HP Inc. (Hewlett-Packard Company) — FY2012 Form 10-K
Reporting period: Fiscal year ended October 31, 2012. This is an annual filing, not a standalone fourth-quarter report; quarterly results are also summarized below. HP sold personal computers, printers and supplies, enterprise IT products and software, services, and customer financing.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net revenue | $120.4 billion | $127.2 billion |
| Gross profit / gross margin | $28.0 billion / 23.2% | $29.8 billion / 23.4% |
| Operating income (loss) / margin | $(11.1) billion / (9.2)% | $9.7 billion / 7.6% |
| Net income (loss) | $(12.7) billion | $7.1 billion |
| Diluted earnings (loss) per share | $(6.41) | $3.32 |
| Cash from operating activities | $10.6 billion | $12.6 billion |
| Capital expenditures | $3.7 billion | $4.5 billion |
| Cash and cash equivalents at year-end | $11.3 billion | $8.0 billion |
| Total debt at year-end | $28.4 billion | $30.6 billion |
| Long-term debt at year-end | $21.8 billion | $22.6 billion |
HP’s $18.0 billion goodwill and intangible-asset impairment charges and $2.3 billion of restructuring charges drove the reported operating loss. Excluding those items and other unallocated costs, the report’s segments together recorded $12.5 billion of operating earnings; this is not consolidated GAAP operating income. Cash increased by $3.3 billion during the year. HP reported $17.4 billion of available borrowing resources and said cash, operating cash flow, and market access should cover expected FY2013 cash outlays. The debt-to-equity ratio rose to 1.25x from 0.79x, primarily as equity fell.
Changes versus the prior comparable period
- Revenue declined 5.4% (4.4% on a constant-currency basis), following 1.0% growth in FY2011. Management attributed the decline mainly to weaker demand and lower hardware and printing-supplies volumes, alongside contractual rate declines in Services.
- Revenue fell in Personal Systems (9.9%), Printing (6.5%), Services (2.2%), and ESSN (7.1%). Software revenue rose 20.6%, primarily reflecting the Autonomy acquisition; HP Financial Services revenue rose 6.2%.
- Gross margin declined 0.2 percentage points. Services’ operating margin fell to 11.7% from 14.6%, and ESSN’s to 10.4% from 13.6%; segment operating margins also declined in Personal Systems, Printing, and Software. HPFS margin improved to 10.2% from 9.7%.
- Operating cash flow decreased $2.1 billion to $10.6 billion. Cash used in investing fell substantially, largely because acquisition spending was lower than in FY2011.
Outlook, management commentary, risks, and unusual items
- Management described ongoing structural and execution challenges, including aligning costs with revenue, rebuilding channel relationships, addressing prior underinvestment in R&D and internal IT, and adapting to mobility, cloud, and software-as-a-service. It cited weak consumer demand, soft European SMB and enterprise demand, and slower growth in some emerging markets.
- The May 2012 restructuring plan is expected to eliminate approximately 29,000 positions through FY2014 and incur about $3.7 billion of charges. HP recorded approximately $2.1 billion of plan charges in FY2012; expected future restructuring cash expenditures were approximately $2.7 billion, including about $1.6 billion in FY2013. Management cautioned that timing, costs, and savings could differ from estimates.
- HP recorded an $8.0 billion goodwill impairment for Services’ enterprise services reporting unit, an $8.8 billion goodwill and intangible-asset impairment for Autonomy, and a $1.2 billion impairment of the Compaq trade name. HP said its Autonomy investigation identified alleged pre-acquisition accounting improprieties, disclosure failures, and misrepresentations; investigations by U.S. and U.K. authorities and related litigation were ongoing. These are allegations and unresolved matters.
- HP expected $5.5 billion of U.S. dollar global notes to mature in FY2013 and said it anticipated sufficient cash, operating cash flow, and capital-market access to repay them. Credit-rating downgrades had raised borrowing costs, reduced commercial-paper market capacity, and could require additional collateral; Moody’s outlook was negative.
- Other disclosed exposures include India customs-duty proceedings (orders of approximately $386 million and $17 million, plus possible additional deposits), a Brazilian postal-service contracting sanction under appeal, copyright-levy disputes, employment and securities litigation, and bribery-related investigations. HP stated it believed existing litigation provisions were adequate, but warned that unfavorable outcomes could materially affect results or cash flows.
- FY2012 Q4 reported revenue of $30.0 billion and a net loss of $6.9 billion, including $8.8 billion of impairment charges and $378 million of restructuring charges. The filing provides no separate management earnings guidance for FY2013.
Important facts for investors to verify
- Whether revenue and operating performance stabilize, particularly in PCs, Printing, Services, and ESSN, and whether software growth persists apart from acquisitions.
- Whether restructuring achieves planned savings and investment benefits, and how actual headcount reductions, charges, and cash payments compare with estimates.
- The assumptions underlying the Autonomy and Services impairment valuations, the outcome of investigations and litigation, and whether further impairments or liabilities emerge.
- Liquidity and refinancing progress, especially repayment of FY2013 maturities, commercial-paper access, credit ratings, and cash held outside the United States.
- Developments in the India customs and Brazil proceedings, tax audits and uncertain tax positions, pension funding, and other contingencies.
- Audit and control status: Ernst & Young issued unqualified opinions on the FY2012 financial statements and internal control over financial reporting.