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, 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 July 31, 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
July 31, 1998 (Unaudited) and October 31, 1997 2
Consolidated Condensed Statement of Earnings
Three and nine months ended July 31, 1998
and 1997 (Unaudited) 3
Consolidated Condensed Statement of Cash Flows
Nine months ended July 31, 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 13
Part II. Other Information
Item 2. Changes in Securities 13
Item 6. Exhibits and Reports on Form 8-K. 14
Signature 15
Exhibit Index 16
<PAGE> 1
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
1998 1997
----------- ----------
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 5,311 $ 3,072
Short-term investments 176 1,497
Accounts and notes receivable 8,030 8,173
Inventories:
Finished goods 4,437 4,136
Purchased parts and fabricated assemblies 2,333 2,627
Other current assets 1,640 1,442
------- -------
Total current assets 21,927 20,947
------- -------
Property, plant and equipment (less accumulated
depreciation: July 31, 1998 - $5,983;
October 31, 1997 - $5,464) 6,471 6,312
Long-term investments and other assets 4,897 4,490
------- -------
$33,295 $31,749
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable and short-term borrowings $ 2,093 $ 1,226
Accounts payable 2,824 3,185
Employee compensation and benefits 1,620 1,723
Taxes on earnings 1,900 1,515
Deferred revenues 1,374 1,152
Other accrued liabilities 2,726 2,418
------- -------
Total current liabilities 12,537 11,219
------- -------
Long-term debt 2,189 3,158
Other liabilities 1,253 1,217
Stockholders' equity:
Preferred stock, $1 par value; 300,000,000
shares authorized; none issued
Common stock and capital in excess of $0.01 par
value; 4,800,000,000 shares authorized;
1,037,117,000 and 1,041,042,000 shares
issued and outstanding at July 31, 1998
and October 31, 1997, respectively 993 1,187
Retained earnings 16,323 14,968
------- -------
Total stockholders' equity 17,316 16,155
------- -------
$33,295 $31,749
======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE> 2
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
------------------ ----------------
1998 1997 1998 1997
Net revenue:
Products $ 9,213 $ 8,900 $29,709 $26,558
Services 1,766 1,571 5,126 4,548
------- ------- ------- -------
10,979 10,471 34,835 31,106
------- ------- ------- -------
Costs and expenses:
Cost of products sold and
services 7,505 7,053 23,566 20,490
Research and development 815 777 2,498 2,220
Selling, general and
administrative 1,885 1,816 5,821 5,188
------- ------- ------- -------
10,205 9,646 31,885 27,898
------- ------- ------- -------
Earnings from operations 774 825 2,950 3,208
Interest income and other, net 154 109 378 254
Interest expense 54 53 180 158
------- ------- ------- -------
Earnings before taxes 874 881 3,148 3,304
Provision for taxes 253 264 913 991
------- ------- ------- -------
Net earnings $ 621 $ 617 $ 2,235 $ 2,313
======= ======= ======= =======
Net earnings per share:
Basic $ 0.60 $ 0.60 $ 2.15 $ 2.26
======= ======= ======= =======
Diluted $ 0.58 $ 0.58 $ 2.09 $ 2.20
======= ======= ======= =======
Cash dividends declared
per share $ .32 $ .28 $ .60 $ .52
======= ======= ======= =======
Average shares used in
computing basic net
earnings per share 1,035 1,031 1,039 1,022
======= ======= ======= =======
Average shares and equivalents
used in computing diluted net
earnings per share 1,076 1,060 1,081 1,051
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE> 3
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
(Millions)
Nine months ended
July 31
-----------------
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 2,235 $ 2,313
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,323 1,105
Deferred taxes on earnings (310) (371)
Changes in assets and liabilities:
Accounts and notes receivable 306 128
Inventories 3 37
Accounts payable (378) 169
Taxes on earnings 382 157
Other current assets and liabilities 257 254
Other, net (305) (357)
------- ------
Net cash provided by operating activities 3,513 3,435
------- ------
Cash flows from investing activities:
Investment in property, plant and equipment (1,522) (1,599)
Disposition of property, plant and equipment 272 255
Purchases of short-term investments (2,750) (2,588)
Maturities of short-term investments 4,086 2,915
Other, net (50) 17
------- -------
Net cash provided by (used in)
investing activities 36 (1,000)
------- -------
Cash flows from financing activities:
Change in notes payable and short-term borrowings 290 (1,870)
Issuance of long-term debt 206 47
Payment of long-term debt (577) (112)
Issuance of common stock under employee stock plans 369 280
Repurchase of common stock (1,121) (598)
Dividends (457) (387)
Other, net (20) ---
------- -------
Net cash (used in) financing activities (1,310) (2,640)
------- -------
Increase in cash and cash equivalents 2,239 205
Cash and cash equivalents at beginning of period 3,072 2,885
------- -------
Cash and cash equivalents at end of period $ 5,311 $ 2,680
======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE> 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 July 31, 1998 and October
31, 1997, the results of operations for the three and nine months
ended July 31, 1998 and 1997, and the cash flows for the nine months
ended July 31,1998 and 1997.
The results of operations for the three and nine months ended July 31,
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)
mounts. 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 Nine Months Ended
July 31 July 31
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions except
per share data)
Numerator:
Net earnings $ 621 $ 617 $2,235 $2,313
Adjustment for interest
expense, net of income
tax effect 6 - 19 -
------ ------ ----- ------
Net earnings, adjusted $ 627 $ 617 $2,254 $2,313
Denominator:
Weighted-average shares
outstanding 1,035 1,031 1,039 1,022
Effect of dilutive
securities:
Dilutive options 31 29 32 29
Convertible zero-coupon
notes due 2017 10 - 10 -
------ ------ ------ -----
<PAGE> 5
Dilutive potential
common shares 41 29 42 29
Weighted-average shares
and dilutive potential
common shares 1,076 1,060 1,081 1,051
Basic earnings per share $ 0.60 $ 0.60 $ 2.15 $ 2.26
Diluted earnings per share $ 0.58 $ 0.58 $ 2.09 $ 2.20
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 $177 million and $223 million during the
nine months ended July 31, 1998 and 1997, respectively. During the same
periods, the Company paid income taxes of $728 million and $1,113
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. In June 1998 the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as
assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is
effective for fiscal years beginning after June 15, 1999. The Company
will adopt the standard in the first quarter of fiscal 2000 and is in
the process of determining the impact that adoption will have on its
consolidated financial statements.
7. On July 21, 1998, the Company announced a new authorization for the
repurchase of up to $2 billion of the Company's common stock in the open
market or in private transactions. These repurchases are in addition to
the Company's existing systematic share-repurchase program.
<PAGE> 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 third quarter ended July 31, 1998 was
$11.0 billion, an increase of 5 percent from the same period of fiscal 1997.
Product sales increased 4 percent and service revenue grew 12 percent over the
corresponding period of fiscal 1997. Net revenue grew 1 percent to $5.8
billion internationally and 9 percent to $5.2 billion in the U.S.
Net revenue for the first nine months of fiscal 1998 was $34.8 million, an
increase of 12 percent from the same period of fiscal 1997. Product sales
increased 12 percent and service revenue grew 13 percent over the
corresponding period of fiscal 1997. Net revenue grew 8 percent to $19.0
billion internationally and 17 percent to $15.8 billion in the U.S. Strong net
revenue growth for the first six months of fiscal 1998 was offset partially by
weakness in the third quarter, resulting in a slight increase in the rate of
growth for the first nine months of fiscal 1998 as compared to the same period
in fiscal 1997.
Without the unfavorable impact of currency, the Company's net revenue growth
would have been approximately 9 percent in the third quarter and 17 percent in
the first nine months of 1998.
Net revenue growth for the third quarter of fiscal 1998 was led by UNIX
servers and enterprise storage products, due in part to shipments of backlog.
Information storage products also posted strong unit and revenue growth. The
rate of revenue growth slowed from the second quarter of fiscal 1998 and the
third quarter of fiscal 1997 due to a combination of factors. Revenues in the
PC business were flat as a result of continuing declines in average selling
prices and shifts to lower-end products. For the second quarter in a row, the
decline in average selling prices offset the strong unit growth in PCs.
Hardcopy revenue growth was moderate as the Company focused on reducing
inventory in the channel ahead of new product offerings later in the fiscal
year. Revenue growth was further constrained by continuing weakness in the
Asian markets. In particular, test and measurement was impacted significantly
by lower demand in Asia, as well as declines in the market for semiconductor
test equipment, and unfavorable fluctuations in foreign currency exchange
rates.
Costs and Expenses - Cost of products sold and services as a percentage of net
revenue was 68.4 percent for the third quarter and 67.7 percent for the first
nine months of fiscal 1998, compared to 67.4 percent for the third quarter and
65.9 percent for the first nine months of fiscal 1997. The increase in the
ratio over the third quarter and first nine months of fiscal 1997 was
attributable to continuing pricing pressures and shifts to low end products,
specifically in the PC and hardcopy businesses. However, in an effort to
return to profitability in the PC business, the Company changed some of its
pricing practices which helped mitigate the impact of declining average
selling prices. Additionally, the macro-economic environment in which the
Company operates worsened, which impacted profitability. The test and
measurement business experienced a deterioration in margins as a result of
declining revenue. To a lesser extent, charges taken for the consolidation of
<PAGE> 7
the Company's inkjet manufacturing operations in the second and third quarters
of 1998 contributed to the increase in cost of sales for the first nine months
of 1998. 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
24.6 percent for the third quarter and 23.8 percent for the first nine months
of fiscal 1998, compared to 24.7 percent for the third quarter and 23.8
percent for the first nine months of fiscal 1997. Year-over-year growth in
operating expenses was 4 percent for the third quarter and 12 percent for the
first nine months of 1998. Research and development expenses increased 5
percent and selling, general and administrative expenses increased 4 percent
over the third quarter of fiscal 1997. The decrease in the rate of growth in
the third quarter compared to the second quarter of fiscal 1998 was
attributable to Company-wide cost reduction programs which resulted in
significant decreases in certain variable costs such as travel and
discretionary marketing programs. Fluctuations in foreign currency exchange
rates favorably impacted the operating expense growth rate by 2 percentage
points in the third quarter and over 2 percentage points in the first nine
months of fiscal 1998. In addition, reduced compensation expense recorded on
stock appreciation rights favorably impacted operating expenses by 2 percentage
points in the third quarter of fiscal 1998. The Company remains focused on and
committed to controlling operating expenses and has taken measures designed to
reduce these ratios.
Actions designed to reduce costs and expenses are currently underway
throughout the Company in order to achieve more competitive cost and expense
structures going forward. Based on current plans, the Company expects to incur
approximately $150 million of special charges in the fourth quarter of fiscal
1998 related to these actions. The charges will primarily impact cost of
sales, and to a lesser extent, operating expenses.
Provision for Taxes - The provision for taxes as a percentage of earnings
before taxes was 29 percent for the third quarter and first nine months of
fiscal 1998 compared to 30 percent for the same periods of fiscal 1997.
Net Earnings - Net earnings for the third quarter of fiscal 1998 were $621
million compared to net earnings of $617 million for the third quarter of
fiscal 1997. For the nine months ended July 31, 1998, net earnings were $2.2
billion compared to net earnings of $2.3 billion for the first nine months of
1997. Earnings per share for the third quarter and first nine months of
fiscal 1998 on a diluted basis were 58 cents and $2.09 per share,
respectively, on 1.08 billion weighted average shares and equivalents,
compared to 58 cents and $2.20 per share on 1.06 and 1.05 billion weighted
average shares for the corresponding periods 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 $5.5
billion at July 31, 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 $3.5 billion during the first nine
months of fiscal 1998, compared to $3.4 billion for the corresponding period
of fiscal 1997. Cash flows from operating activities in fiscal 1998 was
<PAGE> 8
attributable primarily to net income earned in the period. Working capital
remained consistent year over year. Inventory as a percentage of net revenue
declined to 14.5 percent at July 31, 1998 from 15.6 percent in the
corresponding prior period. The decline in the ratio is attributable to
continued progress in supply-chain management. Accounts and notes receivable
decreased as a percentage of net revenue, from 17.5 percent in the prior
period to 17.2 percent as of July 31, 1998.
Capital expenditures for the first nine months of fiscal 1998 were $1.5
billion, compared to $1.6 billion for the corresponding period in fiscal 1997.
The changes in short-term investment and borrowing activities during the first
nine 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 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. 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. During the nine months ended July 31, 1997, the Company purchased
and retired approximately 11.3 million shares for an aggregate price of $598
million. In July 1998, the Board of Directors approved a new incremental
repurchase program under which up to $2 billion in additional repurchases
beyond those shares needed for issuance under employee stock plans may be made.
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
<PAGE> 9
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 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 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
<PAGE> 10
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 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.
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 July 31,
1998, the analysis indicated that such market movements would not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows. Actual gains and losses in the future may differ
materially from that analysis, however, based on changes in the timing and
amount of interest rate and foreign currency exchange rate movements and the
Company's actual exposures and hedges.
Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. As a
matter of course, the Company frequently engages in discussions with a variety
of parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. Although consummation of any transaction is
unlikely to have a material effect on the Company's results as a whole, the
implementation or integration of a transaction may contribute to the Company's
results differing from the investment community's expectation in a given
<PAGE> 11
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.
Year 2000. Many computer systems experience problems handling dates in and
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.
Some of the products are used in critical applications where the impact of
non-performance to these customers and other parties could be significant.
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,
<PAGE> 12
the potential impact on the Company's financial condition and results of
operations, especially the impact to warranty cost trends, could be material
in any given quarter.
It is unknown how customer spending patterns may be impacted by year 2000
programs. As customers focus on preparing their business for the year 2000 in
the near term, capital budgets may be spent on remediation efforts,
potentially delaying the purchase and implementation of new systems, thereby
creating less demand for the Company's products and services. This could
adversely affect the Company's future revenues, though the impact 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 their 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.
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 stockholders on February 24, 1998. See also
Item 6(b)(ii) below.
<PAGE> 13
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.
<PAGE> 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: September 4, 1998
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. None
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.
<PAGE> 16
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Statement Regarding Computation of Per Share Earnings
Registrant's Basic and Diluted Earnings Per Share (in millions except per
share amounts)
Exhibit 11
----------
Three months ended Nine months ended
July 31 July 31
------------------ -----------------
1998 1997 1998 1997
Basic earnings per share
Net earnings $ 621 $ 617 $2,235 $2,313
Number of shares on which basic
earnings per share is based:
Weighted average common shares
outstanding during the period 1,035 1,031 1,039 1,022
Basic earnings per share $ 0.60 $ 0.60 $ 2.15 $ 2.26
====== ====== ====== ======
Diluted earnings per share
Net earnings $ 621 $ 617 $2,235 $2,313
Adjustment for interest
expense, net 6 - 19 -
----- ----- ------ ------
Net earnings, adjusted $ 627 $ 617 $2,254 $2,313
Number of shares on which diluted
earnings per share is based:
Weighted average common shares
outstanding during the period 1,035 1,031 1,039 1,022
Weighted average dilutive
potential common shares:
Stock options 31 29 32 29
Convertible zero-coupon notes
due 2017 10 - 10 -
Number of shares and equivalents
on which diluted earnings per
share is based 1,076 1,060 1,081 1,051
Diluted earnings per share $ 0.58 $ 0.58 $ 2.09 $ 2.20
====== ====== ====== ======
<PAGE> 17
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Statement Regarding Computation of Ratio of Earnings to Fixed Charges (1)
(in millions, except ratios)
<TABLE>
<CAPTION>
Exhibit 12
----------
FOR THE NINE MONTHS
ENDED JULY 31 YEAR ENDED OCTOBER 31
------------------ -----------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income
from continuing
operations......... $3,148 $3,304 $4,455 $3,694 $3,632 $2,423 $1,783
Minority interest
in the income of
subsidiaries with
fixed charges...... 7 28 39 38 29 17 11
Undistributed
(earnings) or loss
of equity investees. 10 (4) (6) (62) (47) 4 6
Fixed charges:
Interest expense
and amortization
of debt discount
and premium on all
indebtedness..... 180 158 215 327 206 155 121
Interest included
in rent............ 121 102 139 126 111 104 102
------ ------ ------ ------ ------ ------ ------
Total fixed
charges.......... 301 260 354 453 317 259 223
Earnings before
income taxes,
minority interest,
undistributed
earnings or loss of
equity investees
and fixed charges.. $3,466 $3,588 $4,842 $4,123 $3,931 $2,703 $2,023
====== ====== ====== ====== ====== ====== ======
Ratio of earnings
to fixed charges... 11.5 13.8 13.7 9.1 12.4 10.4 9.1
====== ====== ====== ====== ====== ====== ======
(1) The ratio of earnings to fixed charges was computed by dividing earnings(income
from continuing operations before income taxes, adjusted for fixed charges,
minority interest in the income of subsidiaries with fixed charges and equity in
earnings or loss of equity investees) by fixed charges for the periods indicated.
Fixed charges include (i) interest expense and amortization of debt discount or
premium on all indebtedness, and (ii) a reasonable approximation of the interest
factor deemed to be included in rental expense.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED STATEMENT
OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 5,311
<SECURITIES> 176
<RECEIVABLES> 8,030
<ALLOWANCES> 0
<INVENTORY> 6,770
<CURRENT-ASSETS> 21,927
<PP&E> 12,454
<DEPRECIATION> 5,983
<TOTAL-ASSETS> 33,295
<CURRENT-LIABILITIES> 12,537
<BONDS> 2,189
<COMMON> 993
0
0
<OTHER-SE> 16,323
<TOTAL-LIABILITY-AND-EQUITY> 33,295
<SALES> 29,709
<TOTAL-REVENUES> 34,835
<CGS> 0
<TOTAL-COSTS> 23,566
<OTHER-EXPENSES> 8,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180
<INCOME-PRETAX> 3,148
<INCOME-TAX> 913
<INCOME-CONTINUING> 2,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,235
<EPS-PRIMARY> 2.15
<EPS-DILUTED> 2.09
</TABLE>
