HP Reports Q3 Numbers – Key Integration Milestones On Target

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HP Reports Q3 Numbers - Key Integration Milestones On Target

HP (NYSE:HPQ) today reported financial results for its third fiscal quarter ended July 31, 2002. This is the company’s first earnings report that includes the merger transaction with Compaq Computer Corp., which was completed May 3, 2002. (Results and comparisons in this release are stated on a combined company basis and reflect Compaq’s prior fiscal quarter results as if combined with HP at the start of HP’s prior fiscal quarters.(1))

The company reported third quarter revenue of $16.5 billion, compared to $18.2 billion on a combined company basis in the prior quarter. Sequentially, combined company revenue declined 9%, while pro forma gross margin increased from 25.5% to 25.7%. Pro forma operating expenses were up sequentially from 21.0% to 22.5% of net revenue, reflecting normal seasonality and merger-related sales training and product rollouts. Operating expenses were down 10% year over year, equivalent to $400 million on an absolute dollar basis.

Pro forma earnings per share (EPS) for the quarter was 14 cents, compared to 19 cents in the second quarter and 11 cents in the year-ago period, in both cases on a pro forma combined company basis. This represents a year-over-year net profit improvement of 31%. (All pro forma numbers have been adjusted to exclude certain acquisition-related charges and inventory write-downs, in-process research and development charges, amortization of goodwill and purchased intangibles, restructuring charges, net investment losses, net losses on divestiture, and litigation expense.)

Reported GAAP EPS was ($0.67) per diluted share. Pro-forma EPS reflects a $2.4 billion adjustment on an after-tax basis. The pre-tax charges consist of a $1.6 billion restructuring charge; $735 million of in-process R&D; $322 million for merger-related retention; and $340 million for other merger-related items.

HP’s integration progress was reflected in key third-quarter milestones, consistent with the company’s targets and commitments made in June:

On track for synergies of $500 million in 2002, $2.5 billion in 2003 – a year ahead of plan – and $3 billion in 2004.

Completed nearly 4,740 net workforce reductions and remain on track to meet 10,000 target reductions by end of fiscal 2002;

Achieved $419 million in annualized direct procurement savings (76% of 2003 target), plus $52 million in annualized indirect procurement savings (21% of 2004 target);

Successfully integrated key financial IT systems, on track to meet $45 million goal in IT-related savings by fiscal year-end;

Reduced facilities square footage by 2% in third quarter and on track for targeted 19% reduction by 2004.

In the midst of significant integration progress, HP also maintained its focus on customers. In recent weeks, HP has closed a number of very large contracts, including some key strategic win-backs. HP’s 50 largest new business contracts – with an average value of approximately $40 million each – together represent $2 billion in incremental long-term revenue for the company.

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