As customers focus their attention in the near term on preparing their
own businesses for the year 2000, they may delay purchases of new applications,
services and systems from the Company. As a result, this may affect the
Company's future revenues and revenue patterns. However, there is no information
to date that any such impact would materially affect the Company's revenue
growth.
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 analyses were completed with the Company's base of
suppliers and contingency plans are now being developed and tested. All critical
surveys and testing efforts were 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 has been identifying and analyzing the most reasonably likely worst-
case scenarios for third-party relationships affected by Y2K. These scenarios
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.
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 23
of this report.
(b) Reports on Form 8-K:
None
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: September 20, 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. None.
3(b). Registrant's Amended Bylaws
4. None
5-9. Not applicable.
10(ee). Transition Agreement, dated May 20, 1999, between Registrant
and Lewis E. Platt
10(ff). Employment Agreement, dated May 20, 1999, between Registrant
and Robert P. Wayman
10(gg). Employment Agreement, dated July 17, 1999, between Registrant
and Carleton S. Fiorina
10(hh). Executive Transition Program
10(ii). Incentive Stock Plan Stock Option Agreement (Non-Qualified),
dated July 17, 1999, between Registrant and Carleton S. Fiorina
10(jj). Restricted Stock Agreement, dated July 17, 1999, between
Registrant and Carleton S. Fiorina
10(kk). Restricted Stock Unit Agreement, dated July 17, 1999, between
Registrant and Carleton S. Fiorina
11. See Item 3 in Notes to Consolidated Condensed Financial
Statements on Page 7.
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.
26