HP (then Hewlett-Packard Company) — Q1 FY2013 Form 10-Q
Reporting period: Three months ended January 31, 2013; comparisons are with the three months ended January 31, 2012 unless otherwise noted. Amounts are in U.S. dollars. HP reported seven segments: Personal Systems, Printing, Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments.
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter | Change or context |
|---|---|---|---|
| Revenue | $28.359 billion | $30.036 billion | Down 5.6% reported; down 4.3% at constant currency |
| Gross profit / margin | $6.330 billion / 22.3% | $6.723 billion / 22.4% | Margin down 0.1 percentage point |
| Operating earnings / margin | $1.752 billion / 6.2% | $2.042 billion / 6.8% | Lower earnings and margin |
| Net earnings | $1.232 billion | $1.468 billion | Down approximately 16% |
| Diluted EPS | $0.63 | $0.73 | Down $0.10 |
| Operating cash flow | $2.562 billion | $1.193 billion | Increase attributed primarily to cash management and lower webOS contract-cancellation payments |
| Cash and cash equivalents | $12.589 billion at Jan. 31 | $11.301 billion at Oct. 31, 2012 | Up $1.288 billion in the quarter |
| Total borrowings | $28.2 billion | $28.4 billion at Oct. 31, 2012 | Weighted-average borrowing rate was 2.90%, versus 2.95% |
Cash flows also included $644 million used in investing activities and $630 million used in financing activities. HP paid $258 million in dividends and repurchased $253 million of common stock. The declared dividend was $0.26 per share, compared with $0.24 a year earlier. Current assets were $49.552 billion and current liabilities $44.386 billion at January 31.
Segment results
- Personal Systems: Revenue fell 7.7% to $8.204 billion; operating earnings fell 51.4% to $223 million. Notebook revenue declined 16%, reflecting market contraction and the shift toward tablets.
- Printing: Revenue fell 5.3% to $5.926 billion, while operating earnings rose 25.2% to $953 million. HP cited improved mix and margins from higher-end printers and supplies.
- Enterprise Group: Revenue fell 4.1% to $6.984 billion and operating earnings fell 18.4% to $1.084 billion. Business Critical Systems revenue declined 24%; Networking revenue grew 4%.
- Enterprise Services: Revenue fell 7.1% to $5.919 billion and operating earnings fell 47.6% to $76 million. HP cited service revenue runoff, weaker contract signings and contractual price declines.
- Software: Revenue fell 2.1% to $926 million; operating earnings fell 3.1% to $157 million, primarily reflecting lower higher-margin license revenue.
- HP Financial Services: Revenue rose 0.7% to $957 million and operating earnings rose 11.0% to $101 million. Financing originations declined 24.7% to $1.162 billion.
Changes, outlook and management commentary
- Revenue declined across most businesses and regions; HP cited weak global demand, particularly in EMEA, and continued weakness in Personal Systems. U.S. revenue fell 0.9%; revenue outside the U.S. fell 8.0%.
- HP said it was addressing structural and execution challenges, including aligning costs with revenue, rebuilding channel relationships, improving internal systems and investing in products. Its strategic priorities include cloud computing, security and information management. Management noted that changes and restructuring could disrupt operations.
- HP reorganized reporting segments in Q1 FY2013, creating Enterprise Group and Enterprise Services and eliminating the former ESSN and Services segments. Prior-year segment results were reclassified; the changes did not affect consolidated results.
- No specific quarterly or annual revenue, earnings or EPS guidance is provided in the supplied filing text. HP cautioned that quarterly results are not necessarily indicative of full-year results.
- The May 2012 restructuring plan targets approximately 29,000 position eliminations through FY2014 and approximately $3.7 billion of total charges. HP had eliminated approximately 15,200 positions by January 31, 2013. The plan recorded about $290 million of charges in the quarter, while consolidated restructuring charges were $130 million after reversals of prior-plan accruals. HP estimated $2.3 billion of future restructuring cash expenditures, including about $1.3 billion for the remainder of FY2013.
- HP recorded an approximately $8.8 billion non-cash impairment charge in Q4 FY2012 related to Autonomy goodwill and intangible assets. HP said its investigation found alleged accounting improprieties, disclosure failures and misrepresentations connected with Autonomy before and during the acquisition. The SEC, U.S. Department of Justice and U.K. Serious Fraud Office were investigating; HP said it was cooperating.
Liquidity, debt and key risks
- HP said it expected to have sufficient cash, operating cash flow and capital-market access to repay $5.5 billion of Global Notes maturing over the next four fiscal quarters. It reported approximately $17.5 billion of available borrowing resources, including commercial-paper capacity and uncommitted lines, in addition to an unspecified amount available under its shelf registration.
- Moody’s had downgraded HP’s long-term rating to Baa1 and maintained a negative outlook; ratings were BBB+ from S&P and A- from Fitch. HP warned that further downgrades could increase borrowing costs, reduce commercial-paper capacity, require more derivative collateral and adversely affect liquidity.
- HP reported $2.8 billion of gross unrecognized tax benefits and approximately $2.3 billion of recorded liabilities and related interest and penalties for uncertain tax positions, partially offset by deferred tax assets and interest receivable. Tax audits and potential settlements remain uncertain.
- HP said it had adequate provisions for litigation and contingencies and that an additional material loss beyond amounts recognized was not reasonably possible as of January 31, 2013. It nevertheless warned that unfavorable resolutions could materially affect cash flows or results in a particular period. Matters include copyright-levy disputes, employment and shareholder litigation, investigations concerning Autonomy and the Russia GPO transaction, and customs-duty proceedings in India.
- HP identified continuing risks from macroeconomic weakness, competitive pricing, declines in PC and legacy enterprise markets, product transitions, supplier and channel dependence, currency movements, restructuring execution, cybersecurity, pension obligations and legal or regulatory matters. The filing states disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether the revenue and profit declines stabilize, particularly in Personal Systems, Enterprise Services and Enterprise Group, and whether Printing’s margin improvement is sustainable.
- Whether restructuring delivers expected savings on schedule, given the remaining position reductions, future cash payments and possible execution costs.
- Developments in Autonomy investigations and related shareholder litigation, including any financial consequences beyond the Q4 FY2012 impairment.
- HP’s ability to refinance or repay upcoming maturities while maintaining access to commercial-paper and capital markets amid rating pressure.
- Cash generation quality and working-capital trends: operating cash flow improved materially, while management attributed much of the increase to cash management and lower specified payments.
- Potential changes in tax exposures and material legal contingencies, including the India customs-duty assessments and ongoing investigations.