SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 31, 1999
OR
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| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________ to __________
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
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(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
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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 January 31, 1999
----------------------------- -------------------------------
Common Stock, $0.01 par value 1.015 billion shares
<PAGE>
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
January 31, 1999 (Unaudited) and October 31, 1998 2
Consolidated Condensed Statement of Earnings
Three months ended January 31, 1999
and 1998 (Unaudited) 3
Consolidated Condensed Statement of Cash Flows
Three months ended January 31, 1999 and 1998 (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) 7-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K. 17
Signature 18
Exhibit Index 19
<PAGE> 1
<PAGE>
Item 1. Financial Statements.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
------------------------------------
(Millions except par value and number of shares)
January 31 October 31
1999 1998
----------- ----------
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 3,694 $ 4,046
Short-term investments 4 21
Accounts receivable 5,790 6,232
Financing receivables 1,780 1,520
Inventory 6,302 6,184
Other current assets 3,370 3,581
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Total current assets 20,940 21,584
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Property, plant and equipment (less accumulated
depreciation: January 31, 1999 - $6,383;
October 31, 1998 - $6,212) 6,139 6,358
Long-term investments and other assets 5,789 5,731
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$32,868 $33,673
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Notes payable and short-term borrowings $ 1,288 $ 1,245
Accounts payable 2,835 3,203
Employee compensation and benefits 1,740 1,768
Taxes on earnings 1,903 2,796
Deferred revenues 1,605 1,453
Other accrued liabilities 3,088 3,008
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Total current liabilities 12,459 13,473
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Long-term debt 1,708 2,063
Other liabilities 1,191 1,218
Shareholders' 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;
1,015,339,000 and 1,015,403,000 shares
issued and outstanding at January 31, 1999
and October 31, 1998, respectively 64 10
Retained earnings 17,446 16,909
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Total shareholders' equity 17,510 16,919
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$32,868 $33,673
======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE 2>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
--------------------------------------------
(Unaudited)
(Millions except per share amounts)
<TABLE>
<CAPTION>
Three months ended
January 31
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1999 1998
---- ----
<S> <C> <C>
Net revenue:
Products $10,116 $10,158
Services 1,821 1,658
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11,937 11,816
Costs and expenses:
Cost of products sold and
services 7,984 7,837
Research and development 799 803
Selling, general and
administrative 1,955 1,872
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10,738 10,512
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Earnings from operations 1,199 1,304
Interest income and other, net 163 90
Interest expense 47 67
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Earnings before taxes 1,315 1,327
Provision for taxes 355 398
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Net earnings $ 960 $ 929
======= =======
Net earnings per share:
Basic $ 0.95 $ 0.89
======= =======
Diluted $ 0.92 $ 0.86
======= =======
Cash dividends declared per share $ 0.16 $ 0.14
======= =======
Average shares used in computing
basic net earnings per share 1,011 1,038
======= =======
Average shares and equivalents
used in computing diluted net
earnings per share 1,049 1,076
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE 3>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
(Millions)
Three month ended
January 31
-----------------
1999 1998
---- ----
Cash flows from operating activities:
Net earnings $ 960 $ 929
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 420 411
Deferred taxes on earnings 350 (108)
Change in assets and liabilities:
Accounts and financing receivables (23) (64)
Inventories (119) (326)
Accounts payable (368) (210)
Taxes on earnings (890) 495
Other current assets and liabilities (100) 34
Other, net 60 (17)
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Net cash provided by operating activities 290 1,144
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Cash flows from investing activities:
Investment in property, plant and equipment (311) (450)
Disposition of property, plant and equipment 178 152
Purchase of short-term investments (475) (1,605)
Maturities of short-term investments 492 925
Other, net 48 (21)
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Net cash used in investing activities (68) (999)
Cash flows from financing activities:
Change in notes payable and short-term borrowings 175 462
Issuance of long-term debt 28 139
Payment of long-term debt (529) (446)
Issuance of common stock under employee stock plans 179 96
Repurchase of common stock (265) (589)
Dividends (162) (146)
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Net cash used in financing activities (574) (484)
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Decrease in cash and cash equivalents (352) (339)
Cash and cash equivalents at beginning of period 4,046 3,072
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Cash and cash equivalents at end of period $3,694 $2,733
====== ======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE 4>
<PAGE>
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 January 31, 1999 and October 31, 1998, the
results of operations for the three months ended January 31, 1999 and
1998, and the cash flows for the three months ended January 31, 1999 and
1998.
The results of operations for the three months ended January 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 Form 10-K.
2. The Company's basic EPS is calculated based on net earnings available
to common shareholders and the weighted-average number of shares
outstanding during the reported period. Diluted EPS includes additional
dilution from potential common stock, such as stock issuable pursuant
to the exercise of stock options outstanding and the conversion of debt.
Three Months Ended
January 31
------------------
1999 1998
---- ----
(in millions except
per share data)
Numerator:
Net earnings $ 960 $ 929
Adjustment for interest
expense, net of income
tax effect 6 6
------ ------
Net earnings, adjusted 966 935
Denominator:
Weighted-average shares
outstanding 1,011 1,038
Effect of dilutive
securities:
Dilutive options 27 28
Convertible zero-coupon
notes due 2017 11 10
------ ------
Dilutive potential
common shares 38 38
<PAGE 5>
Weighted-average shares
and dilutive potential
common shares 1,049 1,076
Basic earnings per share $0.95 $0.89
Diluted earnings per share $0.92 $0.86
3. Income tax provisions for interim periods are based on estimated
effective annual income tax rates. The effective income tax rate varies
from the U.S. federal statutory income tax rate primarily because of
variations in the tax rates on foreign income.
4. Inventory
(In Millions)
January 31 October 31
1999 1998
---- ----
Finished Goods $4,327 $4,170
Purchased parts and fabricated
assemblies 1,975 2,014
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$6,302 $6,184
====== ======
5. The Company paid interest of $99 million and $96 million during the three
months ended January 31, 1999 and 1998, respectively. During the same
periods, the Company paid income taxes of $871 million and received an
income tax refund, net of income taxes paid, of $40 million,
respectively. The effect of foreign currency exchange rate fluctuations
on cash balances held in foreign currencies was not material.
6. In June 1998, the Financial Accounting Standards Board (FASB)issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of
those instruments at fair value. The statement is effective for fiscal
years beginning after June 15, 1999. The Company will adopt the standard
no later than the first quarter of fiscal 2000 and is in the process of
determining the impact that adoption will have on its consolidated
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.
<PAGE 6>
<PAGE>
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 first quarter ended January 31, 1999 was
$11.9 billion, an increase of 1 percent from the same period of fiscal
1998. Product sales decreased by less than 1 percent and service revenue
grew 10 percent over the corresponding period of fiscal 1998. Net revenue
grew 3 percent to $6.8 billion internationally and declined 2 percent to
$5.1 billion in the U.S. Currency had no significant impact on the
Company's reported net revenue growth for the quarter.
The first quarter's net revenue growth was principally due to solid demand
for the Company's family of DeskJet and LaserJet printers and related
supplies, strong demand for the Company's HP Pavilion home personal
computers and strong growth in service and support revenue, primarily
customer support, outsourcing and financing services. Net revenue growth
from these products and services was offset by declines in revenue growth
in the Company's measurement businesses, enterprise server products and
commercial personal computers. The decline in net revenue in the Company's
measurement business was primarily attributable to test and measurement
which experienced a 14% decline in net revenue during the first quarter of
1999. Growth in test and measurement net revenue continued to be impacted
by economic weakness in Asia as well as the worldwide semiconductor
industry slowdown that began in 1998.
Costs and Expenses - Cost of products sold and services as a percentage of
net revenue was 66.9 percent for the first quarter of fiscal 1999,
compared to 66.3 percent for the first quarter of fiscal 1998, a 0.6
percentage point increase. The slight increase in the cost of sales
percentage was attributed to a number of factors. The effect of lower
volumes for the Company's measurement products as well as an overall
continued shift in the Company's product sales mix to lower-gross-margin
products resulted in an increase in the cost of sales percentage. This
increase in the cost of sales ratio was partially offset by operational
efficiencies in personal computers, increased volume in printers and lower
component costs in some enterprise servers. The Company expects continued
variability in the cost of sales trend over time, with an overall upward
trend over the long-term, as competitive pricing pressures and mix shifts
continue.
Operating expenses as a percentage of net revenue were 23.1 percent for
the first quarter of fiscal 1999, compared to 22.7 percent for the first
quarter of fiscal 1998, a 0.4 percentage point increase. Despite the
increase in the operating expense percentage, operating expenses grew only
3 percent for the first quarter of fiscal 1999, compared to 15 percent
growth experienced in the first quarter of fiscal 1998. The first quarter
1999 increase of 3 percent resulted primarily from higher expenses
including the effect of stock appreciation rights. Fluctuations in foreign
currency exchange rates had no significant impact on the year-over-year
operating expense growth rate.
<PAGE 7>
The Company continues to focus on the reduction of operating expense
ratios and optimization of manufacturing processes in order to improve
profitability.
Provision for Taxes - The provision for taxes as a percentage of earnings
before taxes was 27 percent for the first quarter of fiscal 1999 compared
to 30 percent for the corresponding period in the prior year and 28
percent for the entire fiscal 1998. The annual effective tax rate
decreased as a result of changes in the expected geographic mix of the
Company's earnings.
Net Earnings - Net earnings for the first quarter of fiscal 1999 were $960
million, compared to net earnings of $929 million for the first quarter of
fiscal 1998. Earnings per share for the first quarter of fiscal 1999 on a
diluted basis were 92 cents per share on 1.05 billion weighted-average
shares and equivalents, compared to 86 cents per share on an average of
1.08 billion shares for the first quarter of fiscal 1998. Basic earnings
per share for the first quarter of fiscal 1999 were 95 cents per share on
an average of 1.01 billion shares, compared to 89 cents per share on an
average of 1.04 billion shares for the first quarter of fiscal 1998.
FINANCIAL CONDITION
-------------------
Liquidity and Capital Resources - The Company's financial position
continues to be strong, with cash and cash equivalents and short-term
investments of $3.7 billion at January 31, 1999, compared with $4.1
billion at October 31, 1998. In addition, other long-term investments of
$1.9 billion, relatively low levels of debt compared to assets, and a
large equity base continue to contribute to the Company's financial
flexibility.
Cash flows from operating activities were $290 million during the first
three months of fiscal 1999, compared to $1.1 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 in the first quarter of fiscal 1999 and the change in
accounts payable, partially offset by increased net earnings and slower
growth in accounts and financing receivables and inventory. Inventory as
a percentage of net revenue has decreased from 16.0 percent at the end of
the first quarter of fiscal 1998 to 13.4 percent at January 31, 1999, due
primarily to ongoing progress in supply-chain management. In addition,
accounts and financing receivables as a percentage of net revenue
decreased from 16.5 percent at January 31, 1998 to 16.0 percent as of
January 31, 1999.
Capital expenditures for the first three months of fiscal 1999 were $311
million, compared to $450 million for the corresponding period in fiscal
1998. The decrease in capital expenditures was due in part to a Company-
wide emphasis on reducing non-essential expenditures combined with
increased outsourcing of certain production processes and slowing capacity
requirements.
Shares of the Company's common stock are repurchased under a systematic
program to manage the dilution created by shares issued under employee
stock plans. During July 1998, the Company's Board of Directors
authorized a new incremental repurchase program under which up to $2
billion of the Company's common stock can be repurchased in the open
market or in private transactions. Under both these plans, during the
first quarter ended January 31, 1999, the Company purchased and retired
approximately 4.2 million shares for an aggregate price of $265 million.
Under the systematic program, during the first quarter ended January 31,
1998, the Company purchased and retired approximately 9.4 million shares
for an aggregate price of $589 million.
<PAGE 8>
FACTORS THAT MAY AFFECT FUTURE RESULTS
--------------------------------------
Competition. The Company encounters aggressive competition in all areas
of its business activity. The Company's competitors are numerous, ranging
from some of the world's largest corporations to many relatively small and
highly specialized firms. The Company competes primarily on the basis of
technology, performance, price, quality, reliability, distribution and
customer service and support. Product life cycles are short, and, to
remain competitive, the Company will be required to develop new products,
periodically enhance its existing products and compete effectively on the
basis of the factors described above. In particular, the Company
anticipates that it will have to continue to adjust prices of many of its
products to stay competitive and it will have to effectively manage
financial returns with reduced gross margins.
New Product Introductions. The Company's future operating results may
be adversely affected if the Company is unable to continue to develop,
manufacture and market innovative products and services rapidly that meet
customer requirements for performance and reliability. The process of
developing new high technology products and solutions is inherently
complex and uncertain. It requires accurate anticipation of customers'
changing needs and emerging technological trends. The Company
consequently must make long-term investments and commit significant
resources before knowing whether its predictions will eventually result in
products that achieve market acceptance. After a product is developed, the
Company must quickly manufacture sufficient volumes at acceptable costs.
This is a process that requires accurate forecasting of volumes, mix of
products and configurations. Moreover, the supply and timing of a new
product or service must match customers' demand and timing for the
particular product or service. Given the wide variety of systems,
products and services the Company offers, the process of planning
production and managing inventory levels becomes increasingly difficult.
Inventory Management. Inventory management has become increasingly complex
as the Company continues to sell a greater mix of products, especially
printers and personal computers, through third-party distribution
channels. Channel partners constantly adjust their ordering patterns in
response to the Company's and its competitors' supply into the channel and
the timing of their new product introductions and relative feature sets,
as well as seasonal fluctuations in end-user demand such as the
back-to-school and holiday selling periods. Channel partners may increase
orders during times of shortages, cancel orders if the channel is filled
with currently available products, or delay orders in anticipation of new
products. Any excess supply could result in price reductions and
inventory writedowns, which in turn could adversely affect the Company's
gross margins.
Short Product Life Cycles. The short life cycles of many of the Company's
products pose a challenge for the effective management of the transition
from existing products to new products and could adversely affect the
Company's future operating results. Product development or manufacturing
delays, variations in product costs, and delays in customer purchases of
<PAGE 9>
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
noncancelable purchase commitments with vendors for such components.
Volatility in the prices of these component parts, the possible inability
of the Company to secure enough components at reasonable prices to build
new products in a timely manner in the quantities and configurations
demanded or, conversely, a temporary oversupply of these parts, could
adversely affect the Company's future operating results.
Reliance on Third-Party Distribution Channels. The Company continues to
expand into third-party distribution channels to accommodate changing
customer preferences. As a result, the financial health of 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.
<PAGE 10>
International. Sales outside the United States make up more than half of
the Company's revenues. In addition, a portion of the Company's product
and component manufacturing, along with key suppliers, are located outside
the United States. Accordingly, the Company's future results could be
adversely affected by a variety of factors, including changes in a
specific country's or region's political conditions or changes or
continued weakness in economic conditions, trade protection measures,
import or export licensing requirements, the overlap of different tax
structures, unexpected changes in regulatory requirements and natural
disasters.
Derivative Financial Instruments. The Company is also exposed to foreign
currency exchange rate risk inherent in its sales commitments, anticipated
sales and assets and liabilities denominated in currencies other than the
U.S. dollar, as well as interest rate risk inherent in the Company's debt,
investment and finance receivable portfolio. As more fully described in
the notes to the Company's 1998 annual report to shareholders, the
Company's risk management strategy utilizes derivative financial
instruments, including forwards, swaps and purchased options to hedge
certain foreign currency and interest rate exposures, with the intent of
offsetting gains and losses that occur on the underlying exposures with
gains and losses on the derivative contracts hedging them. The Company
does not enter into derivatives for trading purposes.
The Company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in foreign exchange rates and interest rates applied
to the hedging contracts and underlying exposures described above. As of
January 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. As a
matter of course, the Company frequently engages in discussions with a
variety of parties relating to possible acquisitions, strategic alliances,
joint ventures and divestitures. Although consummation of any transaction
is unlikely to have a material effect on the Company's results as a whole,
the implementation or integration of a transaction may contribute to the
Company's results differing from the investment community's expectation in
a given quarter. Divestitures may result in the cancellation of orders
and charges to earnings. Acquisitions and strategic alliances may
require, among other things, integration or coordination with a different
company culture, management team organization and business infrastructure.
They may also require the development, manufacture and marketing of
product offerings with the Company's products in a way that enhances the
performance of the combined business or product line. Depending on the
size and complexity of the transaction, successful integration depends on
a variety of factors, including the hiring and retention of key employees,
management of geographically separate facilities, and the integration or
coordination of different research and development and product
manufacturing facilities. All of these efforts require varying levels of
management resources, which may temporarily adversely impact other
business operations.
<PAGE 11>
Earthquake. A portion of the Company's research and development
activities, its corporate headquarters, other critical business operations
and certain of its suppliers are located near major earthquake faults.
The ultimate impact on the Company, its significant suppliers and the
general infrastructure is unknown, but operating results could be
materially affected in the event of a major earthquake. The Company is
predominantly uninsured for losses and interruptions caused by
earthquakes.
Environmental. Certain of the Company's operations involve the use of
substances regulated under various federal, state, and international laws
governing the environment. It is the Company's policy to apply strict
standards for environmental protection to sites inside and outside the
U.S., even if not subject to regulations imposed by local governments.
The liability for environmental remediation and related costs is accrued
when it is considered probable and the costs can be reasonably estimated.
Environmental costs are presently not material to the Company's operations
or financial position.
Profit Margin. The profit margins realized by the Company vary somewhat
among its products, its customer segments and its geographic markets.
Consequently, the overall profitability of the Company's operations in any
given period is partially dependent on the product, customer and geographic
mix reflected in that period's net sales.
Year 2000. The information provided below constitutes a "Year 2000
Readiness Disclosure" for purposes of the Year 2000 Information and
Readiness Disclosure Act.
The Year 2000 ("Y2K") problem arises from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the assumption of
a single century, the 1900s. Any program so created may read, or attempt
to read, "00" as the year 1900. There are two other related issues which
could also lead to incorrect calculations or failure, such as (i) some
systems' programming assigns special meaning to certain dates, such as
9/9/99, and (ii) the year 2000 is a leap year. Accordingly, some computer
hardware and software, including programs embedded within machinery and
parts, will need to be modified prior to the year 2000 to remain
functional. The Company's Y2K initiatives are focusing primarily on four
areas of potential impact: internal information technology (IT) systems;
internal non-IT systems and processes, including services and embedded
chips (controllers); the Company's products and services, and the
readiness of significant third parties with whom the Company has material
business relationships. The Company established a Y2K Program Office in
1997 to coordinate these programs across the enterprise and to provide a
single point of contact for information about the Company's Y2K programs.
The Company's Y2K efforts in these areas are led by the Y2K General
Manager who reports directly to the Company's Senior Management.
The 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.
<PAGE 12>
Internal IT Systems. - The Company has established a dedicated Y2K IT
Internal Readiness Program Organization to oversee the Company's worldwide
Y2K internal IT application and infrastructure readiness activities. The
Internal Readiness IT Program Organization provides monthly progress
reports to the Company's senior management. The Internal Readiness IT
Program Organization is charged with raising awareness throughout the
Company, developing tools and methodologies for addressing the Y2K issue,
monitoring the development and implementation of business and
infrastructure plans to bring non-compliant applications into compliance
on a timely basis and identifying and assisting in resolving high-risk
issues.
The Company is approaching its Y2K IT internal readiness program in the
following four phases: (1) assessment, (2) planning, (3) preparation and
(4) implementation. The assessment phase involves taking an inventory of
the Company's internal IT applications to prioritize risk, identifying
failure dates, defining a solution strategy, estimating repair costs and
communicating across and within business units regarding the magnitude of
the problem and the need to address Y2K issues. The planning phase
consists of identifying the tasks necessary to ensure readiness,
scheduling remediation plans for applications and infrastructure, and
determining resource requirements and allocations. The third phase,
preparation, involves readying the development and testing environments,
and piloting the remediation process. Implementation, the last phase,
consists of executing the Company's plans to fix, test and implement
critical applications and associated infrastructure, and putting in place
contingency plans for processes that have a high impact on the Company's
businesses.
The Company is targeting its efforts to ensure that its IT applications
will be Y2K compliant by July 31, 1999. The assessment, planning and
preparation phases have been completed. As of January 31, 1999, the
implementation phase is approximately 60 percent complete.
Internal Non-IT Systems and Processes. - Non-IT systems include, but are
not limited to, those systems that are not commonly thought of as IT
systems, such as telephone/PBX systems; fax machines; facilities systems
regulating alarms, building access and sprinklers; manufacturing, assembly
and distribution equipment; and other miscellaneous systems and processes.
Y2K readiness for these internal non-IT systems is the responsibility of
the Company's worldwide operating units and their respective functions and
operations, e.g., facilities, research and development, manufacturing,
distribution, logistics, sales and customer support.
The Company's Y2K Program Office has developed a comprehensive process to
assure all Company operations and global business units use a structured
and standardized methodology to organize, plan and implement their Y2K
readiness.
<PAGE 13>
The Company has also established a Year 2000 Council to coordinate its
overall internal readiness and its business continuity planning efforts.
It is composed of representatives from the major business units within the
Company and the critical corporate and infrastructure functions that
support them. The Council is chaired by the Company's Year 2000 General
Manager and has initiated a comprehensive program to ensure timely and
consistent business continuity planning by all of the Company's business
units. The program objective is to assure that substantially all Y2K
testing, internal mitigation and remediation activities, and business
contingency plans are finalized by July 31, 1999. From July 31, 1999,
until November 30, 1999, the company's Y2K internal readiness solutions,
contingency plans, crisis management and recovery mechanisms will be
further stress-tested to ensure full preparation.
Product and Customer Readiness. - The Company's newly introduced products
are Y2K compliant. However, certain hardware and software products
currently installed at customer sites will require upgrade or other
remediation. Some of these products are used in critical applications
where the impact of non-performance to these customers and other parties
could be significant. The Company believes that its customers are
responsible for costs to achieve their Y2K compliance. The Company,
however, is taking steps to preserve customer satisfaction and brand
reputation. In 1997, the Company established a dedicated Y2K Product
Compliance Program Office to coordinate the Company's worldwide Y2K
product compliance activities. The Product Compliance Program Office is
charged with developing and overseeing implementation of plans to identify
all standard products delivered since January 1, 1995; to test those
products for compliance; to identify an appropriate path to compliance for
non-compliant standard products; and to communicate the status and
necessary customer action for non-compliant standard products.
The Company has an internet website dedicated to communicating Y2K issues
to a broad customer base. This website includes a product compliance
search page that allows customers to look up the status of the Company's
products they have installed. In certain areas, the Company is taking
additional steps to identify affected customers, raise customer awareness
related to non-compliance of certain Company products and assist the
customer base to assess their risks. The Company is in the process of
implementing plans to accommodate increased levels of customer assistance
in the first quarter of fiscal 2000 and currently anticipates that a
significant portion of the costs related to such actions would occur in
the fourth quarter of fiscal 1999 and the first quarter 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. In addition, while 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 customer satisfaction steps are under way so that
any such claims against the Company would be without merit.
<PAGE 14>
It is unknown how Y2K issues may affect customer spending patterns. As
customers focus their attention and capital budgets in the near term on
preparing their own businesses for the Year 2000, they may either delay or
accelerate purchases of new applications, services and systems from the
Company. Many of the Company's products run custom software or connect to
other systems or peripheral products that may be adversely affected by
operating system or hardware upgrades. Although these factors may
increase demand for certain of the Company's products and services, it
could also soften the demand for other offerings. As a result, these
events may affect the Company's future revenues and revenue patterns.
Material Third-Party Relationships. - The Company has developed a Y2K
process for dealing with its key suppliers, contract manufacturers,
distributors, vendors and partners. The process generally involves the
following steps: (i) initial supplier survey, (ii) risk assessment and
contingency planning, (iii) follow-up supplier reviews and escalation, if
necessary, and where relevant, (iv) testing. To date, the Company has
received formal responses from all of its critical suppliers. Most of them
have responded that they expect to address all their significant Y2K
issues on a timely basis. The Company regularly reviews and monitors the
suppliers' Y2K readiness plans and performance. Based on the Company's
risk assessment, selective on-site reviews may be performed. Risk analysis
has been completed with the Company's base of suppliers and contingency
plans are now being developed and tested. All testing is targeted to be
complete by June 1, 1999. In some cases, to meet Y2K readiness, the
Company has replaced suppliers or eliminated suppliers from consideration
for new business. The Company has also contracted with multiple
transportation companies to provide product delivery alternatives. The
Company has also completed substantially all Electronic Data Interchange
(EDI) migration and testing with its supply base.
The Company is working to identify and analyze the most reasonably likely
worst-case scenarios for third-party relationships affected by Y2K. These
scenarios could include possible infrastructure collapse, the failure of
power and water supplies, major transportation disruptions, unforeseen
product shortages due to hoarding of products and sub-assemblies and
failures of communications and financial systems. Any one of these
scenarios could have a major and material effect on the Company's ability
to build its products and deliver services to its customers. While the
Company has contingency plans in place to address most issues under its
control, an infrastructure problem outside of its control or some
combination of several of these problems could result in a delay in
product shipments depending on the nature and severity of the problems.
The Company would expect that most utilities and service providers would
be able to restore service within days although more pervasive system
problems involving multiple providers could last two to four weeks or more
depending on the complexity of the systems and the effectiveness of their
contingency plans.
Although the Company is dedicating substantial resources towards attaining
Y2K readiness, there is no assurance it will be successful in its efforts
to identify and address all Y2K issues. Even if the Company acts in a
timely manner to complete all of its assessments; identifies, develops and
implements remediation plans believed to be adequate; and develops
contingency plans believed to be adequate some problems may not be
identified or corrected in time to prevent material adverse consequences
to the Company.
<PAGE 15>
The discussion above regarding estimated completion dates, costs, risks
and other forward-looking statements regarding Y2K is based on the
Company's best estimates given information that is currently available and
is subject to change. As the Company continues to progress with its Y2K
initiatives, it may discover that actual results will differ materially
from these estimates.
Adoption of the Euro. In 1997, the Company established a dedicated task
force to address the issues raised by the introduction of a European single
currency (the Euro) for initial implementation as of January 1, 1999 and
during the transition period through January 1, 2002. The Company's primary
focus has been on the changes needed to deal with a mix of Euro and local
denomination transactions from the first day of changeover - January 1, 1999.
Since the beginning of the transition period, product prices in local
currencies are being converted to Euros as required. At an appropriate
point during the transition period, product prices in participating
countries will be established and stored in Euros, and converted to local
denominations. System changes were implemented to give multi-currency
capability to the few internal applications that did not have it yet, or
to ensure that external partners facing systems processing euro conversions
be compliant with the European council regulations.
The Company has developed plans to support display and printing of the
Euro character by impacted Hewlett-Packard products. Most products are
currently able to perform these functions while plans are still in process
for a few remaining products. Current information about the impact of the
adoption of the Euro on the Company's products and businesses is available
at the Hewlett-Packard Euro Web site.
The Company does not presently expect that introduction and use of the
Euro will materially affect the Company's foreign exchange and hedging
activities or the Company's use of derivative instruments. Management does
not expect that the introduction of the Euro will result in any material
increase in costs to the Company and all costs associated with the
introduction of the Euro will be expensed to operations as incurred.
While the Company will continue to evaluate the impact of the Euro
introduction over time, based on currently available information,
management does not believe that the introduction of the Euro currency
will have a material adverse impact on the Company's financial condition
or overall trends in results of operations.
Quarterly Fluctuations and Volatility of Stock Prices. Although the
Company believes that it has the product offerings and resources needed
for continuing success, future revenue and margin trends cannot be
reliably predicted and may cause the Company to adjust its operations,
which could cause period-to-period fluctuations in operating results.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. The announcement of new products,
services or technological innovations by the Company or its competitors,
quarterly variations in the Company's results of operations, changes in
revenue or earnings estimates by the investment community and speculation
in the press or investment community are among the factors affecting the
Company's stock price. In addition, the stock price may be affected by
general market conditions and domestic and international macroeconomic
factors unrelated to the Company's performance. Because of the foregoing
reasons, recent trends should not be considered reliable indicators of
future stock prices or financial results.
<PAGE 16>
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 19 of this report.
(b) Reports on Form 8-K:
None
<PAGE 17>
<PAGE>
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: February 26, 1999 By:/s/Robert P. Wayman
--------------------------
Robert P. Wayman
Executive Vice President,
Finance and Administration
(Chief Financial Officer)
<PAGE 18>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
-------------
Exhibits:
1. Not applicable.
2-4 None.
5-9. Not applicable.
10. None
11. See Item 2 in Notes to Consolidated Condensed Financial
Statement on Page 4.
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.
<PAGE 19>
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