HP Inc. (Hewlett-Packard Company) — FY2013 Form 10-K
Business context and reporting period. HP reported for the fiscal year ended October 31, 2013; the filing also provides fourth-quarter results for the three months ended that date. HP was a diversified global technology company operating in Personal Systems, Printing, Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments. Approximately 64% of FY2013 revenue came from outside the United States.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $112.3 billion | $120.4 billion |
| Gross profit / margin | $25.9 billion / 23.1% | $28.0 billion / 23.2% |
| Operating earnings (loss) / margin | $7.1 billion / 6.4% | ($11.1 billion) / (9.2%) |
| Net earnings (loss) / diluted EPS | $5.1 billion / $2.62 | ($12.7 billion) / ($6.41) |
| Cash provided by operating activities | $11.6 billion | $10.6 billion |
| Capital expenditures | $3.2 billion | $3.7 billion |
| Cash and cash equivalents at year-end | $12.2 billion | $11.3 billion |
| Total debt at year-end | $22.6 billion | $28.4 billion |
FY2013 revenue declined 6.7% (5.5% in constant currency). Gross margin slipped 0.1 percentage point. The return to operating and net profitability principally reflects the absence of FY2012’s $18.0 billion goodwill and intangible-asset impairment charges, alongside lower restructuring expense; it does not represent revenue growth. FY2013 restructuring charges were $990 million, versus $2.3 billion in FY2012.
FY2013 fourth quarter: Revenue was $29.1 billion, compared with $30.0 billion in Q4 FY2012. Operating earnings were $1.9 billion versus an operating loss of $6.5 billion; net earnings were $1.4 billion versus a net loss of $6.9 billion. The prior-year quarter included $8.8 billion of impairment charges.
HP repaid $5.7 billion of debt, paid $1.1 billion in dividends and repurchased $1.5 billion of shares during FY2013. Its cash-conversion cycle improved to 17 days from 21 days. Available borrowing resources were $17.8 billion. Current assets were $50.4 billion and current liabilities $45.5 billion.
Material changes versus the prior comparable period
- Revenue declined across all reported segments: Personal Systems 10.2%, Enterprise Services 8.2%, Enterprise Group 5.4%, HP Financial Services 5.0%, Software 3.6% and Printing 2.6%.
- Personal Systems operating margin fell to 3.0% from 4.7%, amid PC-market contraction, lower unit volume and competitive pricing. Consumer-client revenue fell 19%.
- Enterprise Group operating margin fell to 15.3% from 17.4%; Enterprise Services margin fell to 2.9% from 4.1%. Enterprise Services continued to face contract runoff, price declines and weak public-sector and enterprise demand.
- Printing was a relative bright spot: operating margin rose to 16.3% from 14.6%, despite lower revenue. Software margin rose to 22.1% from 20.4%, while its revenue declined.
- Cash from operations increased by about $1.0 billion, while total debt declined by $5.8 billion. Stockholders’ equity increased to $27.7 billion from $22.8 billion.
- HP reorganized segment reporting in FY2013, creating Enterprise Group and Enterprise Services and eliminating the former ESSN and Services segments; prior-period segment figures were recast.
Outlook, management commentary, risks and unusual items
- Management said revenue declines had begun to moderate and cited early benefits from product innovation, restructuring, improved channel tools and more predictable Enterprise Services performance. It also said significant challenges continued into FY2014; the filing provides no numerical FY2014 revenue or earnings guidance.
- The May 2012 restructuring plan was expanded to approximately 34,000 positions and an estimated $4.1 billion in total charges, expected through FY2014. HP had eliminated approximately 24,600 positions by October 31, 2013. It expected about $1.9 billion of future restructuring cash outlays, including approximately $1.4 billion in FY2014.
- Near-term financing needs include $4.9 billion of U.S. dollar global notes scheduled to mature in FY2014. Ratings at year-end were BBB+ (S&P), Baa1 (Moody’s) and A- (Fitch); Moody’s outlook was negative. Prior downgrades increased borrowing costs, reduced commercial-paper capacity and required some additional derivative collateral.
- Material risks include continued PC-market decline and shifts to tablets, cloud and SaaS; intense pricing competition; execution of restructuring and Enterprise Services’ turnaround; supplier and channel-partner dependence; foreign-exchange and macroeconomic exposure; and goodwill impairment sensitivity. Software and Enterprise Group’s ESSN reporting unit had the smallest reported goodwill fair-value cushions, 31% and 14%, respectively; a hypothetical 10% fair-value decline reduced ESSN’s cushion to 2%.
- Legal and regulatory matters include Autonomy-related investigations and shareholder litigation, FCPA investigations involving public-sector transactions, the South Carolina child-support system contract dispute (claimed damages about $275 million), and Indian customs proceedings involving demands and penalties. HP stated it had accrued adequate provisions and that additional material loss beyond amounts recognized was not reasonably possible as of year-end; outcomes remain uncertain.
- HP reported $3.0 billion of recorded liabilities, interest and penalties for uncertain tax positions, with only $104 million expected to be paid within one year; timing of the remainder was not estimable. Separately, it disclosed $38.2 billion of indefinitely reinvested foreign earnings without U.S. federal tax provision.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at October 31, 2013.
Investor verification priorities
- Confirm the extent to which the FY2013 earnings rebound reflects the absence of FY2012 impairment charges versus sustainable operating improvement.
- Track revenue trends and margins in Personal Systems, Enterprise Group and Enterprise Services, including whether PC-market declines and contract runoff stabilize.
- Verify delivery, cash costs and realized savings from the expanded restructuring plan, including the FY2014 expected payments.
- Assess liquidity and refinancing capacity against FY2014 debt maturities, ratings outlook and commercial-paper access.
- Review developments in Autonomy, FCPA, tax and other litigation or regulatory matters, and any resulting charges, settlements or cash payments.
- Monitor goodwill impairment assumptions, particularly for Software and ESSN, and the impact of foreign exchange and deferred-tax valuation allowances.