- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) <TABLE> <C> <S> /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. </TABLE> FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000 OR <TABLE> <C> <S> / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. </TABLE> FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 1-4423 ------------------------ HEWLETT-PACKARD COMPANY (Exact name of registrant as specified in its charter) <TABLE> <S> <C> 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) </TABLE> (650) 857-1501 (Registrant's telephone number, including area code) (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. <TABLE> <CAPTION> CLASS OUTSTANDING AT APRIL 30, 2000 ------------------------------ <S> <C> Common Stock, $0.01 par value 997 million shares </TABLE> - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES INDEX <TABLE> <CAPTION> PAGE NO. -------- <S> <C> <C> <C> Part I. Financial Information Item 1. Financial Statements. Consolidated Condensed Statement of Earnings Three and six months ended April 30, 2000 and 1999 (Unaudited)................................................. 3 Consolidated Condensed Balance Sheet April 30, 2000 (Unaudited) and October 31, 1999............. 4 Consolidated Condensed Statement of Cash Flows Six months ended April 30, 2000 and 1999 (Unaudited)........ 5 Notes to Consolidated Condensed Financial Statements (Unaudited)................................................. 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)....................... 14-24 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 24 Part II. Other Information...................................................... 25 Item 4. Submission of Matters to a Vote of Security Holders......... 25 Item 6. Exhibits and Reports on Form 8-K............................ 25 Signature...................................................................................... 26 Exhibit Index.................................................................................. 27 </TABLE> 2
ITEM 1. FINANCIAL STATEMENTS. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (UNAUDITED) (IN MILLIONS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net revenue: Products.............................................. $10,232 $ 8,899 $20,193 $17,601 Services.............................................. 1,796 1,556 3,508 3,089 ------- ------- ------- ------- Total net revenue................................... 12,028 10,455 23,701 20,690 ------- ------- ------- ------- Costs and expenses: Cost of products sold and services.................... 8,595 7,299 16,944 14,367 Research and development.............................. 671 633 1,278 1,209 Selling, general and administrative................... 1,872 1,628 3,637 3,122 ------- ------- ------- ------- Total costs and expenses............................ 11,138 9,560 21,859 18,698 ------- ------- ------- ------- Earnings from operations................................ 890 895 1,842 1,992 Interest income and other, net.......................... 210 194 373 343 Interest expense........................................ 40 45 96 92 ------- ------- ------- ------- Earnings from continuing operations before taxes........ 1,060 1,044 2,119 2,243 Provision for taxes..................................... 244 278 509 595 ------- ------- ------- ------- Net earnings from continuing operations................. 816 766 1,610 1,648 Net earnings from discontinued operations............... 119 152 119 230 ------- ------- ------- ------- Net earnings............................................ $ 935 $ 918 $ 1,729 $ 1,878 ======= ======= ======= ======= Net earnings per share--Continuing operations: Basic................................................. $ 0.82 $ 0.76 $ 1.62 $ 1.63 Diluted............................................... $ 0.79 $ 0.73 $ 1.56 $ 1.58 Net earnings per share--Discontinued operations: Basic................................................. $ 0.12 $ 0.15 $ 0.12 $ 0.23 Diluted............................................... $ 0.11 $ 0.15 $ 0.11 $ 0.22 Net earnings per share--Total: Basic................................................. $ 0.94 $ 0.91 $ 1.74 $ 1.86 Diluted............................................... $ 0.90 $ 0.88 $ 1.67 $ 1.80 Cash dividends declared per share....................... $ 0.00 $ 0.00 $ 0.32 $ 0.32 Average number of shares and equivalents: Basic................................................. 994 1,010 996 1,010 Diluted............................................... 1,042 1,051 1,042 1,050 </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements. 3
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (IN MILLIONS EXCEPT PAR VALUE AND NUMBER OF SHARES) <TABLE> <CAPTION> APRIL 30, OCTOBER 31, 2000 1999 ----------- ------------ (UNAUDITED) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents................................. $ 3,678 $ 5,411 Short-term investments.................................... 225 179 Accounts receivable....................................... 5,509 5,958 Financing receivables..................................... 1,996 1,889 Inventory................................................. 4,985 4,863 Other current assets...................................... 3,609 3,342 ------- ------- Total current assets.................................... 20,002 21,642 ------- ------- Property, plant and equipment (less accumulated depreciation of $4,810 at April 30, 2000 and $4,587 at October 31, 1999)..................................................... 4,347 4,333 Long-term investments and other assets...................... 5,970 5,789 Net assets of discontinued operations....................... 3,789 3,533 ------- ------- Total assets............................................ $34,108 $35,297 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and short-term borrowings................... $ 647 $ 3,105 Accounts payable.......................................... 3,873 3,517 Employee compensation and benefits........................ 1,570 1,287 Taxes on earnings......................................... 1,490 2,152 Deferred revenues......................................... 1,534 1,437 Other accrued liabilities................................. 2,916 2,823 ------- ------- Total current liabilities............................... 12,030 14,321 ------- ------- Long-term debt.............................................. 1,855 1,764 Other liabilities........................................... 774 917 Stockholders' equity: Preferred stock, $0.01 par value (300,000,000 shares authorized; none issued)............................................ -- -- Common stock, $0.01 par value (4,800,000,000 shares authorized; 997,230,869 issued and outstanding at April 30, 2000, and 1,004,569,000 shares issued and outstanding at October 31, 1999......................... 10 10 Additional paid-in capital................................ 786 -- Retained earnings......................................... 18,529 18,285 Accumulated other comprehensive income.................... 124 -- ------- ------- Total stockholders' equity.............................. 19,449 18,295 ------- ------- Total liabilities and stockholders' equity.............. $34,108 $35,297 ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements. 4
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (IN MILLIONS) <TABLE> <CAPTION> SIX MONTHS ENDED APRIL 30, ------------------- 2000 1999 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings from continuing operations................... $1,610 $1,648 Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities: Depreciation and amortization........................... 673 626 Deferred taxes on earnings.............................. (128) 340 Change in assets and liabilities: Accounts and financing receivables.................... 18 (181) Inventory............................................. (131) (152) Accounts payable...................................... 356 (43) Taxes on earnings..................................... (428) (884) Other current assets and liabilities.................. 146 363 Other, net............................................ (103) 82 ------ ------ Net cash provided by operating activities............. 2,013 1,799 ------ ------ Cash flows from investing activities: Investment in property, plant and equipment............... (763) (429) Disposition of property, plant and equipment.............. 219 190 Purchases of investments.................................. (650) (713) Maturities and sales of investments....................... 751 726 Other, net................................................ 32 54 ------ ------ Net cash used in investing activities................. (411) (172) ------ ------ Cash flows from financing activities: Increase (decrease) in notes payable and short-term borrowings.............................................. (2,315) 171 Issuance of long-term debt................................ 324 227 Payment of long-term debt................................. (342) (531) Issuance of common stock under employee stock plans....... 504 330 Repurchase of common stock................................ (2,254) (728) Dividends................................................. (321) (325) ------ ------ Net cash used in financing activities................. (4,404) (856) ------ ------ Net cash provided by discontinued operations................ 1,069 77 ------ ------ Increase (decrease) in cash and cash equivalents............ (1,733) 848 Cash and cash equivalents at beginning of period............ 5,411 4,046 ------ ------ Cash and cash equivalents at end of period.................. $3,678 $4,894 ====== ====== </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements. 5
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: BASIS OF PRESENTATION In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of April 30, 2000 and October 31, 1999, the results of operations for the three- and six-month periods ended April 30, 2000 and 1999, and the cash flows for the six-month periods ended April 30, 2000 and 1999. The results of operations for the three- and six-month periods ended April 30, 2000 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 of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in the Hewlett-Packard Company 1999 Annual Report on Form 10-K. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2: DISCONTINUED OPERATIONS On March 2, 1999, Hewlett-Packard Company (HP) announced its intention to launch a new company, subsequently named Agilent Technologies, Inc. (Agilent Technologies), through a distribution of Agilent Technologies common stock to HP's stockholders in the form of a tax-free spin-off. Agilent Technologies is composed of HP's Measurement Systems Organization, which includes its test-and- measurement, semiconductor products, chemical analysis and healthcare solutions businesses. Effective July 31, 1999, HP's management and Board of Directors completed the plan of disposition for Agilent Technologies. HP's consolidated condensed financial statements for all periods present Agilent Technologies as a discontinued business segment in accordance with Accounting Principles Board Opinion No. 30. In the second quarter of fiscal 2000, the cumulative net earnings of Agilent Technologies since the July 31, 1999 measurement date began to exceed the total estimated net costs to effect the spin-off. Net earnings of Agilent Technologies for the period from July 31, 1999 through April 30, 2000 totaled $287 million (net of related tax expense of $174 million), and the estimated net costs to effect the spin-off were $168 million (net of related tax benefit of $32 million). Accordingly, the net of these two amounts, or $119 million, was recognized in the second quarter of fiscal year 2000. The net earnings of Agilent Technologies for the period from May 1, 2000 through the spin-off date of June 2, 2000, and any true-up of the estimated net costs to effect the spin-off, will be reflected as net earnings from discontinued operations in HP's results for the third quarter of fiscal 2000. Net earnings from discontinued operations for the second quarter and first six months of fiscal 1999 consisted only of the net earnings of Agilent Technologies. 6
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Net assets of discontinued operations are summarized below: <TABLE> <CAPTION> APRIL 30, OCTOBER 31, 2000 1999 ---------- ------------ (IN MILLIONS) <S> <C> <C> Current assets........................................... $ 4,957 $ 3,538 Property, plant and equipment, net....................... 1,453 1,387 Other assets............................................. 811 619 Current liabilities...................................... (2,213) (1,681) Other liabilities........................................ (1,219) (330) ------- ------- Net assets of discontinued operations.................... $ 3,789 $ 3,533 ======= ======= </TABLE> In the first quarter of fiscal 2000, HP provided net funding of approximately $1.1 billion to Agilent Technologies. In November 1999, Agilent Technologies completed an initial public offering of approximately 16% of its common stock and distributed the net proceeds of approximately $2.1 billion to HP. These transactions resulted in an increase in cash of approximately $1.0 billion, net assets of discontinued operations of approximately $0.4 billion and additional paid-in capital of approximately $1.4 billion. In April 2000, HP's Board of Directors declared a stock dividend of HP's remaining interest in Agilent Technologies to HP's stockholders of record as of 5:00 p.m. Eastern Daylight Time on May 2, 2000. On June 2, 2000, this distribution was made on the basis of 0.3814 of a share of Agilent Technologies common stock on each outstanding share of HP common stock. The decrease in the intrinsic value of HP's employee stock plans attributable to the distribution of Agilent Technologies was restored in accordance with the methodology set forth in the Financial Accounting Standards Board (FASB) Emerging Issues Task Force Issue 90-9, "Changes to Fixed Employee Stock Option Plans as a Result of Equity Restructuring." NOTE 3: ENHANCED EARLY RETIREMENT PROGRAM In March 2000, HP offered 2,500 United States employees the opportunity to retire early and receive an enhanced payout. The purpose of the enhanced early retirement program was to balance the work force based on HP's long-term business strategy. All employees who were offered the program were required to accept the offer by April 20, 2000, and approximately 1,300 employees accepted the offer. The cost of the enhanced payout of approximately $100 million was recorded in the second quarter of fiscal 2000 upon employee acceptance of the offer. Approximately $37 million was classified as cost of products sold and services and approximately $63 million was classified as operating expenses ($16 million in research and development expense and $47 million in selling, general and administrative expense). HP expects to realize related pension settlement gains of approximately $25 million in the second half of fiscal 2000 as payments to the retirees are made from the pension plan assets. NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement, as amended, is effective for fiscal years beginning after June 15, 2000. HP will adopt the standard no 7
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) later than the first quarter of fiscal year 2001 and is in the process of determining the impact that adoption will have on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The staff accounting bulletin is effective no later than the first quarter of HP's fiscal year 2001. HP is in the process of determining the impact that adoption will have on its consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions involving Stock Compensation--an Interpretation of Accounting Principles Board (APB) Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25. FIN 44 is effective July 1, 2000. Management believes that FIN 44 will not have a material effect on the financial position or results of operation of HP. NOTE 5: EARNINGS PER SHARE HP's basic earnings per share (EPS) is calculated based on net earnings available to common stockholders and the weighted-average number of shares outstanding during the reporting 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. <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED APRIL 30, APRIL 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN MILLIONS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Numerator: Net earnings from continuing operations................... $ 816 $ 766 $1,610 $1,648 Adjustment for interest expense, net of income tax effect.................................................. 8 4 15 11 ------ ------ ------ ------ Net earnings from continuing operations, adjusted......... 824 770 1,625 1,659 Net earnings from discontinued operations................. 119 152 119 230 ------ ------ ------ ------ Net earnings, adjusted.................................... $ 943 $ 922 $1,744 $1,889 ====== ====== ====== ====== Denominator: Weighted-average shares outstanding....................... 994 1,010 996 1,010 Effect of dilutive securities: Dilutive options........................................ 37 30 35 29 Zero-coupon subordinated convertible notes due 2017..... 11 11 11 11 ------ ------ ------ ------ Dilutive potential common shares........................ 48 41 46 40 ------ ------ ------ ------ Weighted-average shares and dilutive potential common shares.................................................. 1,042 1,051 1,042 1,050 ====== ====== ====== ====== Net earnings per share--Continuing operations: Basic..................................................... $ 0.82 $ 0.76 $ 1.62 $ 1.63 Diluted................................................... $ 0.79 $ 0.73 $ 1.56 $ 1.58 Net earnings per share--Discontinued operations: Basic..................................................... $ 0.12 $ 0.15 $ 0.12 $ 0.23 Diluted................................................... $ 0.11 $ 0.15 $ 0.11 $ 0.22 Net earnings per share--Total: Basic..................................................... $ 0.94 $ 0.91 $ 1.74 $ 1.86 Diluted................................................... $ 0.90 $ 0.88 $ 1.67 $ 1.80 Average number of shares and equivalents: Basic..................................................... 994 1,010 996 1,010 Diluted................................................... 1,042 1,051 1,042 1,050 </TABLE> 8
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6: INCOME TAXES 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. NOTE 7: MARKETABLE EQUITY INVESTMENTS Investments in marketable corporate equity securities are considered available-for-sale and are carried at market value, with unrealized gains and losses, net of tax, included in other comprehensive income as a component of stockholders' equity. Marketable equity securities totaling $232 million were included in long-term investments and other assets at April 30, 2000. Proceeds from sales of marketable equities were $47 million in the second quarter and first half of fiscal 2000, and realized gains on sales of marketable equities were $45 million in the same periods. The specific identification method is used to account for gains and losses on marketable equity securities. NOTE 8: INVENTORY <TABLE> <CAPTION> APRIL 30, OCTOBER 31, 2000 1999 ---------- ------------ (IN MILLIONS) <S> <C> <C> Finished goods........................................... $3,643 $3,581 Purchased parts and fabricated assemblies................ 1,342 1,282 ------ ------ $4,985 $4,863 ====== ====== </TABLE> NOTE 9: STOCKHOLDERS' EQUITY HP repurchases shares of its common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and a separate incremental plan authorizing purchases in the open market or in private transactions. During the second quarter of fiscal 2000, 9.8 million shares were repurchased under these plans for an aggregate price of $1.3 billion. In the first half of fiscal 2000, 18.7 million shares were repurchased for an aggregate price of $2.3 billion. In fiscal 1999, 6.7 million shares were repurchased for an aggregate price of $463 million in the second quarter, and 10.9 million shares were repurchased for an aggregate price of $728 million in the first half of the year. The Board of Directors authorized an additional $2.0 billion in repurchases under these two programs in the aggregate in November 1999, and an additional $2.0 billion in May 2000. As of May 31, 2000, HP had remaining authorization for future repurchases under the two programs of approximately $3.2 billion. 10
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 10: COMPREHENSIVE INCOME Comprehensive income consists of net earnings as well as other comprehensive income. HP's other comprehensive income consists of unrealized gains and losses on available-for-sale securities. Comprehensive income for the periods ended April 30, 2000 was as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, 2000 APRIL 30, 2000 ------------------ ---------------- (IN MILLIONS) <S> <C> <C> Net earnings................................ $935 $1,729 Net unrealized gain (loss) on available-for-sale securities, net of taxes..................................... (19) 124 ---- ------ Comprehensive income........................ $916 $1,853 ==== ====== </TABLE> Comprehensive income for the three- and six-month periods ended April 30, 1999 consisted of net earnings only. NOTE 11: SUPPLEMENTAL CASH FLOW INFORMATION <TABLE> <CAPTION> SIX MONTHS ENDED APRIL 30, ------------------- 2000 1999 -------- -------- (IN MILLIONS) <S> <C> <C> Cash paid for income taxes, net............................. $ 594 $ 1,013 Cash paid for interest...................................... 115 121 Non-cash transactions--issuance of common stock for employee benefit plans: Restricted stock.......................................... (73) (4) Employer matching contributions for TAXCAP and employee stock benefit plans..................................... 47 28 </TABLE> NOTE 12: SEGMENT INFORMATION HP is a leading global provider of computing and imaging solutions and services for business and home and is focused on capitalizing on the opportunities of the Internet and the emergence of next-generation appliances, e-services and infrastructure. As of April 30, 2000, HP organized its operations into four major businesses: Imaging and Printing Systems, Computing Systems, IT Services, and Measurement Systems, each of which comprised a reportable segment. The Measurement Systems business, now named Agilent Technologies, is reported in these financial statements as a discontinued operation. For further discussion, see Note 2 to the consolidated condensed financial statements. In the second quarter of fiscal 2000, HP made certain strategic changes to its organizational structure. These changes included the movement of our appliances business from the Computing Systems segment to a separate operating segment, and the movement of the majority of our services business related to imaging and printing from the Imaging and Printing Systems segment to our IT Services segment. The appliances operating segment is now included in "All Other" as it does not meet 11
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) the materiality threshold for a reportable segment. Segment financial data for all prior periods has been restated to reflect these organizational changes. The results of the reportable segments are derived directly from HP's management reporting system. These results are based on HP's method of internal reporting and are not necessarily in conformity with generally accepted accounting principles. Management measures the performance of each segment based on several metrics, including earnings from operations. These results are used, in part, to evaluate the performance of, and allocate resources to, each of the segments. The table below presents selected financial information for each continuing reportable segment: <TABLE> <CAPTION> IMAGING AND PRINTING COMPUTING IT ALL TOTAL SYSTEMS SYSTEMS SERVICES OTHER SEGMENTS ----------- --------- -------- -------- -------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> FOR THE THREE MONTHS ENDED APRIL 30, 2000: Net revenue from external customers............ $ 5,127 $4,988 $1,773 $302 $12,190 Intersegment net revenue....................... 2 99 24 46 171 ------- ------ ------ ---- ------- Total net revenue............................ 5,129 5,087 1,797 348 12,361 ======= ====== ====== ==== ======= Earnings (loss) from operations................ $ 694 $ 190 $ 149 $(11) $ 1,022 ======= ====== ====== ==== ======= FOR THE THREE MONTHS ENDED APRIL 30, 1999: Net revenue from external customers............ $ 4,683 $4,148 $1,582 $216 $10,629 Intersegment net revenue....................... 13 134 17 2 166 ------- ------ ------ ---- ------- Total net revenue............................ 4,696 4,282 1,599 218 10,795 ======= ====== ====== ==== ======= Earnings (loss) from operations................ $ 608 $ 119 $ 133 $(22) $ 838 ======= ====== ====== ==== ======= FOR THE SIX MONTHS ENDED APRIL 30, 2000: Net revenue from external customers............ $10,161 $9,834 $3,478 $544 $24,017 Intersegment net revenue....................... 3 164 42 70 279 ------- ------ ------ ---- ------- Total net revenue............................ 10,164 9,998 3,520 614 24,296 ======= ====== ====== ==== ======= Earnings (loss) from operations................ $ 1,389 $ 369 $ 323 $(23) $ 2,058 ======= ====== ====== ==== ======= FOR THE SIX MONTHS ENDED APRIL 30, 1999: Net revenue from external customers............ $ 9,120 $8,303 $3,138 $443 $21,004 Intersegment net revenue....................... 21 258 33 3 315 ------- ------ ------ ---- ------- Total net revenue............................ 9,141 8,561 3,171 446 21,319 ======= ====== ====== ==== ======= Earnings (loss) from operations................ $ 1,272 $ 351 $ 347 $(24) $ 1,946 ======= ====== ====== ==== ======= ASSETS: As of April 30, 2000........................... $ 6,524 $5,587 $7,626 $327 $20,064 ======= ====== ====== ==== ======= As of October 31, 1999......................... $ 7,130 $5,846 $7,120 $250 $20,346 ======= ====== ====== ==== ======= </TABLE> 12
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following is a reconciliation of segment information to HP consolidated totals: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN MILLIONS) <S> <C> <C> <C> <C> NET REVENUE: Total segments.......................................... $12,361 $10,795 $24,296 $21,319 Financing interest income reclassification.............. (89) (74) (171) (143) Elimination of intersegment net revenue and other....... (244) (266) (424) (486) ------- ------- ------- ------- Total HP consolidated................................. $12,028 $10,455 $23,701 $20,690 ======= ======= ======= ======= EARNINGS FROM CONTINUING OPERATIONS BEFORE TAXES: Total segment earnings from operations.................. $ 1,022 $ 838 $ 2,058 $ 1,946 Net financing interest reclassification................. (39) (32) (78) (62) Interest income and other, net.......................... 210 194 373 343 Interest expense........................................ (40) (45) (96) (92) Corporate and unallocated costs, and eliminations....... (93) 89 (138) 108 ------- ------- ------- ------- Total HP consolidated................................. $ 1,060 $ 1,044 $ 2,119 $ 2,243 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> APRIL 30, OCTOBER 31, 2000 1999 ---------- ------------ (IN MILLIONS) <S> <C> <C> ASSETS: Total segments.............................................. $20,064 $20,346 Assets not allocated to segments: Cash and cash equivalents................................. 3,678 5,411 Short-term investments and long-term investments in debt securities.............................................. 1,138 1,192 Other corporate........................................... 5,439 4,815 ------- ------- Total assets from continuing operations..................... 30,319 31,764 Net assets of discontinued operations....................... 3,789 3,533 ------- ------- Total HP consolidated..................................... $34,108 $35,297 ======= ======= </TABLE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) HEWLETT-PACKARD COMPANY AND SUBSIDIARIES THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS DOCUMENT. THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT THE CURRENT VIEW OF HP WITH RESPECT TO FUTURE EVENTS. THESE STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DESCRIBED FROM TIME TO TIME IN HP'S SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING BUT NOT LIMITED TO THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 1999 AND SUBSEQUENTLY FILED QUARTERLY REPORTS. IF ANY OF THESE RISKS OR UNCERTAINTIES MATERIALIZE OR ANY OF THESE ASSUMPTIONS PROVE INCORRECT, HP'S RESULTS COULD DIFFER MATERIALLY FROM HP'S EXPECTATIONS IN THESE STATEMENTS. HP DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS. As more fully discussed in Note 2 to the consolidated condensed financial statements, on March 2, 1999, HP announced its intention to launch a new company, subsequently named Agilent Technologies, through a distribution of Agilent Technologies common stock to HP's stockholders in the form of a tax- free spin-off. Agilent Technologies is composed of the former HP Measurement Systems Organization, which includes its test and measurement, semiconductor products, chemical analysis and healthcare solutions businesses. Effective July 31, 1999, HP's management and Board of Directors completed the plan of disposition for Agilent Technologies. On November 23, 1999, Agilent Technologies completed an initial public offering (IPO) of approximately 16% of its common stock. On April 7, 2000, HP's Board of Directors declared a stock dividend of HP's remaining interest in Agilent Technologies to HP's stockholders of record as of 5:00 p.m. Eastern Daylight Time on May 2, 2000. On June 2, 2000, this distribution was made on the basis of 0.3814 of a share of Agilent Technologies' common stock on each outstanding share of HP common stock. HP's consolidated financial statements for all periods present Agilent Technologies as a discontinued business segment in accordance with Accounting Principles Board Opinion No. 30. Unless otherwise indicated, the following discussion relates to HP's continuing operations. RESULTS OF OPERATIONS Net revenue for the second quarter ended April 30, 2000, was $12.0 billion, an increase of 15% from the same period in fiscal 1999. The increase in net revenue was a result of solid growth across all business segments. Net revenue for the Computing Systems segment grew 19% in the second quarter of 2000, compared with a year ago, while the IT Services segment grew 12%, and the Imaging and Printing Systems segment grew 9%. Overall, product sales for the second quarter increased 15%, and service revenue grew 16% over the corresponding period in fiscal 1999. International revenue grew 14% over the prior year to $6.7 billion, and U.S. revenue increased 17% to $5.3 billion. Strong international growth was fueled primarily by the economic improvement in Asia. Fluctuations in foreign currency rates adversely impacted year-over-year revenue growth for the company as a whole by approximately two percentage points. For the first half of fiscal 2000, net revenue was $23.7 billion, an increase of 15% over the first half of 1999, reflecting revenue growth across all the business segments. Net revenue for Computing Systems grew 17% over the prior year, and net revenue for each of the Imaging and Printing Systems and the IT Services segments increased 11%. Product sales for the first half of 2000 increased 15% over the same period in 1999, while service revenue grew 14%. U.S. revenue increased 15% over 1999 to $10.3 billion. International revenue grew 15% to $13.4 billion. On a year-to-date basis, fluctuations in currency rates had a minimal impact on revenue growth for the company as a whole. 14
Costs, expenses and earnings as a percentage of net revenue were as follows: <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED APRIL 30, APRIL 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Cost of products sold and services.......... 71.5% 69.8% 71.5% 69.4% Research and development.................... 5.6% 6.1% 5.4% 5.8% Selling, general and administrative......... 15.6% 15.6% 15.3% 15.1% Earnings from operations.................... 7.4% 8.6% 7.8% 9.6% Net earnings from continuing operations..... 6.8% 7.3% 6.8% 8.0% </TABLE> In March 2000, HP offered 2,500 United States employees the opportunity to retire early and receive an enhanced payout. The purpose of the enhanced early retirement program was to balance the work force based on HP's long-term business strategy. All employees who were offered the program were required to accept the offer by April 20, 2000, and approximately 1,300 employees accepted the offer. The cost of the enhanced payout of approximately $100 million was recorded in the second quarter of fiscal 2000. This charge consisted of approximately $37 million classified as cost of products sold and services and approximately $63 million classified as operating expenses ($16 million in research and development expense, and $47 million in selling, general and administrative expense). HP expects to realize related pension settlement gains of approximately $25 million in the second half of fiscal 2000 as payments to the retirees are made from the pension plan assets. Cost of products sold and services as a percentage of net revenue was 71.5% in both the second quarter and first half of fiscal 2000, compared with 69.8% in the second quarter of 1999 and 69.4% in the first half of 1999. As discussed above, a portion of the charges related to our enhanced early retirement program were included in cost of products sold and services in the second quarter of fiscal 2000. These charges had an unfavorable impact of 0.3 percentage points on the ratio in the second quarter, and a 0.2 percentage point impact in the first half of fiscal 2000. The remaining percentage point increases in the ratio in both the quarter and year-to-date periods were driven primarily by the Computing Systems and Imaging and Printing Systems segments. HP expects cost of products sold and services as a percentage of net revenue to remain at the same level or improve slightly in the second half of fiscal 2000. Favorable projected impacts of product mix changes and supply chain improvements are expected to be offset at least partially by continued competitive pricing pressures. Total operating expenses, composed of research and development and selling, general and administrative expenses, were $2.5 billion for the second quarter of 2000, an increase of 12% over the second quarter of fiscal 1999. Operating expenses were $4.9 billion for the first half of 2000, a 13% increase over the first half of 1999. The early retirement program discussed above, in addition to higher stock appreciation rights expense and costs incurred to effect the spin-off of Agilent Technologies, contributed approximately 4 percentage points to the operating expense growth in the second quarter of 2000 and approximately 3 percentage points for the first half of 2000. The higher stock appreciation rights expense resulted from an increase in HP's stock price of 25% during the second quarter and 82% in the first half of fiscal 2000. The spin-off costs consisted primarily of retention incentives given to continuing HP employees involved in effecting the transaction. Research and development expense grew 6% in both the second quarter and first half of fiscal 2000 over the prior year due primarily to an increase in spending that reflects our continuing investment in design and development of new technologies in computing systems, imaging and printing systems and digital media. Selling, general and administrative expenses increased 15% in the second quarter and 16% in the first half of fiscal 2000 over the corresponding periods in fiscal 1999. Adjusted for the costs of the early retirement program, the incremental effect of stock appreciation rights and costs to effect the Agilent Technologies spin-off, selling, general and administrative expenses increased 15
9% in the second quarter and 12% in the first half of fiscal 2000. The adjusted growth for both the three- and six-month periods was attributable to higher selling expenses to support business growth and increased marketing expenses to support our corporate branding initiative and e-services strategy. HP's effective tax rate was 24% for the first half of fiscal 2000, reflecting the tax rate expected for the full fiscal year. The tax rate was 23% in the second quarter of 2000. In 1999, the full-year effective tax rate was 26%, and the rate was 26.5% in both the second quarter and first half of the year. The year-to-year decrease in HP's effective tax rate was primarily the result of changes in the mix of our pre-tax earnings in various tax jurisdictions throughout the world. Net earnings from continuing operations increased 7% to $816 million in the second quarter of fiscal 2000 compared with the same period in fiscal 1999. As a percentage of net revenue, net earnings from continuing operations was 6.8% in the second quarter of 2000, compared with 7.3% in the same quarter in fiscal 1999. For the first six months of 2000, net earnings from operations decreased 2% to $1,610 million from $1,648 million in 1999. As a percentage of net revenue, net earnings from continuing operations for the six-month period decreased to 6.8% in 2000 from 8.0% in the same period in 1999. In the second quarter of fiscal 2000, the cumulative net earnings of Agilent Technologies since the July 31, 1999 measurement date began to exceed the total estimated net costs to effect the spin-off. Net earnings of Agilent Technologies for the period from July 31, 1999 through April 30, 2000 totaled $287 million (net of related tax expense of $174 million), and the estimated net costs to effect the spin-off were $168 million (net of related tax benefit of $32 million). Accordingly, the net of these two amounts, or $119 million, was recognized in the second quarter of fiscal year 2000. The net earnings of Agilent Technologies for the period from May 1, 2000 through the spin-off date of June 2, 2000, and any true-up of the estimated net costs to effect the spin-off, will be reflected as net earnings from discontinued operations in HP's results for the third quarter of fiscal 2000. Net earnings from discontinued operations for the second quarter and first six months of fiscal 1999 consisted only of the net earnings of Agilent Technologies. See Note 2 to the consolidated condensed financial statements for further information. SEGMENT INFORMATION The following is a discussion of operating results for each of HP's business segments. A description of products and services for each segment can be found in the notes to the consolidated financial statements in the Hewlett-Packard Company 1999 Annual Report on Form 10-K. Quarterly financial data for each segment can be found in Note 12 to these consolidated condensed financial statements. The financial data for the 1999 periods and the first quarter of 2000 have been restated to reflect changes in HP's organizational structure that occurred during the second quarter of fiscal 2000 which are more fully described in Note 10 to the consolidated condensed financial statements. The reportable segments disclosed in this Form 10-Q are based on HP's management organizational structure as of April 30, 2000. Future changes to this organizational structure may result in changes to the reportable segments disclosed. IMAGING AND PRINTING SYSTEMS <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED APRIL 30, ENDED APRIL 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN MILLIONS) <S> <C> <C> <C> <C> Net revenue................................ $5,129 $4,696 $10,164 $9,141 Earnings from operations................... $ 694 $ 608 $ 1,389 $1,272 </TABLE> Imaging and Printing Systems' net revenue grew 9% for the quarter ended April 30, 2000 compared with the same period in 1999. For the first six months of fiscal year 2000, Imaging and 16
Printing's net revenue increased 11% over the 1999 period. Net revenue growth in both the three- and six-month periods was driven primarily by strong sales of printer supplies. Printer hardware, particularly in the home category, also contributed to the increase. Despite strong printer hardware unit growth, revenue growth was somewhat constrained by declines in average selling prices and a shift to low-end products. In addition, unfavorable foreign currency effects, particularly in Europe, moderated the segment's revenue growth in the second quarter. Net revenue growth in printer supplies in both the second quarter and first half of fiscal 2000 reflected continued growth in the installed base and increased usage of recently introduced products. Net revenue growth in printer hardware was driven primarily by the performance of the home category and color laser printers. Strong revenue growth in HP Photosmart and all-in-one products contributed to growth in the home printer category, as did excellent unit growth in DeskJet printers. Partially offsetting these revenue increases was a decline in office products' revenue, reflecting slower monochrome laser sales. Strong growth in color laser printers mitigated this result to some degree. A contributing factor in the revenue decrease in office products was our recently introduced automatic inventory replenishment program, which had the effect of reducing channel inventory during the first half of fiscal 2000. This program is designed to enhance our supply-chain strategy going forward. Earnings from operations as a percentage of net revenue was 13.5% for the quarter ended April 30, 2000, compared with 12.9% for the same period in 1999. For the first six months of the year, earnings from operations was 13.7% in fiscal 2000, compared with 13.9% in 1999. The ratios in the second quarter and first half of fiscal 2000 were negatively impacted by a shift toward lower-margin home printers and higher component costs related to the strong Japanese yen, partially offset by strong sales of higher-margin printer supplies. In the second quarter of 2000, these higher costs of products and services were more than offset by lower operating expenses as a percentage of revenue due to strong expense controls in all areas as well as improved operational efficiencies in sales and marketing. COMPUTING SYSTEMS <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED APRIL 30, ENDED APRIL 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN MILLIONS) <S> <C> <C> <C> <C> Net revenue................................. $5,087 $4,282 $9,998 $8,561 Earnings from operations.................... $ 190 $ 119 $ 369 $ 351 </TABLE> Computing Systems' net revenue increased 19% for the quarter ended April 30, 2000 compared with the same period in 1999. For the first six months of fiscal 2000, Computing Systems' net revenue increased 17% over the 1999 period. Strong performance in home and notebook PCs and UNIX-Registered Trademark- server products drove the overall growth in both the three- and six-month periods of 2000. This performance was partially offset by a continued shift to low-end products, declines in PC average selling prices and the continued effects of the transition to a new enterprise storage strategy. Computing Systems' net revenue growth benefited from very strong unit shipments of home and notebook PCs in both the three- and six-month periods of fiscal 2000 compared with the 1999 periods. Growth in home PCs was driven by favorable acceptance of new products launched in the first quarter of fiscal 2000 aided by the exit of two major competitors from the retail market. Notebook PCs continued to benefit from strong sales of the base portfolio as well as growth in the retail notebook line. In addition, excellent performance in entry-level and mid-level UNIX-Registered Trademark-(1) servers favorably impacted revenue in the second quarter of 2000. High-end UNIX-Registered Trademark- servers posted good growth in the first quarter of fiscal 2000, but sales declined in the second quarter compared with the second quarter of 1999 which we believe is due to customer anticipation of the new high-end server that we expect to - ------------------------ (1) UNIX is a registered trademark of the Open Group. 17
introduce later this calendar year. Revenue growth in the second quarter and first six months of 2000 was partially offset by the continued effects of the transition to our new high-end enterprise storage strategy, and by the flat revenue performance of business desktop PCs compared with the prior year due to declining average selling prices which offset growth in unit sales. Earnings from operations as a percentage of net revenue was 3.7% for the quarter ended April 30, 2000, compared with 2.8% for the same period in 1999. Improved operating efficiencies resulted in lower operating expenses as a percentage of net revenue. This favorable impact was partially offset by a higher cost of sales percentage due to a continued shift to lower-margin products and declines in average selling prices, moderated by favorable margins on UNIX-Registered Trademark- servers. For the first six months of the year, earnings from operations was 3.7% in 2000, compared with 4.1% in 1999. This decrease in the earnings from operations ratio was attributable to higher memory costs for business desktop PCs and PC servers experienced during the first quarter, as well as the shift to lower-margin products and declines in average selling prices. This decline was partially offset by a shift towards higher-margin enterprise storage products and lower operating expenses as a percentage of net revenue due to improved operational efficiencies. IT SERVICES <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED APRIL 30, ENDED APRIL 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN MILLIONS) <S> <C> <C> <C> <C> Net revenue................................. $1,797 $1,599 $3,520 $3,171 Earnings from operations.................... $ 149 $ 133 $ 323 $ 347 </TABLE> IT Services' net revenue increased 12% in the second quarter and 11% in the first half of 2000 compared with the same periods in 1999. The growth in net revenue was primarily driven by solid performances in customer support, including mission-critical and networking services, as well as outsourcing services such as systems and network management and enterprise resource planning (ERP). Additionally, IT Services overall growth reflected strength in the UNIX-Registered Trademark- business through an increase in support contracts and customer financing arrangements. Earnings from operations as a percentage of net revenue was 8.3% for the second quarter of 2000, flat with the same period in 1999. For the first half of 2000, earnings from operations decreased to 9.2% from 10.9% in 1999. Both the three-and six-month periods of fiscal 2000 were unfavorably impacted by lower margins on our desktop financing business and an increase in consulting hiring to support future growth. In addition, marketing expenses related to HP's e-services and branding initiatives also contributed to the decline in earnings from operations as a percentage of net revenue for these periods as compared with 1999. However, cost of products and services improvements in our Services and Support businesses offset these negative impacts in the second quarter of fiscal 2000. These margin improvements resulted from improved consulting engagement cost management and greater leverage in outsourcing. 18
LIQUIDITY AND CAPITAL RESOURCES. Our financial position remained strong, with cash and cash equivalents and short-term investments of $3.9 billion at April 30, 2000, compared with $5.6 billion at October 31, 1999. During the first six months of fiscal 2000, cash flows from operating activities were used to pay down short- and long-term debt, fund repurchases of our common stock and purchase property, plant and equipment. Cash flows from operating activities were $2.1 billion during the first six months of fiscal 2000 compared with $1.8 billion for the corresponding period of fiscal 1999. The increase in cash flows from operating activities in the first six months of fiscal 2000 resulted primarily from the collection of receivables and favorable fluctuations in accounts payable. Inventory as a percentage of net revenue declined to 11.0% at April 30, 2000, from 12.1% at April 30, 1999 and 11.5% at October 31, 1999. The decline in the ratio is attributable to continued progress in supply-chain management. Trade and financing receivables as a percentage of net revenue were 16.5%, up slightly from 16.2% at April 30, 1999, but down significantly from 18.5% at year-end. The ratio at year-end reflected a relatively high level of receivables due to seasonal fluctuations. Capital expenditures for the first six months of fiscal 2000 were $763 million, compared with $429 million for the corresponding period in fiscal 1999. Net property, plant and equipment as a percentage of net revenue was 9.6% at April 30, 2000 compared with 11.3% at April 30, 1999 and 10.2% at October 31, 1999. This decline reflects our continuing effort to streamline operations through outsourcing and consolidating activities, improving space utilization and reducing asset intensity to build flexibility into its balance sheet. We invest excess cash in short- and long-term investments, depending on our projected cash needs for operations, capital expenditures and other business purposes. We also supplement our internally generated cash flow with a combination of short- and long-term borrowings. Short- and long-term borrowings in the first six months of fiscal 2000 decreased by $2.4 billion, as cash and net receipts from maturities of short-term investments were used to pay down short-term debt. Long-term debt totaling $342 million matured as scheduled in the first six months of fiscal 2000. At April 30, 2000, we had an unused committed borrowing facility in place totaling $1.0 billion. In March 2000, we filed a shelf registration statement (the Shelf) with the Securities and Exchange Commission to register $3.0 billion of debt securities, common stock, preferred stock, depositary shares and warrants. The Shelf was declared effective on March 17, 2000. On June 6, 2000, we offered under the Shelf $1.5 billion of unsecured 7.15% Global Notes (the Notes) which mature June 15, 2005, unless previously redeemed. This offering is expected to close on June 9, 2000. The net proceeds from the sale of the Notes, estimated to be approximately $1,489 million, will be used for general corporate purposes, which may include repayment of existing indebtedness; acquisitions of products, technology and businesses; capital expenditures and meeting working capital needs. After the completion of this offering, we will have the capacity to issue $1.5 billion of securities under the Shelf. We repurchase shares of our common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and a separate incremental plan authorizing purchases in the open market or in private transactions. During the second quarter of fiscal 2000, 9.8 million shares were repurchased under these plans for an aggregate price of $1.3 billion. In the first half of fiscal 2000, 18.7 million shares were repurchased for $2.3 billion. In fiscal 1999, 6.7 million shares were repurchased for $463 million in the second quarter, and 10.9 million shares were repurchased for a total of $728 million in the first half of the year. The Board of Directors authorized an additional $2.0 billion in repurchases under these two programs in the aggregate in November 1999, and an additional $2.0 billion in May 2000. As of May 31, 2000, HP had remaining authorization for future repurchases under the two programs of approximately $3.2 billion. 19
In the first quarter of fiscal 2000, we provided net funding of approximately $1.1 billion to Agilent Technologies. In November 1999, Agilent Technologies completed an initial public offering of approximately 16% of its common stock and distributed the net proceeds of approximately $2.1 billion to us. FACTORS THAT COULD AFFECT FUTURE RESULTS COMPETITION. We encounter aggressive competition in all areas of our business. We have numerous competitors, ranging from some of the world's largest corporations to many relatively small and highly specialized firms. We compete primarily on the basis of technology, performance, price, quality, reliability, distribution and customer service and support. Product life cycles are short. To remain competitive, we must be able to develop new products and periodically enhance our existing products. In particular, we anticipate that we will have to continue to lower the prices of many of our products to stay competitive and effectively manage financial returns with resulting reduced gross margins. In some of our markets, we may not be able to compete successfully against current and future competitors, and the competitive pressures we face could harm our business and prospects. NEW PRODUCT INTRODUCTIONS. If we cannot continue to rapidly develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability, we may lose market share and our future revenue and earnings may suffer. The process of developing new high technology products and services is complex and uncertain. We must accurately anticipate customers' changing needs and emerging technological trends. We consequently must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. After a product is developed, we must be able to manufacture sufficient volumes quickly at low enough costs. To do this we must accurately forecast volumes, mix of products and configurations. Additionally, 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 that HP offers, the process of planning production and managing inventory levels becomes increasingly difficult. RELIANCE ON THIRD PARTY DISTRIBUTION CHANNELS AND INVENTORY MANAGEMENT. We use third-party distributors to sell our products, especially printers and personal computers, in order to accommodate changing customer preferences. As a result, the financial soundness of our wholesale and retail distributors, and our continuing relationships with these distributors, are important to HP's success. Some of these distributors may have insufficient financial resources and may not be able to withstand changes in business conditions. Our revenue and earnings could suffer if our distributors' financial condition or operations weaken or if our relationship with them deteriorates. Additionally, inventory management becomes increasingly complex as we continue to sell a significant mix of products through distributors. Third party distributors constantly adjust their product orders from us in response to: - The supply of our and our competitors' products available to the distributor, - The timing of new product introductions and relative features of the products, and - Seasonal fluctuations in end-user demand, such as back-to-school and holiday buying. Distributors may increase orders during times of product shortages, cancel orders if their inventory is too high or delay orders in anticipation of new products. If we have excess inventory, we may have to reduce our prices and write down inventory, which in turn could result in lower gross margins. SHORT PRODUCT LIFE CYCLES. The short life cycles of many of our products pose a challenge for us to manage effectively the transition from existing products to new products. If we do not manage the transition effectively, our revenue and earnings could suffer. Among the factors that make a smooth 20
transition from current products to new products difficult are delays in product development or manufacturing, variations in product costs and delays in customer purchases of existing products in anticipation of new product introductions. Our revenue and earnings could also suffer due to the timing of product or service introductions by our suppliers and competitors. This is especially true when a competitor introduces a new product just before our own product introduction. Further, our new products may replace or compete with certain of our own current products. INTELLECTUAL PROPERTY. We generally rely upon patent, copyright, trademark and trade secret laws in the United States and in certain other countries, and agreements with our employees, customers and partners, to establish and maintain our proprietary rights in our technology and products. However, any of our intellectual proprietary rights could be challenged, invalidated or circumvented. Our intellectual property may not necessarily provide significant competitive advantages. Also, because of the rapid pace of technological change in the information technology industry, many of our products rely on key technologies developed by third parties, and we may not be able to continue to obtain licenses from these third parties. Third parties may claim that we are infringing their intellectual property. Even if we do not believe that our products are infringing third parties' intellectual property rights, the claims can be time-consuming and costly to defend and divert management's attention and resources away from our business. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. If we cannot or do not license the infringed technology or substitute similar technology from another source, our business could suffer. RELIANCE ON SUPPLIERS. Our manufacturing operations depend on our suppliers' ability to deliver quality components and products in time for us to meet critical manufacturing and distribution schedules. We sometimes experience a short supply of certain component parts as a result of strong demand in the industry for those parts. If shortages or delays persist, our operating results could suffer until other sources can be developed. In order to secure components for the production of new products, at times we make advance payments to suppliers, or we may enter into noncancelable purchase commitments with vendors. If the prices of these component parts then decrease after we have entered into binding price agreements, our earnings could suffer. Further, we may not be able to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations needed. Conversely, a temporary oversupply of these parts could also adversely affect our operating results. INTERNATIONAL. Sales outside the United States make up more than half of our revenues. A portion of our product and component manufacturing, along with key suppliers, are also located outside of the United States. Our future earnings or financial position could be adversely affected by a variety of international factors, including: - Changes in a country 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, - Differing technology standards, - Problems caused by the conversion of various European currencies to the Euro (see "Adoption of the Euro" section below), and - Natural disasters. 21
MARKET RISK. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales and assets and liabilities denominated in currencies other than the U.S. dollar. We are also exposed to interest rate risk inherent in our debt and investment portfolios. Our risk management strategy uses derivative financial instruments, including forwards, swaps and purchased options, to hedge certain foreign currency and interest rate exposures. Our intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. We do not enter into derivatives for trading purposes. We are also exposed to equity securities price risk on our portfolio of marketable equity securities. We typically do not attempt to reduce or eliminate our market exposure on these securities. See also the "Financial Instruments--Off- Balance-Sheet Foreign Exchange Risk" and "Borrowings" notes to the consolidated financial statements in the Hewlett-Packard Company 1999 Annual Report on Form 10-K for more detailed information. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates applied to the hedging contracts and underlying exposures described above, and a hypothetical 10% adverse movement in interest rates applied to our debt and investment portfolios. As of April 30, 2000 and October 31, 1999, the analysis indicated that these hypothetical market movements would not have a material effect on HP'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 HP's actual exposures and hedges. ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES. In the normal course of business, HP frequently engages in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. Although completion of any one transaction is unlikely to have a material effect on our financial position, results of operations or cash flows taken as a whole, it may contribute to our financial results differing from the investment community's expectations in a given quarter. Divestiture of a part of our business may result in the cancellation of orders and charges to earnings. Acquisitions and strategic alliances may require us to integrate with a different company culture, management team and business infrastructure. We may also have to develop, manufacture and market products with our products in a way that enhances the performance of the combined business or product line. Depending on the size and complexity of an acquisition, our successful integration of the entity into HP depends on a variety of factors, including: - The hiring and retention of key employees, - Management of facilities in separate geographic areas, 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 divert our attention from other business operations. EARTHQUAKE. Our corporate headquarters, a portion of our research and development activities, other critical business operations and certain of our suppliers are located near major earthquake faults. The ultimate impact on HP, our significant suppliers and our general infrastructure is unknown, but operating results could be materially adversely affected in the event of a major earthquake. We are predominantly uninsured for losses and interruptions caused by earthquakes. ENVIRONMENTAL. Some of our operations use substances regulated under various federal, state and international laws governing the environment. It is our policy to apply strict standards for environmental protection to sites inside and outside the U.S., even when not subject to local government regulations. We record a liability for environmental remediation and related costs when we 22
consider the costs to be probable and the amount of the costs can be reasonably estimated. Environmental costs are presently not material to our results of operations or financial position. PROFIT MARGIN. Our profit margins vary somewhat among our products, customer groups and geographic markets. Consequently, our overall profitability in any given period is partially dependent on the product, customer and geographic mix reflected in that period's net revenue. STOCK PRICE. HP's stock price, like that of other technology companies, can be volatile. Some of the factors that can affect our stock price are: - Our, or a competitor's, announcement of new products, services or technological innovations, - Quarterly increases or decreases in our earnings, - Changes in revenue or earnings estimates by the investment community, and - Speculation in the press or investment community about our financial condition or results of operations. General market conditions and domestic or international macroeconomic factors unrelated to our performance may also affect HP's stock price. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results. In addition, following periods of volatility in a company's securities, securities class action litigation against a company is sometimes instituted. This type of litigation could result in substantial costs and the diversion of management time and resources. EARNINGS FLUCTUATIONS. Although we believe that we have the products and resources needed for continuing success, we cannot reliably predict future revenue and margin trends. Actual trends may cause us to adjust our operations, which could cause period-to-period fluctuations in our earnings. SPIN-OFF OF AGILENT TECHNOLOGIES. On June 2, 2000, HP distributed to its stockholders of record as of 5:00 p.m. Eastern Daylight Time on May 2, 2000, substantially all of the common stock of Agilent Technologies owned by HP. HP may not obtain the benefits we expect as a result of this distribution, such as greater strategic focus on our core computing and imaging and printing businesses. In addition, HP's consolidated financial statements do not reflect what the financial position, results of operations and cash flows of HP would have been had Agilent Technologies been a separate stand-alone entity during the periods presented. ADOPTION OF THE EURO HP had established a dedicated task force to address the issues raised by the introduction of a European single currency, the Euro. The Euro's initial implementation was effective as of January 1, 1999, and the transition period will continue through January 1, 2002. On January 1, 1999, we began converting our product prices from local currencies to Euros as required. We implemented system changes to give multi-currency capability to internal applications and to ensure that external partners' systems processing Euro conversions are compliant with the European Council regulations. In addition, we have implemented design changes to support display and printing of the Euro character by impacted HP products. The introduction and use of the Euro has not had a material effect on our foreign exchange and hedging activities or our use of derivative instruments, and we do not presently expect that it will. All costs associated with the conversion to the Euro are expensed to operations as incurred. While we will continue to evaluate the impact of the Euro over time, based on currently available information, we do not believe that the introduction of the Euro currency will have a material adverse impact on our consolidated financial condition, cash flows or results of operations. 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. A discussion of HP's exposure to, and management of, market risk appears in Item 2 of this Form 10-Q under the heading "Factors That Could Affect Future Results--Market Risk." 24
PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 29, 2000 the Annual Meeting of Stockholders was held in Cupertino, California. Of the 1,004,949,833 outstanding shares of HP common stock which were entitled to a vote, 864,825,651 shares were represented at the meeting or by proxy. The voting results are presented below. An election of directors was held with the following individuals being elected to the board of directors: <TABLE> <CAPTION> NAME SHARES VOTED FOR VOTES WITHHELD - ---- ---------------- -------------- <S> <C> <C> Philip M. Condit................................ 858,058,620 6,399,479 Patricia C. Dunn................................ 858,479,575 5,978,524 Carleton S. Fiorina............................. 855,818,284 8,639,786 Sam Ginn........................................ 858,492,877 5,965,222 Richard A. Hackborn............................. 857,103,768 7,362,935 Walter B. Hewlett............................... 859,850,262 7,537,437 George A. Keyworth II........................... 858,317,408 6,140,691 Susan Packard Orr............................... 857,012,611 7,811,688 Robert P. Wayman................................ 856,387,929 8,073,770 </TABLE> The nine individuals who received the highest number of votes (all of the above individuals) were elected to the Board of Directors. The stockholders ratified the appointment of PricewaterhouseCoopers LLP as HP's independent accountants for the fiscal year ended October 31, 2000. There were 858,510,163 votes cast for the ratification, 2,058,077 votes cast against, 4,257,411 abstentions, and no broker nonvotes. The stockholders approved the Hewlett-Packard Company 2000 Stock Plan and the reservation of shares for issuance under the plan. There were 483,099,776 votes cast to approve the plan, 262,443,911 votes cast against, 7,365,859 abstentions, and 111,916,105 broker nonvotes. The stockholders approved the Hewlett-Packard Company 2000 Employee Stock Purchase Plan and the reservation of shares for issuance under the plan. There were 702,689,023 votes cast to approve the plan, 44,764,485 votes cast against, 5,502,660 abstentions, and 111,869,483 broker nonvotes. The stockholders approved the Hewlett-Packard Company Pay-for-Results Plan. There were 829,063,545 votes cast to approve the plan, 29,654,685 votes cast against, 6,104,767 abstentions, and 2,654 broker nonvotes. 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 26 of this report. (b) Reports on Form 8-K: On April 11, 2000, HP filed a Form 8-K reporting that a press release was issued on April 7, 2000. The press release stated that the Board of Directors approved the declaration of a dividend of all of HP's shares of Agilent Technologies common stock, to be distributed on June 2, 2000 to HP stockholders of record as of 5:00 p.m. Eastern Daylight Time on May 2, 2000. On May 12, 2000, HP filed a Form 8-K reporting that an information statement regarding the spin-off of Agilent Technologies was issued on May 11, 2000. The information statement contained descriptions of the spin-off, certain tax consequences of the spin-off, Agilent Technologies' business and Agilent Technologies' common stock. On June 5, 2000, HP filed a Form 8-K reporting that a press release was issued on June 2, 2000. The press release stated that the distribution of substantially all of HP's shares of Agilent Technologies common stock had been completed. 25
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. <TABLE> <S> <C> <C> HEWLETT-PACKARD COMPANY (Registrant) By: /s/ ROBERT P. WAYMAN ------------------------------------------------ Robert P. Wayman EXECUTIVE VICE PRESIDENT, FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) </TABLE> Dated: June 8, 2000 26
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- <S> <C> 1 Not applicable. 2 Master Separation and Distribution Agreement between Hewlett-Packard Company and Agilent Technologies, Inc. effective as of August 12, 1999, which appears as exhibit 2 to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference. 3(a) Registrant's Amended and Restated Certificate of Incorporation, which appears as exhibit 3(a) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1998, which exhibit is incorporated herein by reference. 3(b) Registrant's Amended By-Laws, which appears as exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference. 4 Indenture dated as of October 14, 1997 among Registrant and Chase Trust Company of California regarding Liquid Yield Option Notes due 2017 which appears as exhibit 4.2 to Registrant's Registration Statement on Form S-3 (Registration No. 333-44113), which exhibit is incorporated herein by reference. 5-8 Not applicable. 9 None. 10(a) Registrant's 1985 Incentive Compensation Plan, as amended, which appears as exhibit 10(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(b) Registrant's 1985 Incentive Compensation Plan, as amended, stock option agreement, which appears as exhibit 10(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(c) Registrant's Excess Benefit Retirement Plan, amended and restated as of November 1, 1994, which appears as exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, which exhibit is incorporated herein by reference.* 10(d) Registrant's 1990 Incentive Stock Option Plan, as amended, which appears as exhibit 10(d) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(e) Registrant's 1990 Incentive Stock Option Plan, as amended, stock option agreement, which appears as exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(f) Registrant's 1995 Incentive Stock Plan, as amended, which appears as exhibit 10(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(g) Registrant's 1995 Incentive Stock Plan, as amended, stock option and restricted stock agreements, which appears as exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(h) Registrant's 1997 Director Stock Plan which appears as exhibit 99 to Registrant's Form S-8 filed on March 7, 1997, which exhibit is incorporated herein by reference.* </TABLE> 27
<TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- <S> <C> 10(i) Registrant's Executive Deferred Compensation Plan, Amended and Restated effective November 1, 1999, which appears as exhibit 10(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(j) VeriFone, Inc. Amended and Restated 1992 Non-Employee Directors' Stock Option Plan which appears as exhibit 99.1 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(k) VeriFone, Inc. Amended and Restated Incentive Stock Option Plan and form of agreement which appears as exhibit 99.2 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(l) VeriFone, Inc. Amended and Restated 1987 Supplemental Stock Option Plan and form of agreement which appears as exhibit 99.3 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(m) Enterprise Integration Technologies Corporation 1991 Stock Plan and form of agreement which appears as exhibit 99.4 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(n) VeriFone, Inc. Amended and Restated Employee Stock Purchase Plan which appears as exhibit 99.1 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(o) Registrant's 1998 Subsidiary Employee Stock Purchase Plan and the Subscription Agreement which appear as Appendices E and E-1 to Registrant's Proxy Statement dated January 12, 1998, respectively, which appendices are incorporated herein by reference.* 10(p) Transition Agreement, dated May 20, 1999, between Registrant and Lewis E. Platt which appears as exhibit 10(ee) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(q) Employment Agreement, dated May 20, 1999, between Registrant and Robert P. Wayman which appears as exhibit 10(ff) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(r) Employment Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(gg) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(s) Executive Transition Program which appears as exhibit 10(hh) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(t) Incentive Stock Plan Stock Option Agreement (Non-Qualified), dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(ii) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(u) Restricted Stock Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(jj) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(v) Restricted Stock Unit Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(kk) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* </TABLE> 28
<TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- <S> <C> 10(w) Registrant's 2000 Stock Plan which appears as Appendix A to Registrant's Proxy Statement dated January 18, 2000, which appendix is incorporated herein by reference.* 10(x) Registrant's 2000 Employee Stock Purchase Plan which appears as Appendix B to Registrant's Proxy Statement dated January 18, 2000, which appendix is incorporated herein by reference.* 10(y) Registrant's Pay-for-Results Plan which appears as Appendix C to Registrant's Proxy Statement dated January 18, 2000, which appendix is incorporated herein by reference.* 11 Not applicable. 12 Statement of Computation of Ratio of Earnings to Fixed Charges. 13-17 Not applicable. 18 None. 19-21 Not applicable. 22 None. 23-26 Not applicable. 27 Financial Data Schedule. 28 None. 99 Not applicable. </TABLE> - ------------------------ * Indicates management contract or compensatory plan, contract or arrangement. 29