ANNUAL REPORTANNUAL REPORTHEWLETT-PACKARDHEWLETT-PACKARD

VICTORIA KENWARDVICTORIA KENWARDACG2021 ACG2021 SECTION 002SECTION 002

Executive Executive SummarySummaryHewlett-Packard wrapped up the 2005 fiscal Hewlett-Packard wrapped up the 2005 fiscal

year on a very strong note. 2005 produced one year on a very strong note. 2005 produced one of the strongest balance sheets in the industry. of the strongest balance sheets in the industry. The company has strong assets to build on for The company has strong assets to build on for the coming year. Profits showed an increase the coming year. Profits showed an increase from the previous year and the company’s from the previous year and the company’s expectations were not only met but exceeded. expectations were not only met but exceeded. In summary, HP is showing positive growth and In summary, HP is showing positive growth and has a good investment potential.has a good investment potential.

http://www.hp.com/hpinfo/investor/financials/anhttp://www.hp.com/hpinfo/investor/financials/annual/2005/05ar-graphics.pdfnual/2005/05ar-graphics.pdf

Part A. IntroductionPart A. Introduction

Mark Hurd, Chief Executive OfficerMark Hurd, Chief Executive Officer Location of home office: Palo Alto, CaliforniaLocation of home office: Palo Alto, California Ending date of latest fiscal year: October 31, 2005Ending date of latest fiscal year: October 31, 2005 Hewlett-Packard’s principal products include Hewlett-Packard’s principal products include

personal computers, printers, monitors and personal computers, printers, monitors and projectors, handhelds and calculators, fax, copiers, projectors, handhelds and calculators, fax, copiers, scanners, digital cameras, entertainment such as scanners, digital cameras, entertainment such as televisions, servers and networking. televisions, servers and networking.

Main geographic area of activity: United States, Main geographic area of activity: United States, Asia Pacific and EuropeAsia Pacific and Europe

Part A. Audit ReportPart A. Audit Report

Name of the company’s independent auditors: Name of the company’s independent auditors: Performance Metrics, Inc.Performance Metrics, Inc.

In review of Hewlett-Packard’s 2005 In review of Hewlett-Packard’s 2005 consolidated financial statements, the auditing consolidated financial statements, the auditing committee has declared the statements to be in committee has declared the statements to be in compliance with the accounting principles compliance with the accounting principles generally accepted in the United States.generally accepted in the United States.

Part A. Stock Market Part A. Stock Market InformationInformation

Most recent price of the company’s stock: $33.26Most recent price of the company’s stock: $33.26 Twelve month trading range of the company’s Twelve month trading range of the company’s

stock: $19.57 - $34.52stock: $19.57 - $34.52 Dividend per share: 0.0800Dividend per share: 0.0800 Date of the above information: March 3, 2006Date of the above information: March 3, 2006 I would buy stock in Hewlett-Packard. The trend in I would buy stock in Hewlett-Packard. The trend in

price of stocks seems to reflect a steady increase price of stocks seems to reflect a steady increase in the last year. Buying stock in this company in the last year. Buying stock in this company would be a good investment.would be a good investment.

Part B. Industry Part B. Industry Situation and Company Situation and Company PlansPlansHewlett-Packard is part of the fast growing technology Hewlett-Packard is part of the fast growing technology

industry. The company has introduced many new industry. The company has introduced many new products and services in the past year as well as made products and services in the past year as well as made some new acquisitions. On average the company some new acquisitions. On average the company produces 11 new patents each day. The company’s produces 11 new patents each day. The company’s growth for the fiscal year 2005 increased $6.8 billion. growth for the fiscal year 2005 increased $6.8 billion. HP has experienced significant growth and witnessed HP has experienced significant growth and witnessed an appreciation in the price of stock. an appreciation in the price of stock.

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Part C. Income StatementPart C. Income Statement

The format is most like a multi-stepThe format is most like a multi-step

Hewlett-Packard experienced an increase Hewlett-Packard experienced an increase in gross profit from 2004 to 2005 but a in gross profit from 2004 to 2005 but a decrease in operating income and net decrease in operating income and net income.income.

20052005 20042004

Gross ProfitGross Profit $86,696 million$86,696 million $79,905 million$79,905 million

Operating IncomeOperating Income $3,473 million$3,473 million $4,227 million$4,227 million

Net IncomeNet Income $2,398 million$2,398 million $3,497 million$3,497 million

Part C. Balance SheetPart C. Balance Sheet

The stockholder’s equity account remained The stockholder’s equity account remained relatively stable from 2004 to 2005, the relatively stable from 2004 to 2005, the liabilities account reflected more of a change liabilities account reflected more of a change in the form of an increase.in the form of an increase.

Assets =Assets = Liabilities +Liabilities + Stockholder’s EquityStockholder’s Equity

20052005 $77,317 million$77,317 million $40,141 million$40,141 million $37,176 million$37,176 million

20042004 $76,138 million$76,138 million $38,574 million$38,574 million $37,564 million$37,564 million

Part C. Statement Part C. Statement of Cash Flowsof Cash Flows

Cash flows from operations are significantly more than Cash flows from operations are significantly more than net income for the past two years.net income for the past two years.The company is growing through investing activities.The company is growing through investing activities.What is the company’s primary source of financing is What is the company’s primary source of financing is issuance of common stock under employee stock plans.issuance of common stock under employee stock plans.Overall, cash has increased over the past two years by Overall, cash has increased over the past two years by $1,248 million.$1,248 million.

Part D. Accounting PoliciesPart D. Accounting PoliciesHewlett-Packard recognizes revenue when persuasive evidence of a Hewlett-Packard recognizes revenue when persuasive evidence of a sales arrangement exits, delivery occurs or services are rendered, the sales arrangement exits, delivery occurs or services are rendered, the sales price or fee is fixed or determinable and collectibility is sales price or fee is fixed or determinable and collectibility is reasonably assured. HP ceases revenue recognition on delinquent reasonably assured. HP ceases revenue recognition on delinquent accounts based upon a number of factors including customer credit accounts based upon a number of factors including customer credit history, number of days past due and the terms of the customer history, number of days past due and the terms of the customer agreement.agreement.Topics of the notes to the financial statements: Summary of Significant Topics of the notes to the financial statements: Summary of Significant Accounting Policies, Net Earnings per Share, Balance Sheet Details, Accounting Policies, Net Earnings per Share, Balance Sheet Details, Supplemental Cash Flow Information, Acquisitions, Goodwill and Supplemental Cash Flow Information, Acquisitions, Goodwill and Purchased Intangible Assets, Restructuring Charges, Financial Purchased Intangible Assets, Restructuring Charges, Financial Instruments, Financing Receivables and Operating Leases, Instruments, Financing Receivables and Operating Leases, Guarantees, Borrowings, Taxes on Earnings, Stockholder’s Equity, Guarantees, Borrowings, Taxes on Earnings, Stockholder’s Equity, Comprehensive Income, Retirement and Post-Retirement Benefit Comprehensive Income, Retirement and Post-Retirement Benefit Plans, Commitments, Litigations and Contingencies, and Segment Plans, Commitments, Litigations and Contingencies, and Segment InformationInformation

Part E. Financial AnalysisPart E. Financial AnalysisLiquidity RatiosLiquidity Ratios

20052005 20042004

Working CapitalWorking Capital $11,874 million$11,874 million $14,313 million$14,313 million

Current RatioCurrent Ratio 1.381.38 1.501.50

Receivable TurnoverReceivable Turnover 8.75 times8.75 times 7.81 times7.81 times

Average Days’ Sales Average Days’ Sales UncollectedUncollected

41.71 days41.71 days 46.73 days46.73 days

Inventory TurnoverInventory Turnover 7.64 times7.64 times 6.88 times6.88 times

Average Days’ Average Days’ Inventory on HandInventory on Hand

47.77 days47.77 days 53.05 days53.05 days

Part E. Financial AnalysisPart E. Financial AnalysisProfitability RatiosProfitability Ratios

20052005 20042004

Profit MarginProfit Margin 4.01%4.01% 5.29%5.29%

Asset TurnoverAsset Turnover 1.12 times1.12 times 1.05 times1.05 times

Return on AssetsReturn on Assets 4.49%4.49% 5.55%5.55%

Return on EquityReturn on Equity 9.34%9.34% 11.25%11.25%

Part E. Financial AnalysisPart E. Financial AnalysisSolvency RatioSolvency Ratio

Both the 2005 and 2004 fiscal years the Both the 2005 and 2004 fiscal years the creditors have controlcreditors have control

20052005 20042004

Debt to EquityDebt to Equity 107.98%107.98% 102.69%102.69%

Part E. Financial AnalysisPart E. Financial AnalysisMarket Strength RatiosMarket Strength Ratios

20052005 20042004

Price/Earnings Price/Earnings per Shareper Share

$1.19$1.19 $1.45$1.45

Dividend YieldDividend Yield 1.14%1.14% 1.13%1.13%