information. . . earnings- per bhare wetre @.5@rm 257 million shares outstandmg. several factors...
TRANSCRIPT
HEWLETT-PACKARD -
1 9 8 ' 7 A N N U A L R E P O R T
Information. . .
Acquiring it,
displayng it,
analyzing it,
corn A unicating
it, stonng it
and making it
manageable.
C O N T E N T S
I;etter to Shbaldem
Aaphfng Womti~n
Anal* IIdtmmtion
hbmatien
bmmunicating Izdormation
-mtQ W;ty
% k g ai~d Supposring Salut.io11~
blain-aUobalPmm
S o d bpo- at HP
FdRepor t
Was and Ufficets
Corpomte Infannatjon
C O R P O R A T E P R O F I L E
Hewlett-Packard Company designs, manhctures and services electronic products and
systems for measurement and computation. HP's basic business purpose is to provide the
capabilities and support needed to help customers worldwide improve their ~ersonal and
business effectiveness.
F I N A N C I A L H I G H L I G H T S
For the years ended October 31 In millions except per share amounts 1987 1986 Increase
U.S. orders $4,262 963,826 11%
International orders
Total orders
Net revenue
Earnings before taxes
Net earnings
Net earnings per share
products more competitive in fareign markets. the US., the cum- $ m h s t q
to recover from the Man it experienced during 1985 and l!%6.
We achieved our 14 percent net revenue growth during W with
virhtaly no increase in employment and exited @M year with 82,000 people worldwide. This
helped us to m e t our goal of keeping e3~pense p w t h below mrme growth. By mana@ng
mts and expenses and limit@ employment & we've been able to i m p m our
&tax profit ma@n to 8.0 percent.
F h i d Highl&hts;
Net revenue b. the fourth qu&m i n . 4 Mi pemt o w ~ thR m e @dl dl!?%. We David Pockad
m r a d e g ; o o d ~ d ~ & e q u a r t e r i n d u d h g t h e ~ e d ] r S r ~ y ~ n l : Chairman of the Board
third- orclem.
For the yeaq orders totaled $8.4 billion, up 16 perm&
US. orders rose 11 percent, while international oFders in- 22 permat. Net n m e a ~ i h
the year i n 4 to $8.1 billion, compared with 81 billion h B86. Fkt - e
rose 25 peroent in 1987 to W4 million. Net earnings- per Bhare wetre @.5@rm
257 million shares outstandmg.
Several factors contributed tn our b m
The cost of equipment sold and services as a percentage of ow n& zmmw
47.2 percent to 46.8 percent during 1%7. Zn addition, operaibq eapaws p & pmmnt, a
lomrtltethannet m u e p w f h o f 1 4 p r c e s t . h ~ w ~ a ; l r ~ ~ ~ ~ ~
declined to 33 percent, compared with 34 percent in ER6.
Research and development expdhms ammme BO #9i% JE&&~
in lW, representing ll.1 percent of net rmer~ue, c-onapared & U.6 prcaii but ptm 3 % ~ chart at the end of this letter shows how important remad and d d b p d m t in-b
are to sustaining HP'E continued p w E h in our fastfastmmiog, campti- idustry M a r k e t i n g a u d s e ~ e x p e n a e s ~ b y 1 5 ~ t h W 7 ~ l r o s r t s wih. new produet introductions and i n d sales dv i t i e9 .
I n ~ H ~ l e m - P ~ ~ a . g i t a c k ~ ~ p ~ t o b u r y outstanding shares ofthe company's m o n stock fur d m the vwiom employee stDclr option and purdwe $am %riy in the b a d dlhxto3.s au-
s p e n d i n g u p t o a n a d d i d d R W ~ m ~ ~ ~ . ~ t b e ~ ~ ) m a f ~ ~
y e a r w e b o ~ t 4 . 9 & 0 n ~ f o r a n ; p l r & a e + d ~ d o n .
, -.-n Young
Pnesident and
Chief Executive O&er
e
We ended M 1987 with one of the strongest product porthlios in HP history. In addition
to this very tangible evidence of our efTorts, we've impmved the overall effectiveness of the
HP organhation. Virtually every part of the company has played a role in making us more
competitive.
Our R&D orpnbation has been work% to shorten product-
developsnent cycles by using the best methods and tooh available. We've completed a major
study on s h quality and hwe acted on its &dings. We've also e e d our ability
to plan and manage deve1opment projects that involve many &rent HI? entities. This
include stmmWng ow decjsionmakiq ppracesses and adopting a combtent phase
Teeyew prows that includes compa~tive analysis and market reaearcb ae part of our
productddopent cycle.
In man-, we've continued to reduce our msb by
daipingproducts that ate easy to b&, by reducing materials cats and by coltsolidating
a d hpcdng key manufkhuhg processes. Our new M y of computer t e d is a
geod example of what we've been &k to &eve. I@ simple deagn uses lowamt, widely
&Ze wmponents, and f u d assembly talces lesr, than a mirmute to complete. The family
includm .the world's lowest priced termid in i@ h, delivered 'to market with HPI ~ o n a l q d i t y
Our mketing and sales oqpkation lamchd two i n iMves
of parti& in-. Fmt, our new Customer Idbrmation Center helps generate U.S.
cwtcmef hquhie;~'throuj& dinct mall carapdps and provides =one stopm shopping for all
p d e s inquiri~. It as0 dktribu~es q d b d led.& our sales f- and measures the edfecti- of our promotiom. Second, we've provided our US. sales brce with portable
computers that link r~ 0 0 ~ data bases to obtain uptodate infoption on soham
appliwtiona, price, adlability, order stabs and competitive &rings. Response &om
cmtornm has been mtmmly positive.
Our pemd stath have been helping HP peaple meet the
challenges of rapid dzange. We have put in place policies and propmu that encourage
increased job fhibihty. We%e added new retmining o p p o m fbr production workers,
enginaers d h - l e v e l supemisom. Wdve increased incentfves for employees to d o c a ~ .
We've atso expanded our use oftemporary, part-time and contract employexs, with the goal
of providing more stding flexibility to meet business demands.
lkmd
In January l987, WUbu R. EWI& aaflound his de&e to retire as a director and vice
cthakmm and its assume the pa&i~n d & m & d emeritus. & a non-voting m&r of the
Sales outside the United States made up nearly 50 percent of our m u e in M, aed the
continued W ofthe d o h should continue to spnr our - o d orders. At the
time of this writing, economic i n h m show that the world's major economies remain
fundamentall J ~trong. h n t events in world fmmcial mbts, however, may advemly
capital spending p h of our mmers. Thus the ah& holds a d q p e of
u11-.
David Packard
Chairman of the Board
Y
John Young
President and Chief Executive Oflicer
Hewlett-Packard provides the tools
to harness the power of information.
Instruments to make precise
measurements. A range of powef i
computers and peripheral products
to help analyze, manage and store
information. Graphics and printing
capabilities to make it visible.
Networking and software to link it
all together. These capabilities -
combined with a commitment to
quality, customer satisfaction and
a strong global presence - give
HP a solid foundation for future
innovation and growth.
A C Q U I R I N G I N F 0 , B B i A T I O N
Hewlett-Wckarrl laas long had a reputation for advia),- the stateof-the-iut in meEigurment
technologies. This yeaq we've devoted coderable &ort to maintaining our technological
excellence and high +ty. At the m e h e , we've filled out the low-prid end of m y of
our instrument lines. In m y cases, we've d d prima by rededgniq products to make
them ea~tier to man- as 4 as more rugged and easier to maintain.
to sat new p r i c e / p r f o m e e. We Bave 4 a pmpriefaq pracegs ori@dy dmel-
oped for our new linlinf computers to design very-- el-nic circuits that create
and d y z e sipah. Thip, pmass hss allowed UB to dervelop a new line of l@c analyzers witb
s ip i f imt ly higher ptdbrmance and lower cost than previous models. A rndtihxtion
s-r ha9 also been developed using thia prwas.
Another dwna in 19fn has been our new ofleal time domain
rebetome* which rnakas pnwise measwements mu& hter and deeper in fiberoptic
cable than conv~n- units -a s igdhn t contribution to the &sowkg market for h
optic rest equipment. The instnunmt was d d p d in our in W i t Gt3nmmp
fon~wlng iniW n h by HP Iab~tatories, the c~mmy& central Fesearch Mty in N o
Alb. We also induced a new analog trammidon analyzer that measures the q u h y of
telephone limes used for &ta c o m m d m ~ o m without mowing the lines from ~emiae.
ThispductLaMinthe-
w* VlsIS
The gjrowth ofbiotechnolagy and concerns about the safety of our envirommt have
imrewed the need fw ssplzlstiated chemical detection equipment. Wes ofIEP$ analytical
prod~ha~morehdoub1edinhelastfive~,~usoneoftheklargeat
analfld eorn@es in ia world. This year we introduced nen detection technologies in
P liquid chromatqpphy, m w qwtmmetry d i d a n d qmtmewpy.
In madical instrumentation, the need for improved health cam at
d u d h inmmhg the demand %Er better dbgmwtic a d monit~ring system. In
KP W u d new masumnent meEhods for arrythmia d W o n , and m ulmund
cardiac~~ceinserOedinthe&estEorwduring~..HPis~ong&~
world's -st manuhcturew o f m d d eledr~nic imtnmmts.
By hkmg instruments with
computers, tests can be automated
and data ean be captured and analyzed.
Hewlett-PacWs depth of expertise
in measurement and computation is
a unique competitive advantage.
The HP C M t a h b n ,
an anapytical work-
station which combinea
our a n a l y i h d ins6ru-
Oneofthemostiqmtzmt s e n s m w e k i s d w t ' 0 f d g M . W ~ ~ ~
with unde- s@qtSAh, now I when what vm mean &"Now I mdemtad."
Technologies that help us to better see and understad pomrful tools.
This year HP introduced h-ct[mRsional modeling sob br our engineering
workstations. Using common engineering term, a thmedbmnsional model can be created
from a twodimemtonal image. This provides a critical m b h g link in the compute~m~diq
~ a n d ~ t h e n e e d ~ r m o s t o f t h e ~ ~ e -donelq-ddesignem.
Followhg three pears of intensive mearch our Components
G m p tb year ammunced a sqpifhnt b e & in xmm- technology
allowing conammial pmduction of much brighter hght-emitthg diodes (LEDs). These new
aluminum gallium d e LEb emit dme to four four mom red light than conventional
LEDs, pmidmg improved cost performance over existing technologies. These m
d u r n can ~~y be: used in xerographic image formath and processing, automobile
d B & s and hgi b d ~ o r and sutd,octr e1eamnic message pan&.
Nem *IBZ l%mdwad
k p z i n ~ h e h a ~ y m d p ~ ~ l i n e f o r H 1 P . ~ y e s l r w e i n t r o d d
m d new d L inchrdirma; &C HP k J e t XlM, a &$-p~lurne IaeKz pririter ibigmd
for multiple zsseft in o&x appW~118,rtnd the HP hJ& Series II. The inkjet pafn-
~ o ~ h ~ ~ W h ~ a l s K t a B ~ C e i d t h i e ~ w i t h & e i r s t r o d ~ d ~
IDP Paindet, a mlo~paLia e t m which seam images iu 330 N n t &rs using
asmany86 Ibattterime.
Another, new product, a d a b p scamer dd the HP 9crmTetP
d ~ d c o ~ & m ~ d i g ~ & t a b r ~ i n d e g k t a p ~ . W i & t h r ? ~
dspscia~5plin~texltenWW~m-bedi:[email protected]
d r e f t j n g $ o ~ w , & e a e n r H P ~ ~ I a s d ~ ~ ~ a . l a j r g z ~ n a f o u t p l o ~ b
brthe~~~~ketdmbdlerw~iveEhanHay1ett--8
pmViom&.
Computers are key to managkg
information. 15187 saw the shipment
of six new HP Precision Architecture
systems and p0weh.d new
engineering workstations and
personal computers - the strongest
product rollout in years.
Tmdecentm, a division
of Knight-Ridder,
uses a network of HP
Precision Architecture
computers to manage
a database that
pmidea instant access
to gmphieal and
analpied infbmration
on aecuritierr as
they wadi3 around
the world
C O B I M U N I C A T I N G I N F O R M A T I O N
l 3 m . i n e 8 5 d ~ c a l d e c i s i o n ~ ~ a o t & a f ~ ~ e ~ ~ g e t ~ t o
infurmath d communi- it to their idleague%. Thew &rts am &en b t m b d by a
warlqhce thaE ineludes (~~mputers ban &rent aendom, a well as personal wo&station;s
that sit isolated and idle.
dCraL BbJfiep pJkdw?Is
In the early 1980s, WB M y revamped our ntS~o&ing strategy b make ~ ~ u l t i v d o r
c o ~ y i ~ b p r i m a r y g o a l o f o u r & r t a . T b ~ ~ ~ , ~ d d d a d t o ~ a u r n a v
H P h e e N e t s t x a t e g a n o o n f o ~ ~ ~ ~ ~ - b o t h o ~ d f a d ~
WI [Open Sysbme Inter-), and de h, such as DM'S SHA (+tam Netmdc
Archi-). Our strategy stands in sharp contrast to the proprktq a p p d p e d
by mevendors.
In 1987, we introduced more thtzn 70 new networkmg products,
and industry observers de&eribed us as a leader in mdtivendor comdvity a d support
for standards. We became the h t computer c o m p j to mket tl private mtwmk
baaed on the X.25 @ an international s t a d d for prto-pe&r cxmmunh~m.
O u r ~ o f f i o e n e t w o r ~ s y s t e m ~ r s t t K l d a t d ~ e p h o 1 1 6 : ~ b u t a t ~ ~
speeds -a much 1- exp8ivve appmmh rban orher mmw abmwtirn. We a h
annamced new network plannme; and v t d m . IEP has hbped rekkm&p
with selected venbw and will con- to dbpom d manage the resolution ofprob1ems
on a multiwndor netwark.
rhIlbQ*ainto*Nehe~rk
Powerful workstations now sit on the desks ofmany proEessid.Howev8r, few
people work alone, so HP has developed software pducts that help make! the workstation
a team player. Our HP DqCen te r s o k speeds the p d u d b b p n n e n t cycle by m d i q
it possible to pass e q h e e r i q data amoq Weant project members, applications and
workstations. We've also heen descdhd as leadem in integrating personal cornputera inzo
the world of minicornputem and mainhmes with s o h products such m WP I&rmaf.ion
Access and HP Resource Sharing.
fachlJ.ing operdtions
throughout h? us.
MdCaMddThe
nemorkb upthe ir
HPbeliepe that hpm*
product quality is the best way
t~ durn c m ~ ~ and increase
customr gi[ltidkcItio~ Today,
the h1d iidm mte o l d HI?
prodttc~ is oweirth what it
wss in 1979, and' @ty stories
&wd b + o u t the cornpy:
Much of the ear&
work on the thin-film
technologyfor HP's
naw disc drives was
performed in W
LaboratoG. The thin
mugnerie layer is pro-
"ected by a proprietary
sputtered overcoat
which ie virtndy
impervwurr io hmd
wear and erosion.
IF- -- -=
S E L L I N G A N D S U P P O R T I N G S O L U T I O N S
Becattee HP serwts a multitude of markets, we recagnCze that we don't always have all the
answers to cxwbmers' probleraa. But since we're wmrnitted to solving them, we've
shengthed our &amhips with due-added b-. These range h m msn-
who include our ptoducts in their equipment, to consultants and independent mibare
vendors. For example, in 1987 we famed our Industrial Applicatiions Cater to work with
systems intepto~ to help customem develop mpukrintqpaed man- 80Iutilons.
Good &tionships with suppk also encoura~e them to bring ua in to help their
customem. Our value-added meeIIer (VBR) p q m m acently outscored other mijar
computer vendon'pmgmm in Compute1 Systerns Nm' V A R B U S m 1987 h u a l Report
Csrd Revim HP m i d a n&r one mting in the majority of the categories sumeyed.
V A R B l J S m is a business publicattion that sem the vahe-added resekr market.
Supporting. Cmtomers Befire and AJter the Sale
Selling solutions meam geming dose to our customem and undemtmdq their businmi
needs. l'b year we added new kdniq for our salas people to i m p m their ability to
show customers how our p p e d solutions will help their bottom he. Sine they ccvry
HP p d 1 e ccnnputem, ow sales people bve instant access to sipecifiG @u& order
and mpetitive idomation d can gmewte quick ad a-te @ce a d delivery quom
on the spot. They can dm urire our e l m d q&em without returning to their &as.
HP is Number One 'R Support
This year HP ag& achieved a number one position in 0~8to111er suppod satidkction bawd
w d t s ~ l m p ~ ~ H P h a s u r s e y b g ~ h k & , a h P d i o g m v b t - ~ k
o ~ t i o n . We o&r a sir&, integrated set of support gerpiees, and the same team that
p u ~ a customer dution tagether remait3% n3qmdble h r supporting it &I the &. W e s r v w i n c d ~ r i n ~ this year insome dour
unique support pmducts such as Predictive Support, which helps us pmmt awmmer
downtime k r our HP 3000 compuBnl by d u h l i n g a p p m mainbmanm on off hours.
Our new HP h r R W is an inmation dbtdmtion d c e bmtd on a CKLROM (oompacit
diemad only m m q ) . Ebh disc Mds a wide variety of support i d b m n including
technical &nce m a t e d At pmsent, HP LasepROM emas the IP 3000 Series 900
business compucm but d be q d e d tp other @uct liaas in the amdq yem The discs
wiU be replaced each man& and each contains the stme w3lme of idomtion as a
stack ofdixenee manuals 25 feet high.
All of BP'e US. wles
This tool has enabled
them to increase the
time spent with their
customers by 35%.
1 - - ~ - -
Working wirh people
from an indepedent
sajhaam supplier, an
W &am +provide
a system fbr the Pepsi
Cola Bottling Group
&at aids them in
ptherhginfbnnation
from remote locahbns
O"d improving the
) pmductitrify0JcheL
people-
C s I s t - = . - - - 1 i5 s - - % . - a I 5g 8
HP sells solutions to problems.
This means listening to customers'
needs and worlung with outside
vendors to help us find effwtive
answers. We are also committed to
supporting our products and our
customers after the sale.
The spread of information
technology has made the world
a smaller place. The result is a
global marketplace where
competition is keen and strong
international business relationships
are increasmgly important.
Our long-s&ng
presence in Scotland
helped HP engineera
at South Queewferry
work with British
Telecorn to dmebp
RATES. m &g-
equipment a h u s
a cenhal location.
S O C I A I , R E S P O N S I B I L I T Y A T H P
Hewlett-Packard continues to make good progress in providing career opportunities for people
from traditionally disadvantaged groups. The table below reflects the increasing opportunities within
HP for both women and minorities in the United States. This year we also began extending the equal
opportunity program outside the U.S. We are paying special attention to career advancement, asking
senior managers to set specific development objectives for their organizations. HP has also initiated
a program to prepare managers for the complexities of managing a workforce which is increasingly
diverse in terms of culture, ethnic background, gender, age and physical capabilities.
This year the Helen Keller National Center cited HP for its efforts to employ deaf-blind
people. The company also sponsored for the second year a career day for physically disadvantaged
college students. Held at our Cupertino site, several new employees were recruited.
HP shows its support of local communities in many ways. The company makes
contributions to health, welfare, cultural and civic causes, including a dollar-for-dollar matching of
all employee pledges to local United Way campaigns.
One of the ways HP makes a special contribution is in improving education in science,
technology, medicine and business. In 1987, HP contributed $55 million in cash and equipment -
the majority of it to colleges and universities in the form of instruments and computers for use in
laboratories and classrooms. HP also matches employees' cash contributions to colleges, and 1987 was
the tenth year of the HP Faculty Loan Program through which HP people serve as professors at
universities with large minority enrollments. The company also supports elementary and secondary
education in many communities through adopt-a-school programs and by awarding small cash grants
to school teachers for innovative science projects.
Total Minority Female
Number Total Percent Total Percent - - - -
Managers & Supervisors
1982
1987
Profeseionals
1982
1987
Technicians
1982
1987
SkilledlCrgft
1982
1987
Percentage of HP Work Force
F I N A N C I A L R E P O R T Hewlett-Packad Companv and Subsidiaries
Statement of bmqement Respomibii~
We believe the fostering of an environment conducive to good internal controls is a basic management
responsibility.
The control process starts with the hiring and training of q d & d people and then providmg
them with corporate objectives and policies that adhere to the w e s t principles of business ethics so
that they undemtand how we expect them to conduct our business. Continuing education and training
programs made available to all personnel serve to keep our basic goals and objectives in proper
perspective.
Monitoring is an integral part of any control process. Our control systems are reviewed by
Price Waterhouse to the extent they consider necessary when auditing our financial statements. We
continuously monitor our control systems by direct management review with assistance h m a
wellestablished internal audit function that reports directly to the Chief Executive OEcer.
The Audit Committee of the Board of Directors, which consists of four outside directors,
serves in an oversight role by reviewing the internal control monitoring process. The committee has
direct and private access to both internal and external auditors.
Management acknowledges its msponsibiity to provide 6nancial information (both audited
and unaudited) that is representative of the company's operations, reliable on a consistent basis, and
relevant for a meanbghl appraisal of the company. We believe that our control process enables us to
meet this responsibility.
John A. You& Robert P. Wayman
President and Chief Executive OEcer Senior Vice President and ( 3 h i e f F d OEcer
Report of Independent Aocountante
To the Shareholders and Board of Directors of Hewlett-Packad Company
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements
of earnings, of shareholders' equity and of changes in financial position present &ly the 6nancial
position of Hewlett-Packard Company and its subsidiaries at October 31, lW and 1986, and the results
of their operations and the changes in their financial position for each of the three years in the period
ended October 31, lW, in conformity with generally accepted mun t ing principles consistently
applied during the period except for the change in 1986, with which we concur, in the method of
accounting for pension costs as described in the Notes toConsolidated Fmcial Statements. Our
examinations of these statements were made in a c c o h c e with generally accepted auditing standards
and accordingly included such tests of the accounting records and such other auditing procedures as
we considered necessary in the circumstances.
San Francisco, California
November 23,1987
C O N S O L I D A T E D S T A T E M E N T O F E A R N I N G S
Wea hwme ~ b r t h s ~ a r d c d ~ 8 Elldlsolu h~w;csppa rs lMrG lanoap~ 1%' Da6 I
Net revemte:
ESui~anmt %,a5 $5&2 S S 7
%mice8 1,775 1-
-. , . . . . . . . . . . . . , . . . .
. . . - . .. . . . -. .- .- ,- .
. \ : - "
,
.. . -- - - . , , . . . , . 8 -
. , - . . . . . - . , , . - . , -.- . . - . . ... .. - . > . ' I . . _
1 .. , , . & ,- k . 1 'A
lhmqy before taxes
Provision for taxes
Net eamhgs
Net earnin@;s per share
Number of]&lap1oyeea and Net Revenue Per Emplop IndKMda
to anpkment g r u p m &pxl to reduce man- costa through ahfled product &sip and impmmi pmewesd c e m prwmmmt aetlvfttee more efficient u&on
of capacity.
h e r e a s e d ~ t e i n & a n d ~ ~ t d u r i n g r e c e n t ~ m a d e ~ o n e o f
the straqpt yeam ofnew product htroductions in HP histmy. R d and W w t kxpenditclree
increesed $77 million or 9 peroent in 1987 to $901 millon a d amotlnted to $2.4 billion during the
Iacrt t b years. Some ofthe more ~ m t piiucta recently introduced indude aix HZ' P d o n
Architecture computer mod&, an expaaded line of4- analyzers, thin-fiLn disc drlm aid a series
dlaser printem. Generally, over half of HP's annual ordm are for produrn introdaced in the p m d h g
three y-. &%mgement b e k continued fnvestnwn~~ b mmnh and d&pmt are vid to the cbmpq'e future p w t h aid eompetftive position in the marketplace.
HPfurther~item4arke~andsening~eaduringWtoprorideZhenecessary
support for new product htductions and to mane w d y pursue new bushe88 opporhmitks
For example, pductivfty we* I;ealbied through the we dHP pottgble cornputem which allow
sales people imtmt accegs to product price, adability and order status ad on. I n d e d m a r k e ~ ~ , including t n c d product prmnotim and dvertisizrg acts* and a p r o p o r t i d y
p i r &tion e%& on marketing costs h the d& in the due ofthe U.S. d o k mdted in higher marketing, expemm in 1987. Mmhis~ttive and $ e d expenses'ae a pmmt of net m m u e
ia1987and ~ m l o w r t h a n t h o a e q l r s d m 1 9 8 5 i i e a r e s d t d ~ e ~ c o ~ l a d
red& ps ion eosts because of the &pion ofS?atement of F m d A m t i n g Stand& No. 87,
aEm$qer$ Acoounting for Pensions? The o o m ~ ' s e&ctive tax mte w9s 33.0 percent in l987,33.9 percat in I,% and 35.5
percent in 1W. €himpi in the tax rate ware &bed to d fmt~m, the mast notable of which worereductiona of~tory incometax ~ ~ , ~ c J a r I y ~ the US. %Reform Act of1986(TRA),
and r$anges in the mix ofeamiqy among various om^ An d y s i s ofthe coxqmy'~
t a x ~ n s i 6 p d e d i n ~ e m ~ ~ o t h e o o 1 ] ~ 0 ~ ~ c i a l s t a t a n e n t s o n ~ 3 W F u r t b ~ ~
ductlorn in the U.S. etatutory heom tax mfe, aa p.sentIy provided by TRA, are expected to mult
i a a r n d a s t d ~ i n t h e ~ ~ r q ~ ~ ~ ~ m ~ i n l ~ .
Net amiqp br 1987 were $644 m i l k c o m M with net eambqp of $516 &on mi W m i l l i o n i n l ~ a n d l ~ ~ & p W s n e t ~ a s a p a c e n t o f ~ ~ e t ~ u e ~ t o
8.0 percent in 1!B7 fro3n 7.3 percent in EM6 and 7.5 percent in 1985.The mmpany's hpre,ved
p f i ~ ~ i n ~ i s a ~ t e d t o h i g h e r ~ u e p w t h , e f 6 e c t r w ; ~ & n ! t d ~ o s t s a n d ~
andad&eindktivetaxlittes.
HE' employmat was steady hughout 2387 at 82,O employees. Employment levels were ~?1.- from the dose of l%, a year in w W HP redud its worIrPorce by appw-teIy
4600 em+ under w o l w z a r p m 9nd a h a d earIy-mkement progranre.
F I N A N C I A L R E V I E W U ' O L ~ M
Soancce and Uses dbds
wrf
H P ~ b n ~ ~ h t b e . ~ ~ . t o ~ c e i t g ~ w t b t h r o ~ i n t e d ~ ~ r a d ~ . T h e
e~mpmy'a&iadd @tion mmim strong with net 4 Cadi and Umpolary c e s h j m ~ net
a f n o t e s ~ e ) d $ L 7 ~ a t Ckmher31,1987",an i n ~ o f ~ m j l l i o n h ~ , ~
mmpam to taet cash of$1.1 IbiEliiwt and $760 &on at the end of 19% d 1% respmridy. The h m e a w s i n n e t o a s h d t h h i g h e r r l w & d ~ , d d q i d e x p m e t i t i t u r s e a n d h ~
utilization ofopedq m. HP fuxthmizn.prod the: efktivmw dfts mmqpment oEopyatbg tatw in 1W.
htsdn~~eg&de~Epe~centhin,~~bmbpcentrincneaseinnet~
f b r . t 6 e h d ~ d ~ o ~ ~ ~ ~ ~ r O f t h e ~ ~ H ~ r i e s ~ u p @136&oaor 1 4 p m m t h ~ q H P ' ~ i n ~ n t o r y ~ r a t e o f 3 ~ S ~ i n l987incmeslsedh
twmmr razes of3.4 d 3.l in W6 4 1985, mpdve ly .
~ t a l @ ~ m W d o n l 4 1 % 7 , W m i ] l f a n ~ n ~ d W m j W l i a n f n
1985.Man~co~~d&ctenci&hwedBwedm~redvce~apiralspendiag~
thatdB85and1hillpr@debr mplldq aad c q & t a l m w % ro support htm gmwth.
G a p i t a l e z p m d b m & z ~ a z r , t b b e ~ ~ p ~ & a
C O N S O L I D A T E D B A L A N C E S H E E T Hzwlett-Packard Company and Subsidiaries
B October 31 In millions except par value and number of shares 1987 1986
Assets
Current assets:
Cash and temporary cash investments $2,645 $1,372
Accounts and notes receivable 1,561 1,344
Inventories:
Finished goods
Purchased parts and fabricated assemblies
Other current assets
Total current assets 5,490 3,814
Property, plant and equipment:
Land
Buildings and leasehold improvements
Machinery and equipment
Accumulated depreciation and amortization
Other assets
Liabilities and sharelwlders'equity
Current liabilities:
Notes payable
Accounts payable
Employee compensation and benefits
Accrued taxes on earnings
Deferred revenues
Current deferred taxes on earnings
Other accrued liabilities
Total current liabilities 2,735 1,518
Long-term debt
Other liabilities
Deferred taxes on earnings
Shareholders' equity:
Preferred stock, $1 par value (authorized: 300,000,000 shares; issued: none)
Common stock and capital in excess of $1 par value (authorized: 600,000,000 shares; issued and outstanding: 257,251,000 in 1987 and 256,092,000 in 1986)
Retained earnings
Total shareholders' equity
Certain amounts have been reclassified to conform to the 1987 presentation. The accompanying notes are an in twal part of these financial statements.
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N F I N A N C I A L P O S I T I O N
For the years ended October 31 In millions
Hewlett-Pachrd Company and Subsidiaries
1987 1986 1985
Funds provided by operations:
Net earnings
Expenses not requiring an outlay of funds:
Depreciation and amortization
Deferred taxes on earnings
Other, net
Funds used by operations:
Investment in property, plant and equipment
Increase (decrease) in working capital, excluding net cash:
Accounts and notes receivable
Inventories
Other current assets
Accounts payable and other current liabilities
Accrued taxes on earnings
Other, net
Non-operating funds provided (used):
Employee stock plans:
Shares issued
Shares purchased
Dividends to shareholders
Other, net
(1M) (176) (120)
Increase in net cash (cash and temporary cash investments, net of notes payable) 523 383 39
Net cash at beginning of year 1,143 760 721
Net cash at end of year
The accompanying note are an integral part ofthese financial statements.
C O N S O L I D A T E D S T A T E M E N T O F S H A R E H O L D E R S ' E Q U I T Y
Hewlett-Packard Company and Subsidiaries
Common stock
Number of Capital in excess Retamed
In null~ons except number of shares m thousands shares Par value of par value earnings Total
Balance October 31,1984 256,478 $256 $519 $2,770 $3,545
Employee stock plans:
Shares issued
Shares purchased
Dividends
Net earnings
Balance October 31,1985
Employee stock plans:
Shares issued
Shares purchased ( 7,062) (7 ) (280) - (287)
Dividends - (56) ( 56) - -
Net earnings
Balance October 31,1986
Employee stock plans:
Shares issued 6,051 6 278 - 284
b Shares purchased
Dividends
Net earnings
Balance October 31,1987
Certain amounts have been reclassified to conform to the 1987 presentation. The accompanying notes are an integal part of these financial statements.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Hewlett-Packard Company and Subsidiaries
Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statemen& include the accounts of Hewlett-Packard Company and its
subsidiaries, except for Hewlett-Packard Finance Company, which is accounted for by the equity method.
All significant intercompany accounts and transactions have been eliminated.
Reuenue recognition
Revenue from equipment sales is recognized at the time the equipment is shipped. Services revenue is
recognized over the contractual period or as services are performed.
Inventories
Inventories are valued at standard costs which approximate actual costs computed on a first-in, first-out
basis, not in excess of market.
Tmes on earnings
Income tax expense is based on pretax financial accounting income and includes deferred taxes
for the effects of timing differences between financial accounting and taxable earnings. Investment tax
credits reduce the provision for taxes in the year the related assets are placed in service.
Net earnings per share
Net earnings per share is based on the number of shares outstanding at the end of each period.
The use of weighted-average shares outstanding during the period would not have a significant effect
on net earnings per share. Outstanding stock options considered to be common stock equivalents
have not been included because the effect would be immaterial.
Temporary cash investments
Temporary cash investments are principally comprised of cash invested in certificates of deposit,
temporary money market instruments and tax-exempt notes and are stated at cost plus accrued interest,
which approximates market.
Property, plant and equipment
Property, plant and equipment is stated at cost. Additions, improvements and major renewals are
capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Depreciation is provided
using accelerated methods, principally over the following useful lives: buildings and improvements,
15 to 4Q years; and machinery and equipment, three to 10 years. Amortization of leasehold improvements
is provided using the straight-line method over the life of the lease or the asset, whichever is shorter.
Foreign currency tramlation
The company uses the U.S. dollar as its functional currency. Gains or losses from foreign currency
translation are included in net earnings.
Accounting changes
The company adopted Statement of financial Accounting Standards No. 87, "Employers' Accounting
for Pensions" (SFAS 87), for substantially all of its non-U.S. defined benefit plans in fiscal 1987. Beginning
in fiscal 1986, the company implemented SFAS 87 for its U.S. defined benefit plan. The effects of these
changes are described in the Retirement Plans note on pages 34-36.
Effective November 1,1986, the company adopted Statement of Anancial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." This
change did not have a material effect on the company's 1987 financial results.
Taxes on Earnings
The provision for taxes is comprised ofthe following:
In millions 1987 1986 1985
U.S. federal taxes:
Current
Deferred
State taxes
Non-U.S. taxes
The difference between taxes computed by applying the U.S. federal income tax rate to earnings before
taxes and the actual provision for taxes is as follows:
In millions 1987 1986 1985
Taxes on earnings at the U.S. statutory rate $404 $359 $349
State income taxes, net of federal tax benefit 2 1 16 20
Research and development tax credits (19) (30) (27)
Investment tax credits ( 1 ) ( 6 ) (23)
Lower rates in other jurisdictions, net (63) (53) (32)
Other, net (24) (22) ( 18)
Deferred federal taxes result from differences in the timing of revenue and expense recognition for tax and
financial reporting purposes. Included in these differences are amounts relating to deferred payment
contracts totaling $90 million, $30 million and $99 million for 1987,1986 and 1985, respectively. There
are no other individually significant differences.
After allocating eliminations and corporate items, earnings before taxes of U.S. and non-U.S.
operations are as follows:
In millions 1987 1986 1985
U.S. operations, including Puerto Rico $442 $305 $427
Non-U.S. operations 520 475 331
The company has provided for U.S. federal income taxes and foreign withholding taxes on the portion of
non-U.S. subsidiaries' undistributed earnings not expected to be indefinitely reinvested. The company
has not provided for U.S. taxes on undistributed earnings of $753 million at October 31,1987 because
such earnings are intended to be reinvested indefinitely in non-U.S. subsidiary operations. If these
earnings were distributed, foreign tax credits should become available under current law to reduce or
eliminate the resulting U.S. income tax liability. Where excess cash has accumulated and it is
advantageous for tax or foreign exchange reasons, subsidiary earnings are remitted.
As a result of certain employment and capital investment actions undertaken by the company,
income from manufacturing activities in certain countries is subject to reduced tax rates and in some
cases is wholly exempt from taxes for years through 1994 to 2002. The income tax benefits attributable
to the tax status of these subsidiaries are estimated to be $43 million, $40 million and $37 million
for 1987,1986 and 1985, respectively.
The net impact of the retroactive provisions of the U.S. E x Reform Act of 1986 was a decrease
in the 1986 provision for taxes of $21 million-a $29 million decrease as a result of the extension of
the research and development tax credit, offset by an $8 million increase due to the repeal of the
investment tax credit.
Federal income tax returns of the company have been examined through 1979 by the Internal
Revenue Service (IRS ) and settled. The IRS has not completed its examination of returns for years
subsequent to 1979. The company believes that adequate accruals have been provided for all years.
Retirement Plans
Penswn and profit-sharingplans
Substantially all of the company's employees are covered under various pension and deferred profit.
sharing retirement plans. The worldwide pension and deferred profit-sharing expense was $75 million
in 1987, $56 million in 1986 and $86 million in 1985. It is the company's policy to accrue and fund curren
year's costs for all plans.
U.S. employees are provided retirement benefits by the U.S. Deferred Profit-Sharing Plan and
the U.S. Supplemental Pension Plan. The U.S. Deferred Profit-Sharing Plan is a defined contribution
plan that provides the vast majority of the retirement benefits to U.S. employees. The plan is funded
solely by the company through an annual contribution based upon the company's adjusted U.S.
net income? as defined in the plan agreement. Assets of the plan are held in trust for the sole benefit
of employees. Expense for the U.S. Deferred Profit-Sharing Plan was $50 million in 1987, $33 million
in 1986 and $53 million in 1985. The U.S. Supplemental Pension Plan is a defined benefit plan that
provides for any excess of defined minimum benefits over the benefits available from the U.S. Deferred
Profit-Sharing Plan. The amount of the benefit is computed based u p o ~ the employee's highest average
pay rate and length of service, reduced by the annuity value to which the employee is entitled under
the U.S. Deferred Profit-Sharing Plan.
The combined status of the U.S. Deferred Profit-Sharing and U.S. Supplemental Pension plans at
October 31,1987 is as follows:
In millions
Fair value of plan assets $1,131
Projected benefit obligation $ 945
Employees outside of the U.S. generally receive retirement benefits under various defined benefit and
defined contribution plans based upon such factors as years of service and employee compensation levels.
The company adopted Statement of financial Accounting Standards No. 87, "Ernployerj'
Accounting for Pensions" (SFAS 87), for substantially all of its non-U.S. defined benefit plans in 1987.
The effect of implementing SFAS 87 for non-U.S. plans was not material to the company's financial
results. Effective November 1,1985, the company adopted SFAS 87 for its U.S. retirement plans. This
change resulted in a reduction of pension expense of $24 million in 1986.
Net periodic pension cost for 1987 is comprised of the following:
In millions
U.S. Non-U.S. supplemental defined
defined benefit benefit plans
Service cost - benefits earned during the period 96 1 $28
Interest cost on projected benefit obligation 1 17
Actual investment return on plan assets
Net amortization and deferral
Net pension cost (income) $24
The funded status of the plans at October 31,1987 is as follows:
In millions
U. S. Non-U.S supplemental defined
defined benefit benefit
plan plans
Vested benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Projected benefit obligation
Excess of plan assets over projected benefit obligation
Unrecognized net experience (gain) loss
Unrecognized net transition asset*
Prepaid (accrued) pension costs 96 47
*Amortized over 15 y m for the U.S. plan and over periods ranging kom 12 to 20 years for non-U.S. plans.
Plan assets consist primarily of listed stocks and bonds for the U.S. plans and listed stocks, bonds
and cash surrender value life insurance policies for the non-U.S. plans. C
The assumptions used in 1987 to measure net periodic pension cost for the defined
benefit plans are as follows:
Discount rate 8.0% 4.5% to 13.5%
Expected long-term return on assets 9.0% 5.0% to 12.0%
Average increase in compensation levels 7.0% 3.5% to 9.0%
The actuarial present value of projected benefit obligations of the U.S. Deferred Profit-Sharing and
U.S. Supplemental Pension plans at October 31,1986 was $392 million. These obligations reflect an
assumed discount rate of 9 percent, an expected long-term return on assets of 9 percent and an average
increase in compensation levels of 7 percent. The fair value of plan assets for these plans at October
31,1986 was $1,071 million.
At October 31,1986, the assets and reserves of the company's non-U.S. plans exceeded the
actuarially computed value of vested benefits.
TmCAP and other benefite
Employees of the company and certain subsidiaries may participate in the Tax Saving Capital . Accumulation Plan ( T a x 0 j. G x 0 was established by the company as a supplemental retirement
program. Under the TaxCAP 4Ql(k) program, the company contributes one dollar for every three
dollars contributed by employees. Combined Employee Stock Purchase Plan and TaxCAP contributions
by an employee cannot exceed 12 percent of annual compensation. Included as a provision of k C A P
is a Payroll-based Stock Ownership Program (PAYSOP j. PAYSOP resulted in $2 million, $9 million and
$9 million in compensation expense and offsetting tax credits in 1987,1986 and 1985, respectively. At
October 31,1987, approximately 35,000 employees were participating in the 401(k) portion of k C A P
out of the approximately 54,000 who were eligible. Participation in PAYSOP is automatic for all
eligible employees.
In addition to providing pension benefits, the company currently provides certain health-care
and life-insurance benefits for retired employees. Substantially all of the company's U.S. employees could
become eligible for these benefits. The cost of such benefits, which is recognized as expense as claims
are paid, was $3 million in each of 1987 and 1986 and $2 million in 1985.
Short-Term Borrowiq
Short-term borrowings are comprised of the following:
In millions
Notes payable to banks
Commercial paper
Current maturities of long-term debt
Receivable financing (t)
(t) During 1987, the company entered into an agreement to sell undivided interests in a portion of its
trade receivables to certain financial institutions, with recourse. These transactions are recorded as loans
which mature monthly in various amounts through January 1988. Amounts outstanding bear interest
in the form ofa discount, which results in effective rates averaging 7.6 percent. In aggregate, $4% million
of receivables included in the company's balance sheet at October 31, 1987 are subject to transfer
under this arrangement.
Shareholders' Equity
Employee stock purchase plan
Eligible company employees may contribute up to 10 percent of their base compensation to the quarterly
purchase of company stock under an Employee Stock Purchase Plan. Under this plan, employees
contribute 75 percent and the company contributes 25 percent of a formula stock price, which is based
on average market prices during the preceding quarter. At October 31,1987,72,000 employees were
eligible to participate and 53,000 employees were participants in the plan.
Incentive cornpeneation plane
The company has three principal stock option plans, adopted in 1974,1979 and 1985. All plans permit
options granted to qualify as "Incentive Stock Options" under the Internal Revenue Code. The option
price is equal to the fair market value on the date of grant. Options generally vest over periods of three
to four years. The majority of options granted prior to 1987 vest at a rate of 25 percent in each of the
first two years and at 50 percent in the third year from the date of grant. Options granted in 1987 primarily
vest at a rate of 25 percent per year over a ~ e r i o d of four years from the date of grant. The ~ l a n s ~rovide
for the granting of stock appreciation rights with respect to options granted to oEcers.
The following table summarizes option activity during 1987:
Thousands except price per share Price
Options per share
Outstanding at October 31,1986
Granted
Exercised
Cancelled
Outstanding at October 31,1987 9,472 $1069
At October 31,1987, options to purchase 5,165,000 shares were exercisable at prices ranging from
$10 to $47 per share. Shares available for option grants at October 31,1987 and 1986 were 6,954,000
and 8,993,000, respectively. Approximately 31,W employees were considered eligible to receive stock
options in fiscal 1987. There were approximately 12,000 employees holding options under one or
more of the option plans as of October 31,1987.
Under the 1985 Incentive Compensation Plan, certain key employees may be granted cash or
restricted stock awards. Cash and restricted stock awards are independent of option grants and are
subject to restrictions as determined appropriate by the company's Stock Option Committee. The
majority of the shares of restricted stock outstanding at October 31,1987 are subject to forfeiture if
employment terminates prior to five years from the date of grant. During that period, ownership of the
shares cannot be transferred. Restricted stock has the same dividend and voting rights as other common
stock and is considered to be currently issued and outstanding. The cost of the awards, determined
as the fair market value of the shares at the date of grant, is expensed over the period the restrictions
lapse. Such expense amounted to $10 million, $7 million and $2 million in 1987,1986 and 1985,
respectively. At October 31,1987 and 1986, the company had 1,429,000 and 1,044,000 shares, respectively,
of restricted stock outstanding.
Shnres reserved
The company has reserved shares for future issuance under the employee stock plans. At October 31,
1987 and 1986,30,867,000 and 38,380,000 shares, respectively, were reserved under the provisions
of these plans.
Stock repurchmepmgram
In 1984, HP's Board of Directors (the board) approved a stock repurchase program for the purpose
of acquiring shares of the company's common stock for reissuance to employees under various stock
option and purchase plans. In January 1987, the board authorized additional expenditures of up to
$750 million under this program. Approximately 4,892,000 shares were repurchased in 1987 for an
aggregate purchase price of $220 million. In 1986, the company acquired approximately 7,062,000 shares
for an aggregate price of $287 million. At October 31,1987, HP has authorization for an aggregate
of $860 million in future repurchases under this program based on certain price and volume criteria.
Commitments
The company leases certain real and personal property. Minimum commitments under these
operating leases are $72 million for 1988, $59 million for 1989, $43 million for 1990, $28 million for
1991, $22 million for 1992 and $139 million for 1993 through 2033. Certain leases require the company
to pay property taxes, insurance and routine maintenance and include escalation clauses. Rent expense
was $134 million in 1987, $116 million in 1986 and $99 million in 1985.
At October 31,1987, the company had purchase commitments for plant site acquisition,
facility construction and related machinery and equipment aggregating $217 million.
Unused lines of credit amounted to approximately $1,080 million at October 31,1987. These
lines provide for borrowings on a worldwide basis and generally do not involve commitment fees.
Unconsolidated Finance Subsidiary
The company's whollv owned, unconsolidated finance subsidiary, Hewlett-Packard finance Company
(HPFC), provides financing of U.S. installment sales and of leases of the company's products as well
as the financing of third-party software and equipment. The investment in HPFC is accounted for by
the equity method.
HPFC's shareholder's equity and total assets at October 31 amounted to $68 million and
$513 million in 1987, $78 million and $595 million in 1986 and $51 million and $346 million in 1985,
respectively. finance revenue totaled $52 million for 1987, $45 million for 1986 and $36 million for 1985,
while net earnings were $8 million, $7 million and $5 million, respectively.
Additional information is available in the 1987 HPFC Form 10-K filed with the Securities and
Exchange Commission.
Major Customers
Direct and indirect sales to the U.S. Government amounted to approximately $670 million in 1987,
$670 million in 1986 and $620 million in 1985. No other customer accounted for more than 5 percent
of net revenue.
Geographic Area Information
The company operates in a single industry segment: the design, manufacture and senice ofmeasurement
and computation products and systems.
Net revenue, earnings before taxes and identifiable assets, classified by the major geographic
areas in which the company operates, are as follows:
In millions 1987 1986 1985
Net reuenue
United States:
Unaffiliated customer sales
Interarea transfers
Europe:
Unaffiliated customer sales
Interarea transfers
Other areas:
Unaffiliated customer sales
Interarea transfers
Eliminations
Earnings before tuxes
United States
Europe
Other areas
Eliminations and corporate
Identifiable nssety
United States
Europe
Other areas
Eliminations and corporate
Net revenue from sales to unaffiliated customers is based on the 1ocation.of the customer. Interarea
transfers are principally sales between HI' affiliates made at market price, less an allowance primarily
for subsequent manufacturing and/or marketing costs. Earnings before taxes and identifiable assets are
classified based on the location of the company's facilities.
Identifiable corporate assets, which are net of eliminations in the table above, are comprised
primarily of cash, property, plant and equipment and investments and aggregate $3,108 million in 1987,
$1,746 million in 1986 and $1,397 million in 1985.
O R D E R S A N D N E T R E V E N U E B Y G R O U P I N G S O F S I M I L A R P R O D U C T S A N D S E R V I C E S Unaudited
For the years ended October 31 In millions
Hewlett-Packard Company and Subsidiaries
Orders
Measurement, design, information and manufacturing equipment and systems
Peripherals and network products
Service for equipment, systems and peripherals 1,560 1,326
Medical electronic equipment and service 652 544
Analytical instrumentation and service 3% 320
Electronic components 247 203
Net revenue
Measurement, design, information and manufacturing equipment and systems
Peripherals and network products
Service for equipment, systems and peripherals
Medical electronic equipment and service
Analytical instrumentation and service
Electronic components
The company operates in a single industry segment: the design, manufacture and service of measure-
ment and computation products and systems. The table above provides supplemental information showing
orders and net revenue by groupings of similar products and services. The groupings are as follows:
Measurement, design, information and manufacturing equipment and systems
Equipment and systems (hardware and software) used for design, manufacturing, office automation
and information processing; general-purpose instruments and computers; and handheld calculators.
Peripherals and network products
Printers, plotters, magnetic disc and tape drives, terminals and network products.
Service for equipment, systems andperipherals
Support and maintenance services, parts and supplies related to design and manufacturing systems,
office and information systems, general-purpose instruments and computers, peripherals and
network products.
Medical electronic equipment and service
Products that perform patient monitoring, diagnostic, therapeutic and data-management functions;
application software; support and maintenance services; and hospital supplies.
Analytical instruntentation and service
Gas and liquid chromatographs, mass spectrometers and spectmphotometers used to analyze chemical
compounds; support and maintenance services.
Electronic components
Microwave semiconductor and optoelectronic devices that are sold primarily to manufacturers for
incorporation into electronic products.
Corporate Offices
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U.S. Operations
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International Operations