HP Reports Second Quarter 2008 Results

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(In millions except per share amounts)
Three months ended
April 30,
2008
January 31,
2008
April 30,
2007
Net revenue $ 28,262 $ 28,467 $ 25,534
Costs and expenses (a) :
Cost of sales 21,261 21,499 19,283
Research and development 908 898 903
Selling, general and administrative 3,275 3,241 3,044
Amortization of purchased intangible assets 211 206 212
In-process research and development charges 13 - 19
Restructuring 4 10 453

Pension curtailments and pension settlements, net

-

-

(508

)

Total costs and expenses

25,672

25,854

23,406

Earnings from operations 2,590 2,613 2,128
Interest and other, net

3

72

100

Earnings before taxes 2,593 2,685 2,228
Provision for taxes (b)

536

552

453

Net earnings $ 2,057 $ 2,133 $ 1,775
Net earnings per share:
Basic $ 0.83 $ 0.83 $ 0.67
Diluted $ 0.80 $ 0.80 $ 0.65
Cash dividends declared per share $ - $ 0.16 $ -
Weighted-average shares used to compute net earnings per share:
Basic 2,473 2,560 2,638
Diluted 2,557 2,655 2,731
(a) Stock-based compensation expense included under SFAS 123(R) was as follows:
Cost of sales $ 36 $ 36 $ 42
Research and development 19 20 18
Selling, general and administrative

97

101

94

Total costs and expenses $ 152 $ 157 $ 154
(b) Tax benefit from stock-based compensation $ (45 ) $ (47 ) $ (44 )
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(In millions except per share amounts)
Six months ended
April 30,
2008
April 30,
2007
Net revenue

$

56,729

$

50,616

Costs and expenses (a) :
Cost of sales 42,760 38,419
Research and development 1,806 1,780
Selling, general and administrative 6,516 5,952
Amortization of purchased intangible assets 417 413
In-process research and development charges 13 186
Restructuring 14 412
Pension curtailments and pension settlements, net - (517 )
Total costs and expenses 51,526 46,645
Earnings from operations 5,203 3,971
Interest and other, net 75 221
Earnings before taxes 5,278 4,192
Provision for taxes (b)

1,088

870
Net earnings

$

4,190

$

3,322

Net earnings per share:
Basic

$

1.67

$

1.24

Diluted

$

1.61

$

1.20

Cash dividends declared per share

$

0.16

$

0.16

Weighted-average shares used to compute net earnings per share:
Basic 2,516 2,672
Diluted 2,603 2,763
(a) Stock-based compensation expense included under SFAS 123(R) was as follows:
Cost of sales

$

72

$

87

Research and development 39 37
Selling, general and administrative 198 193
Total costs and expenses

$

309

$

317

(b) Tax benefit from stock-based compensation

$

(92

)

$

(92

)

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS,
OPERATING MARGIN AND EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)

Three
months
ended
April 30,
2008

Diluted
earnings
per share

Three
months
ended
January 31,
2008

Diluted
earnings
per share

Three
months
ended
April 30,
2007

Diluted
earnings
per share

GAAP net earnings

$

2,057

$

0.80

$

2,133

$

0.80

$

1,775

$

0.65

Non-GAAP adjustments:

Amortization of purchased intangible assets

211 0.08 206 0.08 212 0.08

In-process research and development charges

13 0.01 - - 19 0.01

Restructuring

4 - 10 - 453 0.16

Pension curtailments and pension settlements, net

- - - - (508 ) (0.19 )
Adjustments for taxes (56 ) (0.02 ) (58 ) (0.02 ) (31 ) (0.01 )
Non-GAAP net earnings

$

2,229

$

0.87

$

2,291

$

0.86

$

1,920

$

0.70

GAAP earnings from operations

$

2,590

$

2,613

$

2,128

Non-GAAP adjustments:

Amortization of purchased intangible assets

211 206 212

In-process research and development charges

13 - 19
Restructuring 4 10 453

Pension curtailments and pension settlements, net

- - (508 )
Non-GAAP earnings from operations

$

2,818

$

2,829

$

2,304

GAAP operating margin 9 % 9 % 8 %
Non-GAAP adjustments 1 % 1 % 1 %
Non-GAAP operating margin 10 % 10 % 9 %
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS,
OPERATING MARGIN AND EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)

Six months
ended
April 30,
2008

Diluted
earnings
per share

Six months
ended
April 30,
2007

Diluted
earnings
per share

GAAP net earnings $ 4,190 $ 1.61 $ 3,322 $ 1.20
Non-GAAP adjustments:

Amortization of purchased intangible assets

417 0.16 413 0.15

In-process research and development charges

13 - 186 0.07
Restructuring 14 0.01 412 0.15

Pension curtailments and pension settlements, net

- - (517 ) (0.19 )
Adjustments for taxes (114 ) (0.04 ) (70 ) (0.02 )
Non-GAAP net earnings $ 4,520 $ 1.74 $ 3,746 $ 1.36
GAAP earnings from operations $ 5,203 $ 3,971
Non-GAAP adjustments:

Amortization of purchased intangible assets

417 413

In-process research and development charges

13 186
Restructuring 14 412

Pension curtailments and pension settlements, net

- (517 )
Non-GAAP earnings from operations $ 5,647 $ 4,465
GAAP operating margin 9 % 8 %
Non-GAAP adjustments 1 % 1 %
Non-GAAP operating margin 10 % 9 %
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)

April 30,
2008

October 31,
2007

(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,591 $ 11,293
Short-term investments 56 152
Accounts receivable 13,558 13,420
Financing receivables 2,589 2,507
Inventory 7,678 8,033
Other current assets 11,577 11,997
Total current assets 47,049 47,402
Property, plant and equipment 7,906 7,798
Long-term financing receivables and other assets 10,318 7,647
Goodwill and purchased intangible assets 26,531 25,852
Total assets $ 91,804 $ 88,699
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings $ 711 $ 3,186
Accounts payable 12,425 11,787
Employee compensation and benefits 3,103 3,465
Taxes on earnings 798 1,891
Deferred revenue 5,446 5,025
Other accrued liabilities 14,663 13,906
Total current liabilities 37,146 39,260
Long-term debt 7,688 4,997
Other liabilities 8,817 5,916
Stockholders' equity 38,153 38,526
Total liabilities and stockholders' equity $ 91,804 $ 88,699
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)

Three months
ended
April 30,
2008

Six months
ended
April 30,
2008

Cash flows from operating activities:
Net earnings $ 2,057 $ 4,190

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization 760 1,509
Stock-based compensation expense 152 309
Provision for bad debt and inventory 107 185
In-process research and development charges 13 13
Restructuring 4 14
Deferred taxes on earnings 625 986
Excess tax benefit from stock-based compensation (75 ) (163 )
Other, net (29 ) (23 )
Changes in assets and liabilities:
Accounts and financing receivables (1,205 ) (198 )
Inventory 232 286
Accounts payable 1,217 558
Taxes on earnings (278 ) (370 )
Restructuring (24 ) (55 )
Other assets and liabilities 1,209 711
Net cash provided by operating activities 4,765 7,952
Cash flows from investing activities:
Investment in property, plant and equipment (704 ) (1,315 )
Proceeds from sale of property, plant and equipment 105 193

Purchases of available-for-sale securities and other investments

(58 ) (78 )

Maturities and sales of available-for-sale securities and other investments

85 191

Payments made in connection with business acquisitions, net

(1,001 ) (1,265 )
Net cash used in investing activities (1,573 ) (2,274 )
Cash flows from financing activities:
Issuance of commercial paper and notes payable, net (999 ) (1,898 )
Issuance of debt 3,002 3,018
Payment of debt (903 ) (1,008 )
Issuance of common stock under employee stock plans 363 917
Repurchase of common stock (2,845 ) (6,169 )
Excess tax benefit from stock-based compensation 75 163
Dividends (197 ) (403 )
Net cash used in financing activities (1,504 ) (5,380 )
Increase in cash and cash equivalents 1,688 298
Cash and cash equivalents at beginning of period 9,903 11,293
Cash and cash equivalents at end of period $ 11,591 $ 11,591
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
(In millions)
Three months ended

April 30,
2008

January 31,
2008

April 30,
2007 (a)

Net revenue:
Enterprise Storage and Servers $ 4,780 $ 4,820 $ 4,594
HP Services 4,627 4,378 4,125
HP Software 727 666 568
Technology Solutions Group 10,134 9,864 9,287
Personal Systems Group 10,071 10,791 8,663
Imaging and Printing Group 7,591 7,312 7,161
HP Financial Services 685 642 550
Corporate Investments 230 218 175
Total Segments 28,711 28,827 25,836
Eliminations of intersegment net revenue and other (449 ) (360 ) (302 )
Total HP Consolidated $ 28,262 $ 28,467 $ 25,534
Earnings (Loss) from operations:
Enterprise Storage and Servers $ 655 $ 673 $ 452
HP Services 508 489 449
HP Software 93 51 7
Technology Solutions Group 1,256 1,213 908
Personal Systems Group 544 628 417
Imaging and Printing Group 1,230 1,150 1,167
HP Financial Services 47 43 36
Corporate Investments 6 8 (18 )
Total Segments 3,083 3,042 2,510
Corporate and unallocated costs and eliminations (134 ) (89 ) (75 )

Unallocated costs related to stock-based compensation expense

(131 ) (124 ) (131 )
Amortization of purchased intangible assets (211 ) (206 ) (212 )
In-process research and development charges (13 ) - (19 )
Restructuring (4 ) (10 ) (453 )
Pension curtailments and pension settlements, net - - 508
Interest and other, net 3 72 100
Total HP Consolidated Earnings Before Taxes $ 2,593 $ 2,685 $ 2,228
(a) Certain fiscal 2008 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. For each of the quarters in fiscal year 2007, the reclassifications resulted in the transfer of revenue and operating profit among the Enterprise Storage and Servers, HP Services and HP Software segments within the Technology Solutions Group. There was no impact on the previously reported financial results for the other segments.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
(In millions)

Six months ended
April 30,

2008

2007 (a)

Net revenue:
Enterprise Storage and Servers $ 9,600 $ 9,015
HP Services 9,005 8,057
HP Software 1,393 1,166
Technology Solutions Group 19,998 18,238
Personal Systems Group 20,862 17,382
Imaging and Printing Group 14,903 14,160
HP Financial Services 1,327 1,097
Corporate Investments 448 332
Total Segments 57,538 51,209
Eliminations of intersegment net revenue and other (809 ) (593 )
Total HP Consolidated $ 56,729 $ 50,616
Earnings (Loss) from operations:
Enterprise Storage and Servers $ 1,328 $ 905
HP Services 997 855
HP Software 144 25
Technology Solutions Group 2,469 1,785
Personal Systems Group 1,172 831
Imaging and Printing Group 2,380 2,240
HP Financial Services 90 68
Corporate Investments 14 (47 )
Total Segments 6,125 4,877
Corporate and unallocated costs and eliminations (223 ) (141 )

Unallocated costs related to stock-based compensation expense

(255 ) (271 )
Amortization of purchased intangible assets (417 ) (413 )
In-process research and development charges (13 ) (186 )
Restructuring (14 ) (412 )
Pension curtailments and pension settlements, net - 517
Interest and other, net 75 221
Total HP Consolidated Earnings Before Taxes $ 5,278 $ 4,192
(a) Certain fiscal 2008 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. For each of the quarters in fiscal year 2007, the reclassifications resulted in the transfer of revenue and operating profit among the Enterprise Storage and Servers, HP Services and HP Software segments within the Technology Solutions Group. There was no impact on the previously reported financial results for the other segments.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SEGMENT / BUSINESS UNIT INFORMATION
(Unaudited)
(In millions)
Three months ended
April 30,
2008
January 31,
2008
April 30,
2007 (a)
Net revenue:
Industry standard servers $ 2,818 $ 2,988 $ 2,818
Business critical systems 919 855 862
Storage 1,043 977 914
Enterprise Storage and Servers 4,780 4,820 4,594
Technology services 2,331 2,241 2,120
Outsourcing services 1,370 1,303 1,200
Consulting and integration 926 834 805
HP Services 4,627 4,378 4,125
Business technology optimization (b) 593 548 437
Other (b) 134 118 131
HP Software 727 666 568
Technology Solutions Group 10,134 9,864 9,287
Notebooks 5,373 5,664 4,086
Desktops 3,921 4,401 3,913
Workstations 494 467 402
Handhelds 102 89 116
Other 181 170 146
Personal Systems Group 10,071 10,791 8,663
Commercial Hardware 1,811 1,726 1,709
Consumer Hardware 974 1,180 1,008
Supplies 4,812 4,399 4,444
Other (6 ) 7 -
Imaging and Printing Group 7,591 7,312 7,161
HP Financial Services 685 642 550
Corporate Investments 230 218 175
Total Segments 28,711 28,827 25,836
Eliminations of intersegment net revenue and other (449 ) (360 ) (302 )
Total HP Consolidated $ 28,262 $ 28,467 $ 25,534

(a) Certain fiscal 2008 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. For each of the quarters in fiscal year 2007, the reclassifications resulted in the transfer of revenue among Enterprise Storage and Servers, HP Services and HP Software segments within the Technology Solutions Group. In addition, revenue was transferred among the business units within the Imaging and Printing Group and among the business units within the Personal Systems Group, but there was no change to the previously reported revenue for either segment as a whole. There was no impact on the previously reported financial results for the HP Financial Services and Corporate Investments segments.

(b) The OpenView business unit was renamed as Business Technology Optimization and the OpenCall and Other business unit was renamed as Other effective in fiscal 2008. The renamed "Other" business unit includes primarily the OpenCall and Business Information Optimization products.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SEGMENT / BUSINESS UNIT INFORMATION
(Unaudited)
(In millions)
Six months ended
April 30,
2008

2007 (a)

Net revenue:
Industry standard servers $ 5,806 $ 5,507
Business critical systems 1,774 1,708
Storage 2,020 1,800
Enterprise Storage and Servers 9,600 9,015
Technology services 4,572 4,182
Outsourcing services 2,673 2,329
Consulting and integration 1,760 1,546
HP Services 9,005 8,057
Business technology optimization (b) 1,141 897
Other (b) 252 269
HP Software 1,393 1,166
Technology Solutions Group 19,998 18,238
Notebooks 11,037 8,232
Desktops 8,322 7,734
Workstations 961 807
Handhelds 191 307
Other 351 302
Personal Systems Group 20,862 17,382
Commercial Hardware 3,537 3,325
Consumer Hardware 2,154 2,249
Supplies 9,211 8,586
Other 1 -
Imaging and Printing Group 14,903 14,160
HP Financial Services 1,327 1,097
Corporate Investments 448 332
Total Segments 57,538 51,209
Eliminations of intersegment net revenue and other (809 ) (593 )
Total HP Consolidated $ 56,729 $ 50,616

(a) Certain fiscal 2008 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. For each of the quarters in fiscal year 2007, the reclassifications resulted in the transfer of revenue among Enterprise Storage and Servers, HP Services and HP Software segments within the Technology Solutions Group. In addition, revenue was transferred among the business units within the Imaging and Printing Group and among the business units within the Personal Systems Group, but there was no change to the previously reported revenue for either segment as a whole. There was no impact on the previously reported financial results for the HP Financial Services and Corporate Investments segments.

(b) The OpenView business unit was renamed as Business Technology Optimization and the OpenCall and Other business unit was renamed as Other effective in fiscal 2008. The renamed "Other" business unit includes primarily the OpenCall and Business Information Optimization products.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF NET EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)
Three months ended
April 30,
2008
January 31,
2008
April 30,
2007
Numerator:
Net earnings $ 2,057 $ 2,133 $ 1,775

Adjustment for interest expense on zero-coupon subordinated convertible notes, net of taxes

1 2 2
Net earnings, adjusted $ 2,058 $ 2,135 $ 1,777
Denominator:

Weighted-average shares used to compute basic EPS

2,473 2,560 2,638
Effect of dilutive securities:
Dilution from employee stock plans 79 87 85
Zero-coupon subordinated convertible notes 5 8 8
Dilutive potential common shares 84 95 93

Weighted-average shares used to compute diluted EPS

2,557 2,655 2,731
Net earnings per share:
Basic (a) $ 0.83 $ 0.83 $ 0.67
Diluted (b) $ 0.80 $ 0.80 $ 0.65

(a) HP's basic earnings per share was calculated based on net earnings and the weighted-average number of shares outstanding during the reporting period.

(b) The diluted earnings per share included additional dilution from potential issuance of common stock, such as stock issuable pursuant to exercise of stock options and conversion of debt, except when such issuances would be antidilutive.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF NET EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)
Six months ended
April 30,
2008 2007
Numerator:
Net earnings $ 4,190 $ 3,322

Adjustment for interest expense on zero-coupon subordinated convertible notes, net of taxes

3 4
Net earnings, adjusted $ 4,193 $ 3,326
Denominator:

Weighted-average shares used to compute basic EPS

2,516 2,672
Effect of dilutive securities:
Dilution from employee stock plans 81 83
Zero-coupon subordinated convertible notes 6 8
Dilutive potential common shares 87 91

Weighted-average shares used to compute diluted EPS

2,603 2,763
Net earnings per share:
Basic (a) $ 1.67 $ 1.24
Diluted (b) $ 1.61 $ 1.20

(a) HP's basic earnings per share was calculated based on net earnings and the weighted-average number of shares outstanding during the reporting period.

(b) The diluted earnings per share included additional dilution from potential issuance of common stock, such as stock issuable pursuant to exercise of stock options and conversion of debt, except when such issuances would be antidilutive.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF NON-GAAP NET EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)
Three months ended
April 30,
2008
January 31,
2008
April 30,
2007
Numerator:
Non-GAAP net earnings $ 2,229 $ 2,291 $ 1,920

Adjustment for interest expense on zero-coupon subordinated convertible notes, net of taxes

1 2 2
Non-GAAP net earnings, adjusted $ 2,230 $ 2,293 $ 1,922
Denominator:

Weighted-average shares used to compute basic EPS

2,473 2,560 2,638
Effect of dilutive securities:
Dilution from employee stock plans 79 87 85
Zero-coupon subordinated convertible notes 5 8 8
Dilutive potential common shares 84 95 93

Weighted-average shares used to compute diluted EPS

2,557 2,655 2,731
Non-GAAP net earnings per share:
Basic (a) $ 0.90 $ 0.89 $ 0.73
Diluted (b) $ 0.87 $ 0.86 $ 0.70

(a) HP's basic non-GAAP earnings per share was calculated based on non-GAAP net earnings and the weighted-average number of shares outstanding during the reporting period.

(b) HP s diluted non-GAAP earnings per share included additional dilution from potential issuance of common stock, such as stock issuable pursuant to exercise of stock options and conversion of debt, except when such issuances would be antidilutive.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF NON-GAAP NET EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)
Six months ended
April 30,
2008 2007
Numerator:
Non-GAAP net earnings $ 4,520 $ 3,746

Adjustment for interest expense on zero-coupon subordinated convertible notes, net of taxes

3 4
Non-GAAP net earnings, adjusted $ 4,523 $ 3,750
Denominator:

Weighted-average shares used to compute basic EPS

2,516 2,672
Effect of dilutive securities:
Dilution from employee stock plans 81 83
Zero-coupon subordinated convertible notes 6 8
Dilutive potential common shares 87 91

Weighted-average shares used to compute diluted EPS

2,603 2,763
Non-GAAP net earnings per share:
Basic (a) $ 1.80 $ 1.40
Diluted (b) $ 1.74 $ 1.36

(a) HP's basic non-GAAP earnings per share was calculated based on non-GAAP net earnings and the weighted-average number of shares outstanding during the reporting period.

(b) HP s diluted non-GAAP earnings per share included additional dilution from potential issuance of common stock, such as stock issuable pursuant to exercise of stock options and conversion of debt, except when such issuances would be antidilutive.

Use of Non-GAAP Financial Measures

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