HP 2006 Annual Report Download - page 50

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
cost control measures, including the benefit from workforce reduction actions in ESS, the consolidation
and realignment of certain IPG research and development infrastructure and lower program spending.
Selling, General and Administrative
Selling, general and administrative (‘‘SG&A’’) expense declined as a percentage of net revenue
during fiscal 2006 due primarily to the increase in net revenue outpacing SG&A expense growth. Total
SG&A expense increased slightly during fiscal 2006 as higher bonus accruals and stock-based
compensation expenses as well as increased marketing spending were offset in part by savings from
expense controls and restructuring actions and favorable currency impacts due to movement of the
dollar against the euro and the yen. As a percentage of net revenue, each of our segments experienced
a year-over-year decrease or no change in SG&A expense in fiscal 2006.
SG&A expense decreased slightly as a percentage of net revenue during fiscal 2005, as net revenue
growth was higher than the growth of SG&A due in part to tight company-wide expense controls. On
an absolute basis, SG&A spending increased 6.6% in fiscal 2005 due primarily to higher employee
bonuses earned in the second half of fiscal 2005 and unfavorable currency impacts.
Pension Curtailment
In conjunction with management’s plan to restructure certain of our operations, as discussed in
Note 8 to the Consolidated Financial Statements in Item 8, we modified our U.S. retirement programs
to align more closely to industry practice. Effective January 1, 2006, we ceased pension accruals and
eliminated eligibility for the subsidized retiree medical program for current employees who did not
meet defined criteria based on age and years of service. As a result, we recognized a curtailment gain
of $199 million in the fourth quarter of fiscal 2005 stemming from the elimination of future benefit
accruals for the affected employee group. In fiscal 2006, we recognized additional curtailment gains,
which were included in our restructuring charges as described below.
For more information on our plan design changes, see Note 15 to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
Restructuring Charges
Restructuring charges in fiscal year 2006 were $158 million. This included a net charge of
$233 million related to true-ups of severance and other related restructuring charges for all
restructuring plans, a $6 million termination benefits expense and a $3 million settlement and
curtailment loss from our non-U.S. pension plans related to the fiscal 2005 restructuring plan, which
was approved by our Board of Directors in the fourth quarter of fiscal 2005. These charges were
partially offset by a $46 million settlement gain from the U.S. pension plans, a $24 million curtailment
gain from the U.S. retiree medical program and a $14 million adjustment to reduce our non-cash stock-
based compensation expense, all related to our fiscal 2005 restructuring plan approved in the fourth
quarter of fiscal 2005.
The fiscal 2005 restructuring plan was designed to simplify our structure, reduce costs and place
greater focus on our customers. We included original estimates of 15,300 positions to be eliminated in
the fiscal 2005 restructuring plan. Subsequent to the initial estimate, we reduced the number of total
positions to be eliminated to 15,200. Approximately 14,200 positions have been eliminated as of
October 31, 2006 in connection with this restructuring plan, including 3,200 U.S. employees who elected
to take early retirement.
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