HP (Hewlett-Packard Company) 10-Q Summary
Reporting period: Quarter ended July 31, 2015; comparisons are with the quarter ended July 31, 2014. The filing also reports results for the first nine months of fiscal 2015. This is the pre-separation Hewlett-Packard Company, not results for HP Inc. as a standalone company.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $25,349 | $27,585 | $77,641 | $83,048 |
| Gross margin | 23.8% | 24.0% | 23.7% | 23.6% |
| Operating earnings | $1,212 | $1,458 | $4,563 | $5,277 |
| Operating margin | 4.8% | 5.3% | 5.9% | 6.3% |
| Net earnings | $854 | $985 | $3,231 | $3,683 |
| Diluted EPS | $0.47 | $0.52 | $1.75 | $1.93 |
| Operating cash flow | Not separately provided for the quarter | $3,881 | $9,632 |
- Quarterly revenue fell 8.1% reported and 2.2% in constant currency; nine-month revenue fell 6.5% reported and 2.3% in constant currency. Currency, declining PC and printing sales, and runoff in large Enterprise Services accounts were key factors.
- Quarterly gross margin declined 0.2 percentage points; nine-month gross margin improved 0.1 point. Competitive pricing and product mix pressured hardware margins, while service-delivery efficiencies supported margins.
- Cash and cash equivalents were $17.2 billion at July 31, versus $15.1 billion at October 31, 2014. Total borrowings were $25.5 billion, up from $19.5 billion; current and long-term borrowings were $11.0 billion and $14.5 billion, respectively.
- Current assets were $52.0 billion and current liabilities $49.0 billion. HP reported $17.4 billion of cash and short- and long-term investments combined.
- Nine-month investing cash outflow was $4.7 billion, including $2.6 billion for acquisitions and $2.6 billion for property, plant and equipment. Financing cash inflow was $2.9 billion, including $6.0 billion of debt issuance; HP repurchased $2.6 billion of shares and paid $913 million in dividends.
Material changes and business trends
- Personal Systems revenue declined 13.4% for the quarter and 6.2% year to date; quarterly operating margin fell to 3.0% from 4.0%. HP cited weaker PC demand, currency, pricing pressure, and customers delaying purchases ahead of Windows 10.
- Printing revenue declined 8.6% quarterly and 6.6% year to date amid weak demand and pricing pressure. Year-to-date operating margin rose to 18.5% from 18.2%, helped by lower operating expenses.
- Enterprise Group revenue increased 2.0% quarterly and 0.4% year to date, with Industry Standard Servers growth and the Aruba acquisition helping offset declines in other areas. Quarterly operating margin decreased to 13.0% from 14.0%.
- Enterprise Services revenue fell 11.0% quarterly and 12.4% year to date, primarily due to currency and large-contract runoff. Operating margin improved to 6.0% quarterly and 4.3% year to date, reflecting service efficiencies and cost controls.
- HP acquired Aruba Networks in May 2015 for approximately $2.8 billion. HP recorded approximately $1.8 billion of goodwill and $628 million of intangible assets related to Aruba. It also completed or initiated divestitures including Snapfish and iManage.
Outlook, risks and unusual items
- HP expected to complete its separation into Hewlett Packard Enterprise and HP Inc. at the end of fiscal 2015, subject to approvals and tax-related conditions. It recorded $750 million of separation costs in the first nine months and estimated total separation charges and net foreign tax expenses of approximately $2.6 billion across fiscal 2015 and 2016. Expected annual dis-synergies were $400 million to $450 million, divided approximately equally between the two companies.
- Management expected future separation-related cash payments of up to $2.0 billion, plus approximately $100 million of separation-related capital expenditures in the remainder of fiscal 2015. HP also described possible separation-related deferred-tax adjustments of approximately $1.0 billion to $1.6 billion.
- The 2012 restructuring plan had incurred $5.3 billion of its estimated $5.5 billion total cost by July 31; approximately 51,500 positions had been eliminated. On August 20, HP increased the estimated positions to be eliminated by up to 5%, without increasing expected aggregate charges.
- Unusual quarterly charges included $401 million of separation costs, $114 million of defined-benefit plan settlement charges, and a $136 million impairment related to data centers HP planned to exit. The pension settlement followed a voluntary lump-sum offer; the plan trust paid $827 million to participants.
- Operating cash flow declined $5.8 billion year over year for the nine-month period. HP attributed the reduction mainly to weaker working-capital cash generation, separation payments, currency effects, lower earnings, and higher pension and other cash payments.
- HP cited ongoing risks from competitive pricing, PC and legacy hardware market shifts, cloud and SaaS transitions, macroeconomic weakness, currency movements, execution of the separation and restructuring, and the ability to manage large services contracts and suppliers. It stated that no formal quantified earnings or revenue guidance is provided in this filing.
- Tax matters include $11.1 billion of unrecognized tax benefits, largely related to timing of intercompany royalty income recognition, and a proposed foreign tax assessment of approximately $680 million that HP is contesting. The filing also describes ongoing tax audits, litigation and investigations; outcomes could affect cash flows or results.
- Moody’s downgraded HP to Baa2 from Baa1 in August 2015, citing the planned separation. HP said further downgrades could raise borrowing costs, reduce commercial-paper capacity, or increase collateral requirements.
Most important facts for investors to verify
- Whether the planned separation was completed on schedule and how actual separation costs, taxes, and post-separation dis-synergies compared with estimates.
- Whether operating cash flow recovers after the sharp year-over-year decline, and how working capital and separation-related payments develop.
- How the $6.0 billion increase in borrowings, near-term maturities, credit ratings, and commercial-paper access affect liquidity and financing costs.
- Whether PC and Printing demand and margins stabilize, and whether Enterprise Group growth can offset continuing Enterprise Services revenue runoff.
- How the Aruba integration performs and whether acquisition purchase-price allocations or subsequent impairment assessments change materially.
- Developments in the proposed tax assessment, uncertain tax positions, and material litigation or investigations, including the Autonomy-related matters.