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 January 31, 1997 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) California 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 (415) 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 January 31, 1997 - -------------------------- ------------------------------- Common Stock, $1 par value 1.02 billion shares
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES INDEX ----- Page No. ________ Part I. Financial Information Item 1. Financial Statements. Consolidated Condensed Balance Sheet January 31, 1997 (Unaudited) and October 31, 1996 2 Consolidated Condensed Statement of Earnings (Unaudited) Three months ended January 31, 1997 and 1996 3 Consolidated Condensed Statement of Cash Flows (Unaudited) Three months ended January 31, 1997 and 1996 4 Notes to Consolidated Condensed Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations and Factors That May Affect Future Results (Unaudited). 6-10 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K. 11 Signature 12 Exhibit Index 13 1
<TABLE> Item 1. Financial Statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET ------------------------------------ (Millions except par value and number of shares) <CAPTION> January 31 October 31 1997 1996 ---------- ---------- Assets (Unaudited) ------ <S> <C> <C> Current assets: Cash and cash equivalents $ 2,789 $ 2,885 Short-term investments 70 442 Accounts and notes receivable 6,841 7,126 Inventories: Finished goods 3,958 3,956 Purchased parts and fabricated assemblies 2,274 2,445 Other current assets 1,254 1,137 ------- ------- Total current assets 17,186 17,991 ------- ------- Property, plant and equipment (less accumulated depreciation: January 31, 1997 - $4,831; October 31, 1996 - $4,662) 5,634 5,536 Long-term investments and other assets 4,336 4,172 ------- ------- $27,156 $27,699 ======= ======= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Notes payable and short-term borrowings $ 380 $ 2,125 Accounts payable 2,223 2,375 Employee compensation and benefits 1,563 1,675 Taxes on earnings 2,050 1,514 Deferred revenues 1,100 951 Other accrued liabilities 2,082 1,983 ------- ------- Total current liabilities 9,398 10,623 ------- ------- Long-term debt 2,584 2,579 Other liabilities 1,062 1,059 Shareholders' equity: Preferred stock, $1 par value; 300,000,000 shares authorized; none issued Common stock and capital in excess of $1 par value; 2,400,000,000 shares authorized; 1,016,182,000 and 1,014,123,000 shares issued and outstanding at January 31, 1997 and October 31, 1996, respectively 1,020 1,014 Retained earnings 13,092 12,424 ------- ------- Total shareholders' equity 14,112 13,438 ------- ------- $27,156 $27,699 ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. </TABLE> 2
<TABLE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF EARNINGS -------------------------------------------- (Unaudited) (Millions except per share amounts) Three months ended January 31 ------------------ <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Net revenue: Products $ 8,825 $ 8,040 Services 1,470 1,248 ------- ------- 10,295 9,288 ------- ------- Costs and expenses: Cost of products sold and services 6,694 5,988 Research and development 699 612 Selling, general and administrative 1,621 1,493 ------- ------- 9,014 8,093 ------- ------- Earnings from operations 1,281 1,195 Interest income and other, net 76 37 Interest expense 54 70 ------- ------- Earnings before taxes 1,303 1,162 Provision for taxes 391 372 ------- ------- Net earnings $ 912 $ 790 ======= ======= Net earnings per share* $ .87 $ .75 ======= ======= Cash dividends declared per share* $ .24 $ .20 ======= ======= Average shares and equivalents used in computing net earnings per share* 1,047 1,052 ======= ======= The accompanying notes are an integral part of these consolidated condensed financial statements. * 1996 amounts have been restated to reflect the retroactive effect of the July 1996 2-for-1 stock split. See Note 5 for a discussion of the stock split. </TABLE> 3 <TABLE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS ---------------------------------------------- (Unaudited) (Millions) <CAPTION> Three months ended January 31 ------------------ 1997 1996 ---- ---- <S> <C> <C> Cash flows from operating activities: Net earnings $ 912 $ 790 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 335 289 Deferred taxes on earnings (195) (55) Change in assets and liabilities: Accounts and notes receivable 314 263 Inventories 169 (743) Accounts payable (152) (270) Taxes on earnings 509 198 Other current assets and liabilities (102) 73 Other, net 20 73 ------ ------ Net cash provided by operating activities 1,810 618 ------ ------ Cash flows from investing activities: Investment in property, plant and equipment (513) (429) Disposition of property, plant and equipment 146 138 Purchases of short-term investments (412) (1,959) Maturities of short-term investments 784 1,824 Other, net 18 (6) ------ ------ Net cash provided by (used in) investing 23 (432) activities ------ ------ Cash flows from financing activities: Change in notes payable and short-term borrowings (1,760) 186 Issuance of long-term debt 34 441 Payment of current maturities of long-term debt (14) (2) Issuance of common stock under employee stock plans 106 86 Repurchase of common stock (172) (309) Dividends (122) (103) Other, net (1) - ------ ------ Net cash (used in) provided by financing (1,929) 299 activities ------ ------ (Decrease) Increase in cash and cash equivalents (96) 485 Cash and cash equivalents at beginning of period 2,885 1,973 ------ ------ Cash and cash equivalents at end of period $2,789 $2,458 ====== ====== The accompanying notes are an integral part of these consolidated condensed financial statements. </TABLE> 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 January 31, 1997 and October 31, 1996, the results of operations for the three months ended January 31, 1997 and 1996, and the cash flows for the three months ended January 31, 1997 and 1996. The results of operations for the three months ended January 31, 1997 are not necessarily indicative of the results to be expected for the full year. 2. Net earnings per share are computed using the weighted-average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent the dilutive effect of outstanding stock options. 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. The Company paid interest of $107 million and $58 million during the three months ended January 31, 1997 and 1996, respectively. During the same periods, the Company paid income taxes of $47 million and $208 million, respectively. The effect of foreign currency exchange rate fluctuations on cash balances held in foreign currencies was not material. 5. On May 17, 1996, the Company's Board of Directors approved a 2-for-1 stock split of the Company's $1 par value common stock in the form of a 100 percent distribution to shareholders of record as of June 21, 1996. As a result of the stock split, which took effect in July 1996, authorized, outstanding, and reserved common shares doubled and retained earnings was reduced by the par value of the additional common shares issued. The rights of the holders of these securities were not otherwise modified. All references in the consolidated statement of earnings for the period ended January 31, 1996 to number of shares and per share amounts of the Company's common stock have been restated. 6. The Company accounts for its employee stock compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which is effective for fiscal year 1997. Under SFAS 123 companies may elect, but are not required, to use a fair value methodology to recognize compensation expense for all stock-based awards. The Company will implement the disclosure-only provisions of SFAS 123 effective with its annual financial statements for fiscal year 1997. 5 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 three months of fiscal 1997 was $10.3 billion, an increase of 11 percent from the same period of fiscal 1996. Product sales increased 10 percent and service revenue grew 18 percent over the corresponding period of fiscal 1996. Net revenue grew 9 percent to $6.0 billion internationally and 14 percent to $4.3 billion in the U.S. The first quarter growth in net revenue was due principally to strong growth in home and desktop PCs, PC servers, UNIX(R) systems, and service and support. The Company's printer products groups grew moderately, with supplies leading growth. The Company's slower revenue growth, as compared to the same period in the prior year, is attributable to slower market growth in some geographies, intensified competitive pricing pressures, and declines in average selling prices for some of the Company's products. Fluctuations in foreign currency exchange rates also unfavorably impacted the Company's net revenue growth. Costs and Expenses - Cost of products sold and services as a percentage of net revenue was 65.0 percent for the first quarter of fiscal 1997, compared to 64.5 percent for the first quarter of fiscal 1996, a .5 percentage point increase. This compares to a 2.2 percentage point year-over-year increase experienced in the first quarter of fiscal 1996. The decline in the rate of increase is due to a lessening in competitive pricing pressures in the PC businesses, favorable component pricing in the PC and printer businesses, and a favorable shift in the Company's product sales mix to higher-gross-margin products. Improved supply-chain management was also a key factor. Cost of sales is expected, however, to continue to trend upward in the future as the benefit of some of the factors above is considered temporary. Operating expenses as a percentage of net revenue were 22.6 percent for the first quarter of fiscal 1997 and 1996. This reflects ongoing efforts to achieve expense structures appropriate for the Company's changing business and expansion of the net revenue base in fiscal 1997. Operating expenses increased 10 percent for the first quarter of fiscal 1997 over the corresponding year-ago period. Within this category, the largest expense growth occurred in research and development expenses, reflecting the Company's commitment to ensuring a continuing flow of high quality products. 6 Provision for Taxes - The provision for taxes as a percentage of earnings before taxes was 30.0 percent for the first quarter of fiscal 1997, compared to 32.0 percent for the first quarter of fiscal 1996. The lower tax rate in fiscal 1997 resulted from changes in the geographic mix of the Company's earnings and resolution of certain issues related to tax returns filed in previous years. Net Earnings - Net earnings for the first quarter of fiscal 1997 were $912 million, or 87 cents per share on an average of 1.05 billion shares, compared to net earnings of $790 million, or 75 cents per share on an average of 1.05 billion shares for the first quarter of fiscal 1996, as restated to reflect the retroactive effect of the July 1996 2-for-1 stock split. FINANCIAL CONDITION - ------------------- Liquidity and Capital Resources - The Company's financial position remains strong, with cash and cash equivalents and short-term investments of $2.9 billion at January 31, 1997, compared to $3.3 billion at October 31, 1996. In addition, other long-term investments, relatively low levels of debt compared to assets, and a large equity base continue to demonstrate the Company's financial flexibility. Cash flows from operating activities were $1.8 billion during the first three months of fiscal 1997, compared to $618 million for the corresponding period of fiscal 1996. The increase in cash flows from operating activities in fiscal 1997 was attributable primarily to changes in inventory levels during fiscal 1997 and 1996. Inventory declined 8 percent on 11 percent revenue growth during the first quarter of fiscal 1997, as compared to an increase of 54 percent on revenue growth of 27 percent in the same period of fiscal 1996. The decline during fiscal 1997, as well as the resulting improvement in inventory as a percentage of net revenue, from 20.3 percent in fiscal 1996 to 15.8 percent in fiscal 1997, is attributable primarily to improved supply-chain management, particularly of order inflows and shipments to third-party distribution channels. 7 Capital expenditures for the first three months of fiscal 1997 were $513 million, compared to $429 million for the corresponding period in fiscal 1996. The increase in capital expenditures was due to expansion of capacity for increased levels of business and increased expenditures to support growth in the Company's leasing business. The changes in short-term investment and borrowing activities during the first quarter continue a program of repatriation of short-term investments from Puerto Rico that the Company began in the fourth quarter of fiscal 1996 due to changes in tax laws in that country. Cash from the liquidation of those investments was used to pay down notes payable and short-term borrowings. Under the Company's ongoing stock repurchase program, shares have been purchased to meet employee stock plan requirements. During the three months ended January 31, 1997, the Company purchased and retired approximately 3.3 million shares for an aggregate price of $172 million. During the three months ended January 31, 1996, the Company purchased and retired approximately 7.4 million shares (on a restated basis) for an aggregate price of $309 million. FACTORS THAT MAY AFFECT FUTURE RESULTS - -------------------------------------- HP's future operating results may be adversely affected if the Company is unable to continue to rapidly develop, manufacture and market innovative products and services that meet customer requirements. 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 then 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 ramp manufacturing in 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 the customers' demand and timing for those particular products or services. Given the wide variety of systems, products and services which the Company offers, the process of planning production and managing inventory levels becomes increasingly difficult. Inventory management has also become increasingly complex as the Company continues to sell a greater mix of products, especially printers and personal computers, through third party distribution channels. Resellers 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. Resellers may increase orders during times of shortages, cancel orders if the channel is filled with currently available products, or delay orders in anticipation of the new products. Any excess supply could result in price reductions and inventory writedowns, which in turn could adversely affect the Company's gross margins. 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 competitors' introductions of new products and services may negatively affect the future operating results of the Company, especially when these 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 replace or compete with others of the Company's current products. 8 Portions of the Company's manufacturing operations are dependent on the ability of suppliers to deliver 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 could be developed. In order to secure components for production and introduction of new products, the Company frequently makes advanced 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. The Company continues to expand into third-party distribution channels to accomodate changing customer preferences. As a result, the financial health of these resellers, and the Company's continuing relationships with them, become 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 these resellers substantially weakens or the Company's relationship with such resellers deteriorates. 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 foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, trade protection measures, import or export licensing requirements, the overlap of different tax structures, unexpected changes in regulatory requirements and natural disasters. 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 the consummation of any transaction is unlikely to have a material effect on the Company's results as a whole, the implementation or integration of the 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 or implementation depends on a variety of factors, including the hiring and retention or coordination 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. 9 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 predominately self-insured for losses and interruptions caused by earthquakes. Operations of the Company 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. 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. 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. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open(R) Company Limited. X/Open is a registered trademark, and the X device is a trademark of X/Open Company Ltd. in the U.K. and other countries. 10 PART II. OTHER INFORMATION --------------------------- Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on February 25, 1997. (b) At the Annual Meeting, shareholders voted on three matters: the election of directors, the adoption of the Company's 1997 Director Stock Plan and the appointment of Price Waterhouse LLP as the Company's independent accountants. The shareholders elected all members of the management slate in an uncontested election and approved the adoption of the 1997 Director Stock Plan and the appointment of independent accountants, by the following votes, respectively. Directors --------- Votes Withheld/ Director Votes For Abstentions -------- --------- --------------- Thomas E. Everhart 839,973,588 6,957,640 John B. Fery 840,037,495 6,893,733 Jean-Paul G. Gimon 840,129,551 6,801,677 Sam Ginn 840,150,525 6,780,703 Richard A. Hackborn 840,189,980 6,741,248 Walter B. Hewlett 840,143,171 6,788,057 George A. Keyworth II 840,183,091 6,748,137 David M. Lawrence, M.D. 840,058,118 6,873,110 Paul F. Miller, Jr. 840,137,583 6,793,645 Susan P. Orr 840,158,608 6,772,620 David W. Packard 840,060,904 6,870,324 Lewis E. Platt 840,185,891 6,745,337 Robert P. Wayman 840,167,232 6,763,996 Adoption of 1997 Director Stock Plan ------------------------------------ Votes Withheld/ Votes For Votes Against Abstentions --------- ------------- --------------- 827,400,859 12,464,458 7,065,911 Accountants ----------- Votes Withheld/ Votes For Votes Against Abstentions --------- ------------- --------------- 843,735,489 1,302,557 1,893,182 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 13 of this report. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended January 31, 1997. 11 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: March 14, 1997 By: ROBERT P. WAYMAN -------------------- Robert P. Wayman Executive Vice President, Finance and Administration (Chief Financial Officer) 12 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES EXHIBIT INDEX ------------- Exhibits: 1. Not applicable. 2. None. 3. Amended By-Laws 4. None. 5-9. Not applicable. 10-11. None. 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. Hewlett-Packard Company 1997 Director Stock Plan, which exhibit is incorporated herein by reference to Form S-8 filing made on March 7, 1997. 13