H-P restates cash flow; shares take hit
   By Rex Crum & Mike Tarsala, CBS.MarketWatch.com
   Last Update: 4:22 PM ET March 13, 2003


   PALO ALTO, Calif. (CBS.MW) -- Hewlett-Packard shares finished in the red
Thursday after investors
   spent most of the day taking the computer and printer giant to task for
what it said was a mistake in
   recording first-quarter operating cash flow.

   H-P (HPQ: news, chart, profile) gave up 57 cents, or 3.7 percent, to
close at
   $15 after the company said in its quarterly Securities and Exchange
Commission report that cash flow from
   operations for the quarter ended Jan. 31 actually came in 18 percent
lower at $647 million. 

   When it reported first-quarter results on Feb. 25, H-P said cash flow
from operations was $791 million. During the
   same period a year ago, H-P reported cash flow from operations of $1.7
billion.

   H-P CFO Bob Wayman issued an apology for the confusion to investors who
saw the classification error and
   subsequently sold off the company's stock to such a point that it fell
to $14.18 a share, its lowest point since
   October. 

   "As part of our normal controls process in preparation for our official
10-Q filing, we discovered an accounting
   classification error." Wayman said. "We obviously regret this error and
the confusion (it) caused."

   Wayman added that the H-P was reviewing the procedures it uses to
prepare its preliminary financial statements.

   Among the numbers H-P changed in its SEC filing were its cash flow from
investing activities, which it listed at
   $329 million. In its quarterly report, H-P reported a figure of $473
million. During the same period a year ago, the
   company recorded $558 million in cash flow from its investment actions.

   Rebecca Robboy, an H-P spokeswoman, said that the $144 million
reclassification was due to the company
   mistakenly recording some investments it sold as operating cash flow.
"The data were mistakenly captured in the
   wrong category, and now it's in the right category," Robboy said. "This
causes no change in our gross cash
   position of $13.2 billion, no change in revenue and no change in
earnings." 

   Operating cash flow is often defined as a company's net income, minus
its noncash charges such as depreciation
   and changes in working capital. H-P made no changes to its capital
expenditures in the quarter, which came to
   $612 million.

   'Genuine' mistake?

   The discovery of the error and the reclassification came in the "normal
diligence process," Robboy said. But she
   wouldn't specify how it was discovered -- by the company, its auditors
or by someone outside H-P -- or say
   whether the misclassified $144 million was the result of one or multiple
accounting errors.

   Sameer Bhasin, an analyst with Okumus Capital in New York, said H-P
could have made a simple error in
   reporting its operating cash flow due to a number of issues, including
the possibility of not having all the systems
   of its subsidiaries aligned.

   However, Bhasin said that for a company to be unknowledgeable about
   its cash position represents a bit of shortsightedness on the part of its
   executive team.

   "Every morning when you wake up as CFO, you know how much cash
   you have," Bhasin said. "It's right there. Anyone can know that. It's not
   so easy to believe that this was a genuine mistake."

   Street's say

   Analysts seemed to want to give Palo Alto-based H-P the benefit of the
   doubt regarding the reclassification, but they still said such a move
would raise eyebrows among investors who
   may begin questioning the company's knowledge of its own business outlook.

   "We believe it was an honest mistake," said Steve Milunovich of Merrill
Lynch. 

   However, "the timing is a bit bad given investor jitters over segment
accounting changes disclosed in the previous
   release," he said.

   Joel Wagonfeld, of Bank of America Securities, said he wouldn't
recommend purchase of H-P's stock right now.
   While giving H-P credit for quickly correcting its mistakes, he said the
incident "further underscores our
   longstanding concerns about (H-P's business) visibility."

   It was the second time since H-P's first-quarter report that the
company's accounting has come under market
   scrutiny. In its first-quarter report, H-P reclassified the estimates of
some of its personal systems group's
   expenses, including items such as research and development and
corporate-governance costs, that resulted in
   the division recording a profit of $33 million. H-P ended up listing
those expenses in a separate category for items
   that aren't normally covered by a specific business area.

   Rex Crum is a reporter for CBS.MarketWatch.com in San Francisco.
   Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com.







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