HP (Hewlett-Packard Company) 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended July 31, 2013. HP reported seven segments: Personal Systems, Printing, Enterprise Group, Enterprise Services, Software, HP Financial Services, and Corporate Investments. HP reorganized its segment structure in fiscal 2013; prior-period segment results were reclassified for comparability without changing consolidated results.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $27.226B | $29.669B | $83.167B | $90.398B |
| Operating earnings (loss) | $1.855B | ($8.833B) | $5.208B | ($4.569B) |
| Net earnings (loss) | $1.390B | ($8.857B) | $3.699B | ($5.796B) |
| Diluted EPS | $0.71 | ($4.49) | $1.89 | ($2.93) |
| Gross margin | 23.4% | 23.1% | 23.1% | 22.9% |
- Q3 revenue fell 8.2% year over year; nine-month revenue fell 8.0% (6.9% and 6.8%, respectively, on a constant-currency basis). Products and services both declined.
- Reported earnings improved sharply versus 2012, primarily because the prior-year periods included a $9.188B goodwill and intangible-asset impairment charge. Restructuring charges also fell substantially. The comparison does not by itself indicate a comparable improvement in underlying business performance.
- Q3 operating margin was 6.8%, versus a reported loss margin of 29.7% in 2012. Nine-month operating margin was 6.3%, versus a reported loss margin of 5.1%.
- By segment, Q3 revenue declined in Personal Systems (10.8%), Enterprise Group (9.4%), Enterprise Services (8.7%), Printing (3.6%) and HP Financial Services (6.0%); Software grew 0.9%. Personal Systems, Enterprise Group and Enterprise Services also recorded lower operating earnings. Printing and Software operating earnings improved for the nine-month period.
- Operating cash flow was $8.792B for the first nine months, versus $6.512B a year earlier. Capital expenditures were $2.280B, making operating cash flow less capital expenditures $6.512B. Cash and cash equivalents rose to $13.251B from $11.301B at October 31, 2012.
- Total borrowings were $24.7B, down from $28.4B; long-term debt on the balance sheet was $17.124B. Current assets were $49.958B and current liabilities $46.012B. Total assets were $105.8B and stockholders’ equity $24.978B.
- Nine-month financing cash outflows included $3.473B of long-term debt repayments, $1.053B of share repurchases and $821M of dividends. HP declared a quarterly dividend of $0.29 per share.
Changes, outlook, and risks
- Management described multi-quarter revenue and margin declines and cited weak PC demand, consumer movement toward tablets, soft enterprise spending, EMEA weakness, aggressive pricing, and execution challenges. It is pursuing cost reductions, restructuring, product innovation and investment in cloud, security, big data and mobility.
- The 2012 restructuring plan targeted approximately 29,000 position eliminations and total charges of about $3.6B through fiscal 2014. About 22,700 positions had been eliminated by July 31, 2013. HP estimated approximately $1.7B of future restructuring cash expenditures, with payments expected through fiscal 2017.
- The filing gives no specific consolidated revenue or earnings guidance. Management said it expected cash, operating cash flow and capital-market access to cover near-term needs, while noting that results are not necessarily indicative of full-year results.
- Approximately $6.7B of U.S. dollar global notes were scheduled to mature during the next four fiscal quarters. Moody’s long-term rating was Baa1 with a negative outlook; HP warned further downgrades could affect borrowing costs, commercial-paper capacity, collateral requirements and liquidity.
- Material contingencies include Autonomy-related investigations and shareholder litigation; a South Carolina contract dispute in which the state sought about $200M and terminated HP’s contract for cause; and Indian customs proceedings with assessed duties and penalties of approximately $403M before considering deposits and appeals. HP stated it believed its litigation provisions were adequate and that additional material loss beyond recorded amounts was not reasonably possible, while acknowledging litigation outcomes are unpredictable.
- HP reported $3.0B of gross unrecognized tax benefits, including accrued interest and penalties, and said certain tax matters could change within 12 months. Other risks include copyright-levy proceedings, product and services competition, restructuring execution, supplier and currency exposures, and environmental obligations.
Key facts for investors to verify
- Revenue trends and operating margins by segment, particularly in Personal Systems, Enterprise Group and Enterprise Services.
- Underlying earnings excluding unusual items, especially the prior-year impairment and restructuring charges.
- Cash conversion and whether operating cash flow remains strong as working-capital benefits normalize.
- Debt maturities, refinancing access, credit-rating outlook and the extent of cash held outside the United States.
- Restructuring costs, cash payments, realized savings and whether position reductions affect execution or growth investment.
- Developments and potential financial exposure in the Autonomy, South Carolina, India, tax and copyright-levy matters.