Administration December 9, 2003

H-P Prints Lower Earnings Picture With Option Expensing

September 12, 2003 (PLANSPONSOR.com) - Computer maker Hewlett-Packard Co. says mandatory stock option expensing would have slashed its third quarter profits 64%.
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With the possibility of stock options paid to executives and employees being reflected as a compensation expense, the company revealed its net income would have been $107 million, or $0.04 per share, rather than $297 million, or $0.10 per share, in a 10-Q filing with the US Securities and Exchange Commission (SEC).   Normally, Hewlett-Packard only accounts for stock options as a compensation expense when it grants options with a discounted exercise price, the filing said.

The disclosure was made following the decision in April by the Financial Accounting Standards Board (FASB) that companies should be required to treat stock option grants as expenses, and said a new rule could be in place by the end of 2003 (See  FASB Says Yes to Option Expensing ).  However, a reprieve of sorts was handed down earlier this week when FASB pushed back the target date for issuing new rules that would force companies to expense options, now saying it does not expect to issue a proposed rule until the fourth quarter of 2004.  

Tech Actions

The Palo Alto, California-based company is not the first technology company to show the potential harmful effects stock option expensing would have on corporate earnings.   NASDAQ, the primary stock exchange for technology companies, has said expensing stock options could hurt small firrms that do not have earnings but need to attract qualified employees as the companies in particular rely on stock options as a form of compensation.   In addition companies such as Apple Computer (See  Apple Shareholders Vote Yes for Option Expensing ), Adobe (See  Adobe Takes Snapshot of Life With Option Expensing ) and Analog Devices (See  Analog Shareholders Defeat Option Expensing Proposal ) have come out with amended earnings releases this year showing lowered earnings with mandated option expensing.

However, a recent Towers Perrin study that found stock option expensing has little effect on corporate bottom lines (See  Expensing Options Has Little Effect On Stock Price ).  Towers concluded from that study that the economic costs of using options had been known to investors before companies began showing profit & loss (P&L) expenses.

Additionally,   Buck Consultants’ study “Options Expensing: By Choice or Mandate? A Critical Question of Timing for High-Tech Companies” showed technology companies forced to adopt stock option expensing guidelines in 2004 would experience a median decrease in fiscal year 2003 EPS of approximately 20 times greater than companies that voluntarily adopt these guidelines before a December 2003 deadline (See  Buck: Early Option Expensing Equals Higher EPS ).

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