HP Inc. (Hewlett-Packard Company) — Form 10-Q Summary
Business context and reporting period
HP reported its fiscal second quarter ended April 30, 2014, and six-month results through that date. HP sells personal systems, printing products, enterprise hardware and services, software, and financing. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended April 30, 2014 | Six months ended April 30, 2014 |
|---|---|---|
| Revenue | $27.309 billion; down 1.0% year over year | $55.463 billion; down 0.9% |
| Gross margin | 24.2%, up 0.5 percentage points | 23.5%, up 0.5 percentage points |
| Operating earnings and margin | $1.822 billion; 6.7% margin versus 5.8% | $3.819 billion; 6.8% margin versus 6.0% |
| Net earnings | $1.273 billion versus $1.077 billion | $2.698 billion versus $2.309 billion |
| Diluted EPS | $0.66 versus $0.55 | $1.40 versus $1.18 |
| Operating cash flow | Not presented separately for the quarter | $5.985 billion versus $6.118 billion |
- Products revenue rose to $17.752 billion in the quarter, while services revenue fell to $9.454 billion. Financing income was $103 million.
- Six-month capital expenditures were $1.837 billion; HP reported a net investment in property, plant and equipment of approximately $1.3 billion. Cash dividends paid were $576 million and share repurchases settled totaled $1.4 billion.
- Cash and cash equivalents were $15.096 billion at April 30, versus $12.163 billion at October 31, 2013. Current assets were $49.883 billion and current liabilities $43.280 billion.
- Borrowings were approximately $22.6 billion, broadly unchanged from October 31, 2013. HP had $17.4 billion of available borrowing resources. It reported a 2.7% weighted-average borrowing rate, compared with 3.0% at October 31.
- HP’s six-month effective tax rate was 22.5%. Its unrecognized tax benefits were $3.6 billion; HP said up to $1.3 billion could be reduced within the next 12 months.
Material changes versus prior comparable periods
- Revenue remained slightly lower, but earnings improved: quarterly net earnings rose about 18%, and six-month net earnings rose about 17%. Lower restructuring charges and intangible amortization, gross-margin improvement, and cost actions contributed to stronger operating margins.
- Personal Systems revenue increased 7.4% in the quarter and 5.5% year to date, led by commercial PCs. Printing revenue declined 4.3% and 3.2%, respectively, mainly on lower supplies revenue; operating margins nevertheless rose to 19.5% and 18.2%.
- Enterprise Services revenue fell 7.0% in the quarter and 7.2% year to date, driven by key-account runoff, price declines, and weak growth. Enterprise Group revenue declined 2.0% and 0.7%; competitive pressure and declines in storage, technology services, and business-critical systems weighed on results.
- HP expanded third-party receivables-financing arrangements by $1.6 billion during the quarter, taking total capacity to approximately $3.0 billion. HP said expanded factoring improved days sales outstanding by an estimated one to two days.
Outlook, commentary, risks, and unusual items
- The filing provides no specific consolidated revenue, earnings, or EPS guidance. Management described ongoing market, competitive, macroeconomic, and execution challenges. It cited shifts toward tablets, cloud and SaaS, pricing pressure, and foreign-exchange effects, while noting signs of stabilization in the PC market and growth in commercial PCs.
- On May 22, 2014, after quarter-end, HP increased its expected workforce reductions under its 2012 restructuring plan by 11,000–16,000 positions. HP estimated approximately $500 million of additional restructuring charges, with about $200 million of cash impact through fiscal 2014 and $300 million thereafter. HP then expected approximately 41,000 total positions to be eliminated by the end of fiscal 2014, with remaining reductions in fiscal 2015.
- HP’s original 2012 plan estimate was approximately $4.0 billion of aggregate charges. At April 30, approximately 31,400 positions had been eliminated or were in process, and expected restructuring cash payments extended through fiscal 2021.
- HP announced a resolution of U.S. DOJ and SEC Foreign Corrupt Practices Act investigations, agreeing to pay approximately $108 million and undertake compliance, reporting, and cooperation obligations. Other investigations and litigation remained, including Autonomy-related matters and a South Carolina government contract dispute in which the state sought approximately $275 million; HP disputed the termination and claims. HP stated it had adequate provisions and did not believe a material loss beyond amounts recognized was reasonably possible as of April 30, while cautioning that litigation outcomes are unpredictable.
- HP and certain insurers agreed to pay approximately $57 million into a proposed settlement fund in a securities class action; the court had preliminarily approved the settlement, with final approval scheduled for September 2014.
- HP identified risks including intense competition, pricing and product-transition pressures, restructuring execution, weak IT spending, supplier and operational disruption, currency movements, tax audits, legal proceedings, and credit-rating pressure. Moody’s outlook remained negative; HP warned further downgrades could raise borrowing costs or reduce commercial-paper access.
Most important facts for investors to verify
- Whether the Personal Systems growth and margin improvement can offset continued declines in Printing supplies, Enterprise Services, and parts of Enterprise Group.
- Actual costs, timing, cash impact, and realized savings from the expanded restructuring plan, including the additional estimated $500 million charge.
- Cash-flow quality and working-capital sustainability, particularly the effect of increased receivables factoring and the reported 13-day cash conversion cycle, which HP said was below its expected long-term sustainable rate.
- Debt maturities and refinancing: HP disclosed $4.3 billion of notes scheduled to mature over the next 12 months, with $2.5 billion repaid in May and June 2014.
- Developments and potential financial exposure from the FCPA resolution, Autonomy-related investigations and litigation, the South Carolina contract dispute, and other disclosed contingencies.