HP Inc. (Hewlett-Packard Company) — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 31, 2012, compared with the three months ended January 31, 2011, unless otherwise stated. Amounts are in U.S. dollars; financial statement amounts are in millions unless indicated. HP reported seven segments spanning personal systems, services, printing, enterprise technology, software, financing and corporate investments.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net revenue | $30.036 billion | $32.302 billion | Down 7.0% (7.9% constant currency) |
| Gross profit / margin | $6.723 billion / 22.4% | $7.921 billion / 24.5% | Margin down 2.1 percentage points |
| Operating earnings / margin | $2.042 billion / 6.8% | $3.394 billion / 10.5% | Down 39.8%; margin down 3.7 points |
| Net earnings | $1.468 billion | $2.605 billion | Down 43.6% |
| Diluted EPS | $0.73 | $1.17 | Down 37.6% |
| Operating cash flow | $1.193 billion | $3.070 billion | Down $1.877 billion |
- Gross margin pressure reflected currency effects, competitive pricing, lower ink-supplies volume and services contract pressures. SG&A was $3.367 billion, or 11.2% of revenue, versus $3.117 billion, or 9.6%.
- Cash and cash equivalents were $8.113 billion at January 31, up $70 million from October 31, 2011. Cash from operations was partly offset by capital spending of $883 million, share repurchases and dividends.
- Debt was approximately $30.9 billion, compared with $30.6 billion at October 31; reported cash was therefore materially below debt. Current assets were $48.749 billion and current liabilities $44.293 billion. HP reported approximately $17.3 billion of available borrowing resources, including commercial-paper capacity and uncommitted credit lines, plus $646 million of available receivables-facility capacity.
- HP repurchased 29.1 million shares for $780 million and paid $244 million in dividends. Quarterly dividends declared per share were $0.24, versus $0.16 a year earlier.
Material changes and segment results
- Revenue fell most in Personal Systems Group (PSG), down 15.1%, and Enterprise Servers, Storage and Networking (ESSN), down 10.4%; Imaging and Printing Group (IPG) declined 7.0%. Services grew 1.1%, Software 30.5% and HP Financial Services 14.9%.
- Operating earnings weakened across most major segments: PSG fell 31.0%, Services 34.5%, IPG 32.0% and ESSN 32.3%. Software operating earnings rose 35.0%; HPFS rose 15.2%. Services operating margin fell to 10.5% from 16.2%; IPG to 12.2% from 16.6%; ESSN to 11.2% from 14.8%.
- Management attributed hardware revenue and volume weakness partly to Thailand flooding, which disrupted hard-disk-drive component supply, and to macroeconomic softness. Services margins faced contract renewal rate concessions, delivery investments and delays. ESSN also faced competitive pricing and reduced demand for Itanium-based systems following an alliance partner’s software-support announcement.
- Segment reporting was reorganized in FY2012, with prior-period segment information reclassified for comparability. The company stated these presentation changes did not affect consolidated revenue, operating earnings, net earnings or EPS.
Outlook, commentary, risks and unusual items
- The filing provides no specific consolidated revenue, earnings or EPS guidance. Management said HDD component shortages could continue during the remainder of FY2012 and described ongoing efforts to improve execution, reduce complexity and costs, and invest in cloud, security, analytics and information management.
- HP continued its multi-year enterprise-services restructuring. The plan’s expected total cost was approximately $1.0 billion; about 6,000 of approximately 8,000 targeted positions had been eliminated by January 31, 2012. The company recorded $40 million in quarterly restructuring charges and expected most remaining infrastructure charges during FY2012.
- Credit ratings were downgraded by S&P, Fitch and Moody’s between November 2011 and January 2012; Fitch maintained a negative outlook. HP said the downgrades raised borrowing costs, reduced commercial-paper market capacity and could increase collateral requirements. Approximately $1.6 billion of notes were due during the remainder of FY2012; HP expected to use operating cash and borrowing resources to repay them. After quarter-end, HP repaid $2.5 billion of notes and issued $2.0 billion of new notes on March 12, 2012.
- Unusual items included a $28 million net gain related to transferring part of Japan’s pension obligation to the Japanese government; a $49 million net discrete tax benefit; and acquisition-related accounting adjustments for Autonomy, including an increase in goodwill. The effective tax rate was 19.4%, versus 21.0%.
- Key exposures include tax audits and uncertain tax positions (gross unrecognized tax benefits of $2.3 billion), copyright-levy cases, India customs-duty proceedings seeking approximately $370 million plus penalties, and U.S. and German investigations into the Russia GPO transaction and potential bribery or other misconduct. HP said it believed its provisions were adequate and that an additional material loss above recognized amounts was not reasonably possible as of January 31; outcomes remain uncertain.
- Other risks highlighted include competition and pricing, macroeconomic weakness, supply-chain disruption, currency movements, service-contract execution, cybersecurity and data protection, acquisition integration, pensions, environmental obligations and litigation. HP stated disclosure controls were effective and there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and segment profitability stabilize, especially in PSG, IPG, ESSN and Services, and whether HDD supply constraints persist.
- Whether operating cash flow recovers and working capital improves: the cash conversion cycle increased to 28 days from 21 days year over year.
- Debt maturities, refinancing costs, rating-agency outlooks, commercial-paper access and the effect of further rating changes on liquidity.
- Progress and realized savings from the enterprise-services restructuring, alongside its remaining charges and execution risks.
- Developments in Autonomy integration and purchase-accounting adjustments, and the resolution or financial impact of tax, customs, FCPA, copyright-levy and other legal matters.