Business Context and Reporting Period
This Form 10-Q covers Hewlett-Packard Company (HP) for the quarterly period ended July 31, 1999, and the nine months ended on that date. The filing reflects a major corporate restructuring: the planned spin-off of Agilent Technologies, Inc., comprising HP's test-and-measurement, semiconductor, chemical analysis, and healthcare solutions businesses. Consequently, Agilent's results are reported as discontinued operations. The remaining continuing operations focus on personal computers, servers, storage, and printing solutions.
Key Financial Metrics
| Metric | Three Months Ended July 31, 1999 | Nine Months Ended July 31, 1999 |
|---|---|---|
| Net Revenue (Continuing) | $10,318 million | $31,008 million |
| Net Earnings (Continuing) | $696 million | $2,344 million |
| Net Earnings (Total incl. Discontinued) | $853 million | $2,731 million |
| Diluted EPS (Continuing) | $0.66 | $2.24 |
| Diluted EPS (Total) | $0.81 | $2.61 |
| Cash and Cash Equivalents | $6,052 million (Balance Sheet) | N/A |
| Operating Cash Flow | N/A | $2,356 million |
| Total Debt (Short + Long Term) | $4,190 million | N/A |
| Inventory | $5,040 million | N/A |
Margins (Continuing Operations): Gross margin improved to 29.7% for the quarter (down from 70.3% cost of sales) and 30.3% for the nine-month period. Operating margin was 7.6% for the quarter and 9.0% for the nine-month period.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue from continuing operations increased 12% in the quarter and 6% for the nine-month period compared to fiscal 1998. Growth was driven by strong demand for home PCs, PC servers, storage products, and color LaserJet/inkjet printers.
- Profitability: Net earnings from continuing operations rose 26% in the quarter and 22% for the nine-month period. Earnings per share (diluted) increased from $0.52 to $0.66 for the quarter.
- Discontinued Operations: Earnings from the Agilent Technologies spin-off (discontinued operations) were $157 million for the quarter and $387 million for the nine months, significantly higher than the prior year due to the inclusion of these businesses in the discontinued category.
- Cost Management: Cost of products sold as a percentage of revenue decreased to 70.3% (quarter) and 69.7% (nine months) from 70.9% and 70.4% respectively in the prior year, aided by stable PC pricing and supply chain improvements.
- Capital Allocation: The company repurchased approximately 12.7 million shares for $891 million during the nine-month period. The Board authorized an additional $2 billion in share repurchases ($1 billion systematic, $1 billion incremental).
Outlook, Risks, and Management Commentary
- Spin-Off Status: The Agilent Technologies spin-off is expected to be completed by July 31, 2000, following a planned IPO of approximately 15% of Agilent's stock. The IRS has ruled the transaction tax-free.
- Guidance: Management noted that results for the three and nine months ended July 31, 1999, are not necessarily indicative of full-year results. They anticipate continued variability in cost of sales trends due to competitive pricing pressures and mix shifts.
- Year 2000 (Y2K) Readiness: HP estimates total IT internal readiness costs of approximately $160 million. As of August 31, 1999, the implementation phase for critical IT applications was nearly 100% complete. Management does not believe Y2K costs will materially affect results, though risks remain regarding third-party infrastructure failures.
- Risks: Key risks include aggressive competition, short product life cycles, inventory management complexities in distribution channels, reliance on third-party suppliers, and potential disruptions from earthquakes (given HQ location in Palo Alto).
- Unusual Items: Operating expenses included higher costs related to the realignment of HP into two companies and higher-than-normal compensation expense for stock appreciation rights due to the rise in stock price.
Investor Verification Checklist
- Spin-Off Timeline: Verify the completion date of the Agilent Technologies spin-off and the status of the planned 15% IPO.
- Inventory Levels: Monitor inventory as a percentage of revenue (currently 12.2%) given the risks of channel stuffing and product life cycle transitions.
- Share Repurchase Execution: Track the utilization of the remaining $3.2 billion in authorized share repurchases.
- Y2K Contingencies: Assess the impact of potential third-party infrastructure failures on HP's supply chain and customer service capabilities.
- Discontinued Operations: Confirm that future financial statements will exclude Agilent Technologies' revenue and earnings to accurately assess the standalone performance of the remaining HP business.