\
Filed by Hewlett-Packard Company Pursuant to Rule 425
Under the Securities Act of 1933
And Deemed Filed Pursuant to Rule 14a-12
Under the Securities Exchange Act of 1934
Subject Company: Compaq Computer Corporation
Commission File No.: 1-9026
This filing relates to a planned merger (the "Merger") between Hewlett-Packard
Company ("HP") and Compaq Computer Corporation ("Compaq") pursuant to the terms
of an Agreement and Plan of Reorganization, dated as of September 4, 2001 (the
"Merger Agreement"), by and among HP, Heloise Merger Corporation and Compaq. The
Merger Agreement is on file with the Securities and Exchange Commission as an
exhibit to the Current Report on Form 8-K, as amended, filed by Hewlett-Packard
Company on September 4, 2001, and is incorporated by reference into this filing.
On November 14, 2001, HP issued the following press release.
[HEWLETT-PACKARD LETTERHEAD]
Editorial Contact: HP REPORTS FOURTH QUARTER RESULTS PR111401GP50
Dave Berman, HP
+1 650 857 7277
dave_berman@hp.com
------------------ - Sequential Revenue and Pro Forma EPS Growth
- Sequential Pro Forma Expense Reduction
Rebeca Robboy, HP - Operating Cash Flow of $1.8 Billion
+1 650 857 2064
rebeca_robboy@hp.com
--------------------
PALO ALTO, Calif., Nov. 14, 2001 -- Hewlett-Packard Company (NYSE:HWP) today
reported financial results for its fourth fiscal quarter ended Oct. 31, 2001.
Fourth quarter results met or slightly exceeded guidance for revenue, gross
margin and expenses provided on the Aug. 16 third quarter earnings call. The
company achieved 6% sequential revenue growth, 4% sequential pro forma
expense reduction, pro forma earnings per share (EPS) of 19 cents and
operating cash flow of $1.8 billion.
The company reported fourth quarter revenue of $10.9 billion compared with
$10.3 billion in the third quarter and $13.3 billion in last year's fourth
quarter. Revenues were down 18% year-over-year, 15% excluding currency
effects.
Gross margin this quarter was 25.7%, essentially flat with 26.0% last quarter
on a pro forma basis. Operating expenses declined 4% sequentially and 11%
year-over-year on a pro forma basis. Operating expenses were 21.4% of net
revenue, down from 23.6% last quarter on a pro forma basis.
Pro forma EPS on a diluted basis was 19 cents (compared with the consensus
analyst estimate of 8 cents), up from pro forma EPS of 12 cents in the third
quarter and down from pro forma EPS of 41 cents in the year-ago quarter. Pro
forma earnings this quarter excluded a $282 million pre-tax restructuring
charge for headcount reduction, as well as several other items.
Nov. 14, 2001
Page 2
Including these items, GAAP total EPS was 5 cents per diluted share on
approximately 2 billion shares of common stock and equivalents outstanding.
GAAP total EPS on a diluted basis for the same period last year was 45 cents.
"In a tough environment, we stayed focused on customers and business
fundamentals. We generated sequential revenue growth, expense reductions and
pro forma EPS improvements, as well as $1.8 billion in operating cash flow in
the fourth quarter. Results were driven by excellent execution in imaging and
printing and good performance in services. While overall computing systems
results remain weak, we saw improvement in certain segments including storage
and PCs. We reduced our cost structure, improved our operational
effectiveness and managed inventory aggressively," said Carly Fiorina,
chairman and chief executive officer.
"While executing well, we continue to focus on our long-term objectives. We
are convinced that the Compaq transaction is a unique opportunity to move HP
into the future and benefit our shareowners, customers and employees. We
expect this transaction to create substantial earnings accretion soon after
the merger closes. With Compaq's customer base and complementary products and
services, we will materially strengthen key HP businesses.
"HP has always stood for a willingness to innovate and evolve in the face of
changing markets. The company has successfully reinvented itself many times
in the past, and we must continue to do so to deliver sustainable shareowner
value.
"In 2001, we met many of the major objectives we set for HP and we thank our
employees for staying the course and making sacrifices during a year of
unprecedented challenges. They enabled HP to be among the select few
technology companies to remain profitable throughout 2001. In recognition of
their efforts, we have awarded all employees and managers, other than the
Executive Council, a special cash bonus equivalent to two days' salary, with
a total cost of approximately $45 million."
Nov. 14, 2001
Page 3
Business Segment Results
------------------------
Imaging and Printing Systems
----------------------------
The imaging and printing systems segment includes laser and inkjet printers,
imaging devices and associated supplies. Revenues increased 16% sequentially
and declined 9% year-over-year (7% in local currency) against the highest
revenue quarter in IPS history last year.
Operating margin was 10.5%, compared to 8.7% last quarter and 12.6% in the
fourth quarter of last year. The sequential operating margin increase
reflects a strong seasonal increase in revenues and solid expense management.
The company made excellent progress during the year on key objectives. These
include increasing share in low-end printers and developing new products to
improve profitability, winning new business in high-end commercial printing,
building on strength in the growing all-in-one market, creating new markets
for digital imaging and driving usage of HP supplies.
During the fourth quarter, supplies revenues grew 16% sequentially and 6%
year-over-year against a strong compare. HP LaserJet hardware revenue
increased 4% sequentially and declined 18% year-over-year. Inkjet printer
revenue increased 17% sequentially and declined 35% year-over-year. HP gained
or maintained share in all printer hardware categories.
Imaging revenue, which includes digital cameras, photo printers, scanners and
all-in-one devices, increased 49% sequentially and 7% year-over-year.
Computing Systems
-----------------
The computing systems segment includes a broad range of Internet
infrastructure systems and solutions for businesses and professionals,
including workstations, desktops, notebooks, mobile devices, UNIX -Registered
Trademark- and PC servers, storage and software solutions. Revenues declined
1% sequentially and declined 31% year-over-year (28% in local currency).
Nov. 14, 2001
Page 4
Operating margin was a negative 4.7%, compared to a negative 3.8% last
quarter and positive 4.0% a year ago, reflecting a highly competitive market
and weakening demand.
For the fourth quarter, UNIX server revenue was down 11% sequentially and 30%
year-over-year, but remained a profitable business amid difficult market
conditions. Superdome continued to gain increased customer acceptance and
HP's low-end UNIX products continued to perform well versus competitors.
Enterprise storage revenues increased 10% sequentially and declined 22%
year-over-year. High-end arrays were up 16% sequentially, driven by new
products and margins stabilized in a difficult market. While software
revenues declined 7% sequentially and 12% year-over-year, the HP OpenView
product showed growth both sequentially and year-over-year.
PC server revenues declined 11% sequentially and 44% year-over-year.
Commercial desktops declined 11% sequentially and 39% year-over-year. Home PC
revenues increased 23% sequentially and declined 37% year-over-year. HP
retained its leading position in home PCs and generated profits in North
America while breaking even globally. Notebooks experienced sequential
revenue growth of 10% and declined 12% year-over-year, significantly
increasing HP's market share in the United States following the release of
Windows XP.
IT Services
-----------
The IT Services segment includes mission-critical, outsourcing, consulting
and customer financing services. Support revenues grew 3% sequentially and 9%
year-over-year (6% in dollars). Outsourcing revenues were up 4% sequentially
and up 22% year-over-year (19% in dollars). Consulting revenues declined 5%
sequentially and grew 2% year-over-year (a 2% decline in dollars). Overall
revenues for the IT Services segment, including HP's financing business, grew
2% sequentially and 5% year-over-year (2% in dollars).
Operating margin was 4.5%, compared to 2.0% for the last quarter and 4.5%
for the same period last year.
Nov. 14, 2001
Page 5
Asset Management
----------------
Net cash generated from operations for the quarter was $1.8 billion.
Inventory declined by $600 million and was 11.5% of revenue, down from 12.2%
last quarter. Trade receivables were 9.9% of revenue compared to 9.2% in the
previous quarter. Net property, plant and equipment was 9.7% of revenue,
unchanged from last quarter.
Workforce Reduction
-------------------
As announced in July, HP has undertaken a workforce reduction program to
eliminate 6,000 jobs and result in an annualized savings of $500 million. HP
took a pre-tax restructuring charge of $282 million in the fourth quarter of
this fiscal year, covering substantially all of the planned headcount
reduction. Approximately 4,000 of the 6,000 reductions have taken place as of
Oct. 31, 2001. The remaining job cuts are expected to be completed in the
first half of fiscal 2002.
2002 Outlook
------------
Market conditions continue to be difficult and the company is not counting on
an economic recovery in 2002. For the first fiscal quarter of 2002, revenues
are expected to be down slightly from the fourth quarter due to normal
seasonal effects. Gross margins are expected to be approximately flat with
the fourth quarter, reflecting an intensely competitive environment. The
company expects to hold expenses approximately flat with the fourth quarter
on a pro forma basis.
Accounting Changes
------------------
During the fourth quarter, HP adopted Securities and Exchange Commission
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements,"
and has restated 2001 quarterly results for the first three quarters
accordingly. HP also made several other minor reporting changes for all
periods presented, including a reclassification of leasing-related interest
income and expense.
Nov. 14, 2001
Page 6
About HP
--------
Hewlett-Packard Company -- a leading global provider of computing and imaging
solutions and services -- is focused on making technology and its benefits
accessible to all. HP had total revenue of $45.2 billion in its 2001 fiscal
year. Information about HP and its products can be found on the World Wide
Web at http://www.hp.com.
# # #
UNIX is a registered trademark of the Open Group.
This news release contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause the results of HP and its consolidated
subsidiaries to differ materially from those expressed or implied by such
forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking
statements, including any projections of earnings, revenues, synergies,
accretion or other financial items; any statements of the plans, strategies,
and objectives of management for future operations, including the execution
of integration and restructuring plans and the anticipated timing of filings,
approvals and closings relating to planned acquisitions; any statements
concerning proposed new products, services, developments or industry
rankings; any statements regarding future economic conditions or performance;
statements of belief and any statement of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above include
the ability of HP to retain and motivate key employees; the timely
development, production and acceptance of products and services and their
feature sets; the challenge of managing asset levels, including inventory;
the flow of products into third-party distribution channels; the difficulty
of keeping expense growth at modest levels while increasing revenues; the
challenges of integration and restructuring associated with acquisitions and
achieving anticipated synergies; the possibility that proposed acquisitions
may not close or that modifications of some aspects of proposed acquisitions
may be required in order to obtain regulatory approvals; the assumption of
maintaining revenues on a combined company basis following acquisitions; and
other risks that are described from time to time in HP's Securities and
Exchange Commission reports, including but not limited to the annual report
on Form 10-K for the year ended Oct. 31, 2000, and subsequently filed
reports. HP assumes no obligation and does not intend to update these
forward-looking statements.
Nov. 14, 2001
Page 7
Additional Information about the Merger and Where to Find It
------------------------------------------------------------
HP and Compaq intend to file with the SEC a joint proxy statement/prospectus
and other relevant materials in connection with the merger. The joint proxy
statement/prospectus will be mailed to the shareowners of HP and Compaq.
Shareowners of HP and Compaq are urged to read the joint proxy
statement/prospectus and the other relevant materials when they become
available because they will contain important information about HP, Compaq
and the merger. The joint proxy statement/prospectus and other relevant
materials (when they become available), and any other documents filed by HP
or Compaq with the SEC, may be obtained free of charge at the SEC's Web site
at www.sec.gov. In addition, shareowners may obtain free copies of the
documents filed with the SEC by HP by contacting HP Investor Relations, 3000
Hanover Street, Palo Alto, California 94304, 650-857-1501. Shareowners may
obtain free copies of the documents filed with the SEC by Compaq by
contacting Compaq Investor Relations, P.O. Box 692000, Houston, Texas
77269-2000, 800-433-2391. Shareowners are urged to read the joint proxy
statement/prospectus and the other relevant materials when they become
available before making any voting or investment decision with respect to the
merger.
HP, Carleton S. Fiorina, HP's chairman of the board and chief executive
officer, Robert P. Wayman, HP's executive vice president and chief financial
officer, and certain of HP's other executive officers and directors may be
deemed to be participants in the solicitation of proxies from the shareowners
of HP and Compaq in favor of the merger. The other executive officers and
directors of HP who may be participants in the solicitation of proxies in
connection with the merger have not been determined as of the date of this
filing. A description of the interests in HP of HP, Ms. Fiorina, Mr. Wayman
and HP's other executive officers and directors is set forth in the proxy
statement for HP's 2001 Annual Meeting of Shareowners, which was filed with
the SEC on January 25, 2001. Full participant information may be found in
HP's Form 425 filed with the SEC on September 25, 2001. Shareowners may
obtain more detailed information regarding the direct and indirect interests
of Ms. Fiorina, Mr. Wayman and HP's other executive officers and directors in
the merger by reading the joint proxy statement/prospectus when it becomes
available.
Nov. 14, 2001
Page 8
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(Unaudited)
(In millions except per share amounts)
Three months ended
October 31, Percent
-------------------- increase/
2001 2000(a) (decrease)
--------- --------- ----------
Net revenue $ 10,876 $ 13,295 (18)
Costs and expenses:
Cost of products sold and services 8,081 9,677
Research and development 650 706
Selling, general and administrative 1,741 1,925
Restructuring charges 282 19
--------- ---------
Total costs and expenses 10,754 12,327 (13)
--------- ---------
Earnings from operations 122 968 (87)
Interest and other, net (7) 48
Net investment losses 90 13
Gains on divestitures 78 195
--------- ---------
Earnings before extraordinary item and taxes 103 1,198 (91)
Provision for taxes 19 276
--------- ---------
Net earnings before extraordinary item 84 922 (91)
Extraordinary item - gain on early
extinguishment of debt, net of taxes 13 -
--------- ---------
Net earnings $ 97 $ 922 (89)
========= =========
Basic net earnings per share:(b)
Net earnings before extraordinary item $ 0.04 $ 0.47
Extraordinary item - gain on early
extinguishment of debt, net of taxes 0.01 -
--------- ---------
Net earnings $ 0.05 $ 0.47
========= =========
Diluted net earnings per share:(b)
Net earnings before extraordinary item $ 0.04 $ 0.45
Extraordinary item - gain on early
extinguishment of debt, net of taxes 0.01 -
--------- ---------
Net earnings $ 0.05 $ 0.45
========= =========
Cash dividends declared per share(b) $ - $ -
Average number of shares and share equivalents:(b)
Basic 1,936 1,955
Diluted 1,960 2,051
(a) Certain reclassifications have been made to previously reported results of
operations for the three months ended October 31, 2000, to reflect the
accounting changes more fully described in notes (b) and (c) to the
Restated Consolidated Condensed Statement of Earnings.
(b) The calculation of diluted earnings per share includes the effect of common
stock equivalents, such as stock options, while the calculation of basic
earnings per share does not. All share and per-share amounts reflect the
two-for-one stock split effective October 27, 2000.
Nov. 14, 2001
Page 9
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(Unaudited)
(In millions except per share amounts)
Twelve months ended
October 31, (a)(b) Percent
-------------------- increase/
2001 2000(a) (decrease)
--------- --------- ----------
Net revenue $ 45,226 $ 48,870 (7)
Costs and expenses:
Cost of products sold and services 33,474 35,046
Research and development 2,670 2,634
Selling, general and administrative 7,259 7,063
Restructuring charges 384 102
--------- ---------
Total costs and expenses 43,787 44,845 (2)
--------- ---------
Earnings from operations 1,439 4,025 (64)
Interest and other, net 171 356
Net investment losses (gains) 455 (41)
Litigation settlement 400 -
Losses (gains) on divestitures 53 (203)
--------- ---------
Earnings from continuing operations before
extraordinary item, cumulative effect of
change in accounting principle and taxes 702 4,625 (85)
Provision for taxes 78 1,064
--------- ---------
Net earnings from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle 624 3,561 (82)
Net earnings from discontinued operations - 136
--------- ---------
Net earnings before extraordinary item and
cumulative effect of change in accounting
principle 624 3,697 (83)
Extraordinary item - gain on early
extinguishment of debt, net of taxes 56 -
Cumulative effect of change in accounting
principle, net of taxes (272) -
--------- ---------
Net earnings $ 408 $ 3,697 (89)
========= =========
Basic net earnings per share:(c)
Net earnings from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle $ 0.32 $ 1.80
Net earnings from discontinued operations - 0.07
Extraordinary item - gain on early
extinguishment of debt, net of taxes 0.03 -
Cumulative effect of change in accounting
principle, net of taxes (0.14) -
--------- ---------
Net earnings $ 0.21 $ 1.87
========= =========
Diluted net earnings per share:(c)
Net earnings from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle $ 0.32 $ 1.73
Net earnings from discontinued operations - 0.07
Extraordinary item - gain on early
extinguishment of debt, net of taxes 0.03 -
Cumulative effect of change in accounting
principle, net of taxes (0.14) -
--------- ---------
Net earnings $ 0.21 $ 1.80
========= =========
Cash dividends declared per share(c) $ 0.32 $ 0.32
Average number of shares and share equivalents:(c)
Basic 1,936 1,979
Diluted 1,974 2,077
(a) As more fully described in note (a) to the Restated Consolidated
Condensed Statement of Earnings, HP adopted SAB 101 in the fourth quarter
of fiscal year 2001. The results of operations for the first three quarters
of fiscal year 2001 have been restated to reflect this accounting change.
(b) Certain reclassifications have been made to previously reported results of
operations for the first three quarters of fiscal year 2001 and all four
quarters of fiscal year 2000 to reflect the accounting changes more fully
described in notes (b) and (c) to the Restate Consolidated Condensed
Statement of Earnings.
(c) The calculation of diluted earnings per share includes the effect of common
stock equivalents, such as stock options, while the calculation of basic
earnings per share does not. All share and per-share amounts reflect the
two-for-one stock split effective October 27, 2000.
Nov. 14, 2001
Page 10
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
Excluding adjustments itemized below
(Unaudited)
(In millions except per share amounts)
Three months ended
October 31, Percent
-------------------- increase/
2001 2000 (decrease)
--------- --------- ----------
Net revenue $ 10,876 $ 13,295 (18)
Costs and expenses:
Cost of products sold and services 8,081 9,677
Research and development 632 704
Selling, general and administrative 1,693 1,904
--------- ---------
Total costs and expenses 10,406 12,285 (15)
--------- ---------
Earnings from operations 470 1,010 (53)
Interest and other, net (7) 48
--------- ---------
Earnings before extraordinary item and taxes 463 1,058 (56)
Provision for taxes 102 216
--------- ---------
Net earnings before extraordinary item $ 361 $ 842 (57)
========= =========
Net earnings per share before extraordinary
item:
Basic $ 0.19 $ 0.43
Diluted $ 0.19 $ 0.41
Average number of shares and share equivalents:
Basic 1,936 1,955
Diluted 1,960 2,051
The pro forma amounts above have been adjusted to exclude the following items:
Costs and expenses:
Amortization of goodwill and other intangible
assets $ 50 $ 23
Acquisition-related charges 16 -
Restructuring charges 282 19
--------- ---------
Total adjustments to costs and expenses 348 42
Net investment losses 90 13
Gains on divestitures (78) (195)
Income tax effect (83) 60
--------- ---------
Total pro forma adjustments $ 277 $ (80)
========= =========
Nov. 14, 2001
Page 11
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
Excluding adjustments itemized below
(Unaudited)
(In millions except per share amounts)
Twelve months ended
October 31, Percent
-------------------- increase/
2001 2000 (decrease)
--------- --------- ----------
Net revenue $ 45,226 $ 48,870 (7)
Costs and expenses:
Cost of products sold and services 33,474 35,046
Research and development 2,629 2,627
Selling, general and administrative 7,066 6,928
--------- ---------
Total costs and expenses 43,169 44,601 (3)
--------- ---------
Earnings from operations 2,057 4,269 (52)
Interest and other, net 171 356
--------- ---------
Earnings from continuing operations before
extraordinary item, cumulative effect of
change in accounting principle and taxes 2,228 4,625 (52)
Provision for taxes 489 1,032
--------- ---------
Net earnings from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle $ 1,739 $ 3,593 (52)
========= =========
Net earnings per share from continuing operations
before extraordinary item and cumulative effect
of change in accounting principle:
Basic $ 0.90 $ 1.82
Diluted $ 0.89 $ 1.74
Average number of shares and share equivalents:
Basic 1,936 1,979
Diluted 1,974 2,077
The pro forma amounts above have been adjusted to exclude the following items:
Costs and expenses:
Amortization of goodwill and other intangible
assets $ 174 $ 86
Acquisition-related charges 60 -
Restructuring charges 384 102
Costs related to Agilent spin-off - 56
--------- ---------
Total adjustments to costs and expenses 618 244
Net investment losses (gains) 455 (41)
Litigation settlement 400 -
Losses (gains) on divestitures 53 (203)
Income tax effect (411) 32
--------- ---------
Total pro forma adjustments $ 1,115 $ 32
========= =========
Nov. 14, 2001
Page 12
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In millions)
October 31, October 31,
2001 2000
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,197 $ 3,415
Short-term investments 139 592
Accounts receivable, net 4,488 6,394
Financing receivables, net 2,183 2,174
Inventory 5,204 5,699
Other current assets 5,094 4,970
----------- -----------
Total current assets 21,305 23,244
Property, plant and equipment, net 4,397 4,500
Long-term investments and other assets 6,882 6,265
----------- -----------
Total assets $ 32,584 $ 34,009
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings $ 1,722 $ 1,555
Accounts payable 3,791 5,049
Employee compensation and benefits 1,477 1,584
Taxes on earnings 1,818 2,046
Deferred revenues 1,867 1,759
Other accrued liabilities 3,289 3,204
----------- -----------
Total current liabilities 13,964 15,197
Long-term debt 3,729 3,402
Other liabilities 938 1,201
Stockholders' equity 13,953 14,209
----------- -----------
Total liabilities and stockholders' equity $ 32,584 $ 34,009
=========== ===========
Nov. 14, 2001
Page 13
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
(In millions)
Net revenue (which includes intersegment revenue) and earnings from
operations for each segment are provided in the tables below:
Three months ended
October 31, Percent
---------------------- increase/
2001 2000 (decrease)
--------- --------- ----------
Net revenue:
Imaging and Printing Systems $ 4,989 $ 5,487 (9)
Computing Systems 3,961 5,748 (31)
IT Services 1,914 1,885 2
Other 149 450 (67)
--------- ---------
Total Segments 11,013 13,570
--------- ---------
Eliminations / Other (137) (275)
Total HP Consolidated $ 10,876 $ 13,295 (18)
========= =========
Earnings from operations:
Imaging and Printing Systems $ 524 $ 690 (24)
Computing Systems (188) 229 (182)
IT Services 86 84 2
Other (52) (46) (13)
--------- ---------
Total Segments 370 957
--------- ---------
Eliminations / Other (248) 11
Total HP Consolidated $ 122 $ 968 (87)
========= =========
Nov. 14, 2001
Page 14
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
(In millions)
Net revenue (which includes intersegment revenue) and earnings from
operations for each segment are provided in the tables below:
Twelve months ended
October 31, Percent
---------------------- increase/
2001 2000 (decrease)
--------- --------- ----------
Net revenue:
Imaging and Printing Systems $ 19,447 $ 20,468 (5)
Computing Systems 17,771 20,653 (14)
IT Services 7,599 7,150 6
Other 1,010 1,556 (35)
--------- ---------
Total Segments 45,827 49,827
--------- ---------
Eliminations / Other (601) (957)
Total HP Consolidated $ 45,226 $ 48,870 (7)
========= =========
Earnings from operations:
Imaging and Printing Systems $ 1,987 $ 2,666 (25)
Computing Systems (450) 1,007 (145)
IT Services 342 474 (28)
Other (321) (92) (249)
--------- ---------
Total Segments 1,558 4,055
--------- ---------
Eliminations / Other (119) (30)
Total HP Consolidated $ 1,439 $ 4,025 (64)
========= =========
Nov. 14, 2001
Page 15
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(Unaudited)
(In millions except per share amounts)
Jan. 31, 2001 April 30, 2001 July 31, 2001
(Restated) (Restated) (Restated)
------------- --------------- -------------
Net revenue $ 12,398 $ 11,668 $ 10,284
Costs and expenses:
Cost of products sold and services 9,060 8,724 7,609
Research and development 673 685 662
Selling, general and administrative 1,793 1,916 1,809
Restructuring charges 102 - -
------------- --------------- -------------
Total costs and expenses 11,628 11,325 10,080
------------- --------------- -------------
Earnings from operations 770 343 204
Interest and other, net 97 39 42
Litigation settlement - 400 -
Net investment losses 365 - -
Loss on divestiture - - 131
------------- --------------- -------------
Earnings before extraordinary item, cumulative
effect of change in accounting principle and taxes 502 (18) 115
Provision (benefit) for taxes 112 (53) -
------------- --------------- -------------
Net earnings before extraordinary item and
cumulative effect of change in accounting
principle 390 35 115
Extraordinary item - gain on early extinguishment
of debt, net of taxes 23 12 8
Cumulative effect of change in accounting principle,
net of taxes (272) - -
------------- --------------- -------------
Net earnings $ 141 $ 47 $ 123
============= =============== =============
Basic net earnings per share:
Net earnings before extraordinary item and
cumulative effect of change in accounting
principle $ 0.20 $ 0.02 $ 0.06
Extraordinary item - gain on early
extinguishment of debt, net of taxes 0.01 - -
Cumulative effect of change in accounting
principle, net of taxes (0.14) - -
------------- --------------- -------------
Net earnings $ 0.07 $ 0.02 $ 0.06
============= =============== =============
Diluted net earnings per share:
Net earnings before extraordinary item and
cumulative effect of change in accounting
principle $ 0.20 $ 0.02 $ 0.06
Extraordinary item - gain on early
extinguishment of debt, net of taxes 0.01 - -
Cumulative effect of change in accounting
principle, net of taxes (0.14) - -
------------- --------------- -------------
Net earnings $ 0.07 $ 0.02 $ 0.06
============= =============== =============
Cash dividends declared per share $ 0.16 $ - $ 0.16
Average number of shares and share equivalents:
Basic 1,930 1,935 1,936
Diluted 1,996 1,987 1,967
The amounts previously reported in HP's Quarterly Reports on Form 10-Q have
been adjusted for the following items to reflect the restated amounts
presented above:
Net revenue:
SAB 101 (a) $ 387 (23) 48
EITF 00-25 (b) (40) (15) (11)
Financing interest income (c) 103 99 100
------------- --------------- -------------
450 61 137
Cost of products sold and services:
SAB 101 (a) 280 2 33
Financing interest expense (c) 77 55 56
------------- --------------- -------------
357 57 89
Operating expense:
EITF 00-25 (b) (40) (15) (11)
Interest and other, net:
Financing interest income (c) (103) (99) (100)
Financing interest expense (c) 77 55 56
------------- --------------- -------------
(26) (44) (44)
Income tax effect 22 (5) 3
------------- --------------- -------------
Total adjustments before cumulative effect of
change in accounting principle 85 (20) 12
Cumulative effect of change in accounting principle,
net of taxes (272) - -
------------- --------------- -------------
Total restatement adjustments $ (187) $ (20) $ 12
============ =============== =============
(a) HP adopted Securities and Exchange Commission Staff Accounting Bulletin
No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in the
fourth quarter of fiscal year 2001. This accounting change was adopted
effective as of the first quarter of fiscal year 2001. Accordingly, HP has
restated its consolidated results of operations for the first three
quarters of fiscal year 2001, including a cumulative effect of change in
accounting principle, which was recorded as a reduction of net income as of
the beginning of the first quarter of fiscal year 2001.
(b) HP adopted Emerging Issues Task Force Issue No. 00-25 ("EITF 00-25"),
"Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products" in the fourth quarter of fiscal year
2001. HP has restated its consolidated results of operations for all
periods presented to reflect this accounting change.
(c) HP adopted a new accounting policy in the fourth quarter of fiscal year
2001 related to the classification of financing interest income and
expense. Previously, HP recorded financing interest and expense as
non-operating interest income and expense, respectively. Under the new
policy, financing interest income and expense are classified as revenue and
costs of products sold and services, respectively. HP has restated its
consolidated results of operations for all periods presented to reflect
this change in accounting policy.
Nov. 14, 2001
Page 16
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
RESTATED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(Unaudited)
(In millions except per share amounts)
Jan. 31, 2001 April 30, 2001 July 31, 2001
(Restated) (Restated) (Restated)
------------- --------------- -------------
Net revenue $ 12,398 $ 11,668 $ 10,284
Costs and expenses:
Cost of products sold and services 9,060 8,724 7,609
Research and development 654 683 660
Selling, general and administrative 1,742 1,869 1,762
------------- --------------- -------------
Total costs and expenses 11,456 11,276 10,031
------------- --------------- -------------
Earnings from operations 942 392 253
Interest and other, net 97 39 42
------------- --------------- -------------
Earnings before extraordinary item, cumulative
effect of change in accounting principle
and taxes 1,039 431 295
Provision for taxes 227 95 65
------------- --------------- -------------
Net earnings from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle $ 812 $ 336 $ 230
============= =============== =============
Earnings per share before extraordinary item
and cumulative effect of change in accounting
principle:
Basic $ 0.42 $ 0.17 $ 0.12
Diluted $ 0.41 $ 0.17 $ 0.12
Cash dividends declared per share $ 0.16 $ - $ 0.16
Average number of shares and share equivalents:
Basic 1,930 1,935 1,936
Diluted 1,996 1,987 1,967
The amounts previously reported in HP's Quarterly Reports on Form 10-Q have
been adjusted for the following items to reflect the restated amounts
presented above:
Net revenue:
SAB 101 (a) $ 387 $ (23) $ 48
EITF 00-25 (b) (40) (15) (11)
Financing interest income (c) 103 99 100
------------- --------------- -------------
450 61 137
Cost of products sold and services:
SAB 101 (a) 280 2 33
Financing interest expense (c) 77 55 56
------------- --------------- -------------
357 57 89
Operating expense:
EITF 00-25 (b) (40) (15) (11)
Interest and other, net:
Financing interest income (c) (103) (99) (100)
Financing interest expense (c) 77 55 56
------------- --------------- -------------
(26) (44) (44)
Income tax effect 22 (5) 3
------------- --------------- -------------
Total restatement adjustments before cumulative
effect of change in accounting principle $ 85 $ (20) $ 12
============= =============== =============
(a) HP adopted Securities and Exchange Commission Staff Accounting Bulletin
No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in the
fourth quarter of fiscal year 2001. This accounting change was adopted
effective as of the first quarter of fiscal year 2001. Accordingly, HP has
restated its consolidated results of operations for the first three
quarters of fiscal year 2001, including a cumulative effect of change in
accounting principle, which was recorded as a reduction of net income as of
the beginning of the first quarter of fiscal year 2001.
(b) HP adopted Emerging Issues Task Force Issue No. 00-25 ("EITF 00-25"),
"Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products" in the fourth quarter of fiscal year
2001. HP has restated its consolidated results of operations for all
periods presented to reflect this accounting change.
(c) HP adopted a new accounting policy in the fourth quarter of fiscal year
2001 related to the classification of financing interest income and
expense. Previously, HP recorded financing interest and expense as
non-operating interest income and expense, respectively. Under the new
policy, financing interest income and expense are classified as revenue and
costs of products sold and services, respectively. HP has restated its
consolidated results of operations for all periods presented to reflect
this change in accounting policy.
# # #
The following is a script for a prepared statement made by Carleton S.
Fiorina, HP's Chairman of the Board and Chief Executive Officer, at the
beginning of a conference call with financial analysts and other members of
the public on November 14, 2001.
CARLETON S. FIORINA:
Thank you Steve.
This morning we announced our fourth quarter results. Given the difficult
environment we're operating in, we're pleased with our performance. Our results
met or slightly exceeded the guidance for revenue, gross margin and expenses we
provided on the August 16th third quarter earnings call.
We reported fourth quarter revenue of $10.9 billion, up 6% sequentially from
$10.3 billion in the third quarter, down 18% from the $13.3 billion reported in
the same period last year.
Our pro forma gross margins were 25.7%, down slightly from 26% in the prior
quarter and from 27.2% last year.
We managed expenses down 4% sequentially, on a pro forma basis, and down
11% year over year. We implemented a painful, but necessary, workforce reduction
program during the quarter, which resulted in a $282 million restructuring
charge.
As a result of these factors, we reported pro forma earnings per share of
19 cents, up from 12 cents in the preceding quarter, and down from 41 cents in
the year-ago quarter. First call consensus estimates for this quarter were at
8 cents.
We exit the fiscal year with a very solid balance sheet. We had a very strong
quarter in terms of cash generation. Cash flow from operations was $1.8 billion
during the quarter. Net cash for the quarter increased $1.3 billion to
$567 million. This strong performance was helped by solid inventory management.
Inventory was down $600 million in the quarter.
All in all, I'm pleased with the team's execution against our stated objectives
in a very tough environment - an environment made even more difficult in the
immediate aftermath of September 11th.
As this represents the end of our fiscal year, a year that is sure to be
remembered as one of the toughest on record for the technology industry, it's
worth spending a few minutes recapping our progress.
As I've said before -- our focus in 2001 has been on transforming our business
and improving our overall execution while making the longer-term strategic moves
required to position us for growth so that we emerge a stronger competitor when
the economy turns around.
Specifically, we said that we would focus on:
Reinvigorating our enterprise go-to-market engine and our channel relationships.
--------------------------------------------------------------------------------
At the outset of the year, we committed to doing a better job of delineating the
rules of engagement for HP and our channel partners to avoid account conflict.
Since we announced our Hard Deck channel program, HP's channel satisfaction
levels are at an all-time high according to a recent CRN survey. We recruited 33
new channel partners in FY 01, with 37 more in the funnel. Today 70% of HP's
worldwide enterprise sales are driven by the channel, up from 63% earlier in the
year.
An energized sales force and focused sales campaigns resulted in a series of
significant customer wins during the quarter. $10.9 billion of revenue
demonstrates we're maintaining our momentum and attracting new customers with
our solutions.
We also said we would invest in areas that represent strategic growth
---------------------------------------------------------------------
opportunities for the business, while simultaneously divesting non-strategic
----------------------------------------------------------------------------
assets.
-------
We recently completed three software acquisitions aimed at improving our
competitive position in the enterprise computing arena: Trinagy, StorageApps and
Bluestone Software.
We also announced the acquisition of Indigo Systems, a high-end printing
technology company, to address the $400 billion commercial printing market.
We continue to pursue the acquisition of Comdisco's Business Recovery Services
unit to enhance our capabilities in providing mission-critical, business
continuity services.
And of course, we announced the merger with Compaq, which will accelerate our
overall strategy and strengthen our position in virtually every category in
which we compete, particularly in our enterprise computing business. I'll talk
more about the benefits of the Compaq transaction later in the call today.
In terms of divestitures in FY01: We sold OpenSkies to PRA Solutions. We
completed the sale of VeriFone to Gores Technology Group. We sold our Cupertino
ASIC development lab to Intel. And we sold our stake in the Ericsson-HP
Technology joint-venture to Ericsson.
In the imaging and printing systems business, we said that we would move
------------------------------------------------------------------------
aggressively into the low-end, sub-$100 Inkjet printing market and invest in new
--------------------------------------------------------------------------------
and adjacent markets such as commercial printing and digital imaging.
---------------------------------------------------------------------
During the year we've made excellent progress in the low-end printer market
increasing our share by 20 percentage points during the year. We completed the
largest rollover ever in our LaserJet business with an award winning line-up
that is gaining strong customer acceptance. We continue to win business in the
emerging high-end printing and digital imaging markets. Our share of the digital
camera market increased 11 points during the year giving us a top position in US
retail according to NPD Intellect.
We also said that we would focus on managing expenses and creating market
-------------------------------------------------------------------------
leading cost structures.
------------------------
During the year, we reduced total headcount to 86,000 people, down from 91,000
at the beginning of the calendar year. At the same time, we added 2,400 services
professionals to our growing services business in the fiscal year.
In FY01, outsourcing and procurement programs yielded important benefits to
operating results. Real estate management and workplace services outsourcing
generated $120 million in savings this year. Travel expenses were down 34% for
the year as employees found effective alternatives to get the job done. New HR
programs, including HP's award-winning employee services portal, generated
year-over-year savings of nearly $100 million.
It's important to recognize the tremendous contribution and commitment our
employees have demonstrated this past year in managing expenses. In addition to
controlling discretionary spending, HP employees made personal sacrifices to
support the cause. More than 80,000 employees voluntarily signed up to
participate in a payroll savings program that included either taking additional
vacation days or pay reductions through the end of the fiscal year.
As a result of the cumulative efforts of HP employees, we are among the few
technology companies that maintained profitability in 2001.
In recognition of these efforts, today we announced a special, one-time
performance bonus for employees to thank them for their accomplishments. The
bonus is equivalent to two days' salary, with a total cost of approximately
$45 million.
Finally, we said that we would maintain our strong balance sheet.
-----------------------------------------------------------------
We exit the year with $5.8 billion of cash on the balance sheet. We've managed
working capital extremely well, with inventory down 9% for the year and accounts
receivable down 30%. We also improved our weeks of inventory with channel
partners in all regions of the world.
This past year has been a challenging one in a multi-year reinvention effort.
While we've made solid progress on many fronts in an extraordinarily difficult
environment, we know there is more work to do.
Bob will go through the segment results in detail and talk about our outlook for
the current quarter. After his remarks I'll make some closing comments to tie
together where we've come and where we're headed.
# # #
CARLETON S. FIORINA [concluding remarks]:
We're in a business environment that is changing radically and rapidly. Customer
requirements are changing and the structure and economics of our industry are
changing with them. The question we ask ourselves is how should we address these
changes? What is the best way to serve our customers and build sustainable value
for shareowners and employees?
During the past 2 1/2 years, the HP Board of Directors and I have focused on
making the necessary changes to the company's strategy, structure, reward
systems and culture to secure HP's future. After a careful review of the
alternatives, and a thorough analysis of the Compaq opportunity in particular,
the Board concluded this transaction helps us achieve our strategic and
performance goals significantly faster than we could on our own.
Our results this quarter and over the past year crystallize the challenges and
opportunities in front of us:
We clearly need to improve our position in enterprise computing. If we don't, we
risk becoming marginalized in a business consolidating around fewer and fewer
vendors.
We need to address our position in industry standard servers. By adding Compaq's
capabilities and substantial market presence, we can enhance our ability to
participate in this pivotal and fast growing segment of the server market.
We need to make faster progress in the enterprise storage market. With Compaq,
we combine HP's leadership in high-end storage with Compaq's leading capability
in mid-range storage systems to strengthen our storage offerings significantly.
By joining forces, we create the #1 provider of storage area networks, the
fastest growing segment of the storage market.
We need to make our enterprise platforms more technically and financially
compelling to systems integrators and application developers. With Compaq, we
dramatically increase the size and importance of our installed base, compelling
partners and ISVs to innovate around our platforms, thereby enhancing our
ability to offer market-leading solutions to customers.
It's clear that we need to improve our overall account coverage so that we can
effectively compete for EVERY important customer engagement, all over the world.
With Compaq, we double the size of our sales force.
We have been talking consistently about the need to build up our services
business. Compaq adds scale to our IT support business which provides a
profitable annuity stream. It's like the supplies business where more is better.
It also gives us a platform - a large installed base of relationships - on which
to build our consulting and outsourcing capabilities so that we can compete for
and win more major accounts. With Compaq, we double the size of services
capacity with more than 65,000 skilled solution architects.
We need to improve the overall economics of our PC business. We're in a
consolidating industry with declining margins - a market where direct
distribution capabilities have become essential to successfully competing. With
Compaq, we gain sufficient PC volume along with a rapidly developing direct
distribution capability so that we can take costs out of the business and begin
to derive real value in a highly competitive market.
Fundamentally, it's clear that we need to do more to ensure that our computing
business is truly poised for leadership and growth. With Compaq, we gain the
added technical and go-to-market breadth and depth required to be a formidable
competitor, capable of playing a lead role in shaping the next era in computing.
Perhaps we could address each of these challenges incrementally, step by step,
over the months and years ahead.
But in my view, and in the view of our Board of Directors, we don't have the
luxury of an incremental approach. We need to take a bold step to address these
challenges now. We need to lead the transformation of this industry now instead
of responding to it later. We need to drive out cost, broaden and strengthen our
product and service offering and provide our customers with a real,
standards-based alternative.
By merging we will fundamentally improve our earnings power through significant
cost synergies and operating efficiencies - and expect to add more than
$2.5 billion to the bottom line annually beginning in year two - irrespective of
market conditions. This will enable us to achieve higher operating margins and
profit growth than either company could achieve independently.
By merging we create a company with leading market positions across the
technology industry and a substantial presence in key regions of the world,
improving our position as the vendor and partner of choice.
By merging we accelerate the strategic, technical and cultural transformations
underway at both companies to create a more powerful industry competitor capable
of both expanding the market and capturing market leadership.
By merging we create a stronger, more balanced operating model, with greater
free cash flow and an even stronger balance sheet, which will enable us to
invest in and drive innovation.
Frankly, it represents the single best way to grow and deliver the value our
shareowners, customers and employees expect and deserve.
Having spent the last several months planning the integration of these two
companies, we're even more convinced of the power of this combination.
Innovation and reinvention are The HP Way. Change and risk-taking can be
unsettling, even frightening, for some. But preserving the status quo and taking
small steps to improve our competitive position will not serve anyone's
interests - not customers, not shareowners and certainly not the highly
motivated people that represent the best of HP and Compaq.
Now I'd like to open up the call to take your questions.
FORWARD-LOOKING STATEMENTS
This script contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause the results of HP and its consolidated
subsidiaries to differ materially from those expressed or implied by such
forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking
statements, including any projections of earnings, revenues, synergies,
accretion or other financial items; any statements of the plans, strategies,
and objectives of management for future operations, including the execution
of integration and restructuring plans and the anticipated timing of filings,
approvals and closings relating to planned acquisitions; any statements
concerning proposed new products, services, developments or industry
rankings; any statements regarding future economic conditions or performance;
statements of belief and any statement of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above include
the ability of HP to retain and motivate key employees; the timely
development, production and acceptance of products and services and their
feature sets; the challenge of managing asset levels, including inventory;
the flow of products into third-party distribution channels; the difficulty
of keeping expense growth at modest levels while increasing revenues; the
challenges of integration and restructuring associated with acquisitions and
achieving anticipated synergies; the possibility that proposed acquisitions
may not close or that modifications of some aspects of proposed acquisitions
may be required in order to obtain regulatory approvals; the assumption of
maintaining revenues on a combined company basis following acquisitions; and
other risks that are described from time to time in HP's Securities and
Exchange Commission reports, including but not limited to the annual report
on Form 10-K for the year ended Oct. 31, 2000, and subsequently filed
reports. HP assumes no obligation and does not intend to update these
forward-looking statements.
ADDITIONAL INFORMATION ABOUT THE MERGER AND WHERE TO FIND IT
HP and Compaq intend to file with the SEC a joint proxy
statement/prospectus and other relevant materials in connection with the Merger.
The joint proxy statement/prospectus will be mailed to the stockholders of HP
and Compaq. Investors and security holders of HP and Compaq are urged to read
the joint proxy
statement/prospectus and the other relevant materials when they become
available because they will contain important information about HP, Compaq and
the Merger. The joint proxy statement/prospectus and other relevant materials
(when they become available), and any other documents filed by HP or Compaq with
the SEC, may be obtained free of charge at the SEC's web site at www.sec.gov. In
addition, investors and security holders may obtain free copies of the documents
filed with the SEC by HP by contacting HP Investor Relations, 3000 Hanover
Street, Palo Alto, California 94304, 650-857-1501. Investors and securityholders
may obtain free copies of the documents filed with the SEC by Compaq by
contacting Compaq Investor Relations, P.O. Box 692000, Houston, Texas
77269-2000, 800-433-2391. Investors and security holders are urged to read the
joint proxy statement/prospectus and the other relevant materials when they
become available before making any voting or investment decision with respect to
the Merger.
HP, Carleton S. Fiorina, HP's Chairman of the Board and Chief Executive
Officer, Robert P. Wayman, HP's Executive Vice President and Chief Financial
Officer, and certain of HP's other executive officers and directors may be
deemed to be participants in the solicitation of proxies from the stockholders
of HP and Compaq in favor of the Merger. The other executive officers and
directors of HP who may be participants in the solicitation of proxies in
connection with the Merger have not been determined as of the date of this
filing. A description of the interests of Ms. Fiorina, Mr. Wayman and HP's other
executive officers and directors in HP is set forth in the proxy statement for
HP's 2001 Annual Meeting of Stockholders, which was filed with the SEC on
January 25, 2001. Full participant information may be found in HP's Form 425
filed with the SEC on September 25, 2001. Investors and security holders may
obtain more detailed information regarding the direct and indirect interests of
Ms. Fiorina, Mr. Wayman and HP's other executive officers and directors in the
Merger by reading the joint proxy statement/prospectus when it becomes
available.