HP Inc. (Hewlett-Packard Company) — Q1 FY2011 Form 10-Q
Reporting period: Three months ended January 31, 2011; comparisons are with the three months ended January 31, 2010 unless otherwise noted. Amounts are in U.S. dollars. HP provides products and services across enterprise technology and services, personal systems, imaging and printing, and financial services. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net revenue | $32.302B | $31.177B | +3.6% reported; +4.3% constant currency |
| Gross profit / margin | $7.894B / 24.4% | $7.150B / 22.9% | Margin +1.5 percentage points |
| Operating earnings / margin | $3.394B / 10.5% | $3.003B / 9.6% | +13.0%; margin +0.9 points |
| Net earnings / net margin | $2.605B / 8.1% | $2.250B / 7.2% | +15.8% |
| Diluted EPS | $1.17 | $0.93 | +25.8% |
| Operating cash flow | $3.070B | $2.407B | +$663M |
| Cash and cash equivalents | $9.934B at Jan. 31 | $10.929B at Oct. 31, 2010 | Down $995M during quarter |
| Total borrowings | $20.4B at Jan. 31 | $22.3B at Oct. 31, 2010 | Down $1.9B |
Investing activities used $363M, including $926M of property and equipment investment and $543M in proceeds from property sales. Financing activities used $3.702B, including $2.290B for share repurchases and net repayments of commercial paper and notes. HP declared a $0.16-per-share dividend, unchanged year over year. The filing reports $7.5B of committed revolving credit facilities and approximately $17.2B in available borrowing resources in total, including commercial-paper capacity and uncommitted lines.
Material changes and segment performance
- Enterprise Servers, Storage and Networking (ESSN): Revenue rose 22.2% to $5.634B and operating earnings increased 36.4% to $828M. Growth reflected servers, networking (including 3Com), and storage (including 3PAR).
- Imaging and Printing (IPG): Revenue increased 6.8% to $6.630B; operating earnings rose 7.1% to $1.129B, with a 17.0% margin. Supplies and commercial hardware grew; consumer hardware declined.
- Personal Systems (PSG): Revenue declined 1.3% to $10.449B, while operating earnings increased 26.8% to $672M. Consumer-market softness and a 6% decline in average selling prices weighed on revenue; commercial PC revenue increased 11%.
- Services: Revenue decreased 2.1% to $8.607B. Operating earnings were nearly flat at $1.375B, and margin improved to 16.0% from 15.7% amid cost and delivery-efficiency measures.
- HP Software: Revenue rose 5.1% to $697M, but operating earnings fell 28.5% to $123M; margin declined to 17.6% from 25.9%, reflecting acquisition impacts and investment in R&D and sales.
- HP Financial Services: Revenue increased 15.0% to $827M and operating earnings increased 17.9% to $79M. Management cited portfolio growth and higher originations, partly offset by lower portfolio margin and higher bad-debt expense.
HP attributed the consolidated gross-margin improvement mainly to favorable product mix, including higher HP Networking revenue, and commodity pricing. Revenue outside the U.S. was $20.9B, about 65% of total revenue. Segment comparisons reflect organizational realignments; HP states these reclassifications did not change previously reported consolidated results.
Outlook, commentary, risks and unusual items
- Outlook: The supplied filing text does not provide a clear numeric revenue, earnings, or EPS forecast. Management described priorities including growth in converged infrastructure, cloud and virtualization, mobility, printing solutions, and emerging markets; operational efficiency and restructuring also remained priorities.
- Restructuring: Q1 charges were $158M. The Enterprise Services plan is expected to cost approximately $1.0B, including elimination of about 9,000 positions; approximately 2,900 positions had been eliminated by January 31, 2011. Remaining costs and cash payments extend over multiple periods.
- Unusual items: HP recorded a $286M gain on the sale of land and buildings, included in SG&A. Q1 also included $101M of net discrete tax benefits, including a $43M benefit from retroactive R&D tax credits. These items affect comparability of reported earnings.
- Capital allocation: HP repurchased approximately 53.6M shares in the quarter for $2.3B; $8.6B of authorization remained at January 31. Weighted-average diluted shares fell to 2.226B from 2.427B a year earlier.
- Key risks and contingencies: The filing highlights intense competition and pricing pressure, economic uncertainty, supply-chain and component availability, product transitions and quality, foreign exchange exposure, acquisition integration, services-contract execution, cybersecurity and data protection, and restructuring execution. Legal matters include ongoing U.S. and German investigations concerning the Russia GPO transaction and FCPA-related allegations, Indian customs-duty notices (including a principal claim of approximately $370M plus penalties), and copyright-levy and printer-related litigation. HP says it intends to contest the India notices; outcomes and ultimate financial effects remain uncertain.
- Other exposures: Gross unrecognized tax benefits were $1.7B at January 31; up to $1.1B could affect the effective tax rate if realized. HP also disclosed pension funding expectations and environmental proceedings. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check whether revenue growth and improved consolidated margins persist, particularly given declines in Services and PSG revenue and the sharp HP Software margin contraction.
- Separate recurring performance from the $286M real-estate gain and $101M discrete tax benefit; assess the effect of lower diluted share count on EPS growth.
- Track cash conversion cycle, which increased to 21 days from 16, and cash balances after repurchases, debt repayments, and investment spending.
- Monitor restructuring costs, eliminated positions, expected savings, and cash-payment timing, especially for Enterprise Services and the HP/EDS plan.
- Follow developments in the Russia GPO investigations, India customs notices, tax audits, and other litigation; the filing does not establish final outcomes or total exposure for these matters.