HP 2011 Form 10-K Summary
Business context and reporting period. Hewlett-Packard Company (the 2011 registrant; not HP Inc.) filed this annual report for the fiscal year ended October 31, 2011. HP was a diversified global provider of personal computers, printing and imaging products, IT infrastructure, software, services and customer financing, organized into seven reporting segments. About 65% of fiscal 2011 revenue came from outside the United States.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net revenue | $127.245 billion | $126.033 billion |
| Gross profit / margin | $29.716 billion / 23.4% | $30.077 billion / 23.9% |
| Earnings from operations / margin | $9.677 billion / 7.6% | $11.479 billion / 9.1% |
| Net earnings / net margin | $7.074 billion / 5.6% | $8.761 billion / 7.0% |
| Diluted EPS | $3.32 | $3.69 |
| Cash provided by operating activities | $12.639 billion | $11.922 billion |
| Cash and cash equivalents at year-end | $8.043 billion | $10.929 billion |
| Total debt at year-end | $30.6 billion | $22.3 billion |
Revenue rose 1.0% as reported but declined 0.9% on a constant-currency basis. The effective tax rate was 21.2%, versus 20.2%. HP declared dividends of $0.40 per share for fiscal 2011 and paid $10.1 billion for share repurchases.
Year-end current assets were $51.0 billion and current liabilities $50.4 billion. Inventory rose to $7.5 billion from $6.5 billion, and the cash conversion cycle lengthened to 26 days from 21. The debt-to-equity ratio increased to 0.79x from 0.55x. HP reported $14.6 billion of available borrowing resources; the filing separately describes a bridge facility that terminated in November 2011.
Fiscal fourth quarter: Revenue was $32.122 billion, compared with $33.278 billion in the prior-year quarter. Operating earnings were $795 million and net earnings $239 million, versus $3.295 billion and $2.538 billion, respectively. The quarter included an $885 million goodwill and intangible impairment and substantial webOS wind-down costs.
Material changes and segment results
- Profitability declined despite slight consolidated revenue growth: operating margin fell 1.5 percentage points and net margin fell 1.4 points.
- ESSN revenue increased 9.3% to $22.241 billion, led by industry-standard servers, networking and storage. Operating earnings increased to $3.026 billion; margin eased to 13.6% from 13.9%.
- PSG revenue declined 2.9% to $39.574 billion, reflecting consumer PC softness and lower average selling prices. Operating margin improved to 5.9% from 5.0%.
- Services revenue increased 1.2% to $35.954 billion, but operating margin declined to 14.3% from 15.9%, amid contract rate concessions, lower utilization and a less favorable mix.
- IPG revenue was nearly flat at $25.783 billion; operating margin fell to 15.4% from 17.1% due to supply constraints, currency, product mix and logistics costs.
- HP Software revenue grew 17.9% to $3.217 billion, including acquired businesses, while operating margin declined to 21.7% from 28.7%. HPFS revenue grew 18.0% to $3.596 billion and operating earnings rose to $348 million.
Outlook, management commentary and principal risks
- HP stated that cash balances and anticipated operating cash flow should cover expected fiscal 2012 outlays. The filing provides no specific consolidated revenue or earnings guidance.
- Management’s strategy emphasized integrated hardware, software and services, cloud and other adjacent markets, portfolio investment, and operational efficiency. Fiscal 2011 R&D spending was $3.3 billion.
- HP decided in August 2011 to wind down webOS device manufacturing and sales. Related fiscal 2011 charges reduced operating earnings by approximately $1.673 billion, including the $885 million impairment. In December 2011, HP announced it would contribute webOS software to the open-source community and was assessing the impact on $273 million of related assets.
- HP acquired approximately 99% of Autonomy in fiscal 2011 for about $11 billion; acquisition-related cash payments totaled $10.48 billion. Purchase accounting values were preliminary, and integration, amortization and valuation risks remain relevant.
- HP cited economic uncertainty, intense pricing competition, product transitions, supplier concentration and component shortages, currency exposure, services-contract execution, acquisitions, cybersecurity and restructuring execution as risks. Thailand flooding constrained disk-drive component supply; Japan’s earthquake and tsunami affected printing supply chains. An alliance partner’s plan to stop software development for Itanium-based servers contributed to delayed or canceled orders.
- Credit ratings were downgraded after year-end by S&P and Fitch; HP reported higher borrowing costs and reduced commercial-paper market capacity. Fitch had a negative outlook and Moody’s had HP under review for possible downgrade.
- Notable legal and regulatory matters include U.S. and German investigations concerning alleged bribery and improper payments related to the Russia GPO transaction, Brazil ECT proceedings that imposed a five-year contracting suspension (with appeals pending), and India customs-duty notices. HP said it had adequate provisions and that additional material loss beyond recorded amounts was not reasonably possible as of October 31, 2011, while acknowledging litigation uncertainty.
- Recorded liabilities for uncertain tax positions, interest and penalties were approximately $2.1 billion. HP also disclosed ongoing tax audits and a $557 million proposed IRS adjustment to certain tax benefits, which HP was contesting.
Most important facts for investors to verify
- Whether recurring operating performance improves after separating the webOS impairment, wind-down costs, restructuring and acquisition-related charges from reported results.
- Whether consumer PC and printing demand, component availability and pricing pressures continue to weigh on revenue and margins.
- Autonomy’s integration progress, final acquisition accounting and any subsequent changes to goodwill or intangible-asset valuations.
- Debt, liquidity and borrowing costs following the post-year-end ratings downgrades, including the refinancing of near-term maturities.
- Cash conversion, inventory growth, receivables quality and HPFS portfolio credit performance.
- Developments and potential financial effects from the Russia GPO, Brazil ECT, India customs, copyright-levy and tax matters.
- HP reported unqualified independent-auditor opinions on the financial statements and internal control over financial reporting; verify subsequent developments and the assumptions underlying material estimates.