HP Inc. (Hewlett-Packard Company) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2012; comparisons are with the corresponding 2011 periods. Amounts are in U.S. dollars. HP operated across personal systems, services, printing, enterprise servers/storage/networking, software, financial services, and corporate investments.
Financial performance
| Metric | Quarter ended Apr. 30, 2012 | Quarter ended Apr. 30, 2011 | Six months ended Apr. 30, 2012 | Six months ended Apr. 30, 2011 |
|---|---|---|---|---|
| Revenue | $30.693B | $31.632B | $60.729B | $63.934B |
| Gross margin | 23.3% | 24.7% | 22.8% | 24.6% |
| Operating earnings | $2.222B | $2.968B | $4.264B | $6.362B |
| Operating margin | 7.2% | 9.4% | 7.0% | 10.0% |
| Net earnings | $1.593B | $2.304B | $3.061B | $4.909B |
| Diluted EPS | $0.80 | $1.05 | $1.53 | $2.23 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.666B | $7.032B |
- Quarterly revenue fell 3.0% and first-half revenue fell 5.0%. Quarterly product revenue declined to $19.962B from $21.055B; services revenue rose to $10.614B from $10.466B.
- Quarterly operating earnings declined about 25% and net earnings about 31% year over year; first-half declines were about 33% and 38%, respectively. HP attributed weaker results to lower hardware and printing demand, margin pressure, lower Services contract rates, and increased interest and currency-related expense.
- Gross margin contracted 1.4 percentage points in the quarter and 1.8 points in the first half. Management cited a lower share of high-margin printing supplies, Services contract economics, Japanese yen strength, and competitive hardware pricing.
- Segment results were mixed. In the quarter, Software revenue grew 21.7% and HP Financial Services revenue grew 9.4%; Imaging and Printing revenue declined 10.4%, Enterprise Servers, Storage and Networking declined 5.5%, and Services declined 1.0%. Services, IPG, and ESSN operating earnings fell substantially year over year. Software growth was primarily acquisition-related, including Autonomy.
- Six-month operating cash flow was $3.666B, down from $7.032B. Capital investment in property, plant and equipment was $1.963B. Cash and cash equivalents were $8.311B at April 30, versus $8.043B at October 31, 2011.
- Debt was approximately $30.1B at April 30, 2012, compared with $30.6B at October 31, 2011; cash was $8.3B. Current borrowings were $4.252B and long-term debt $25.825B. HP reported approximately $17.5B of available borrowing resources, including commercial-paper capacity and uncommitted lines.
- HP declared dividends of $0.24 per share during the first half, versus $0.16 in the comparable 2011 period, and repurchased $1.130B of shares in the first half, versus $4.976B in 2011.
Material changes and management outlook
- HP cited weak demand, HDD component supply constraints following Thailand flooding, competitive pricing, lower supplies revenue, and lower rates on renewed Services contracts. Management expected minimal HDD shortages during the remainder of fiscal 2012, but warned that shortages could be worse than anticipated.
- On May 23, 2012, HP announced a company-wide restructuring targeting approximately 27,000 employee exits by fiscal year-end 2014. It expects about $3.5B of pretax charges, including approximately $3.0B for workforce reductions, and approximately $2.7B in cash expenditures under that plan. HP also reported expected future cash expenditures of approximately $3.4B for its approved restructuring plans, including the new plan.
- HP expected a roughly $1.2B noncash impairment charge in fiscal Q3 2012 after changing its Compaq trade-name strategy and useful-life estimate. It was also evaluating possible impairment of long-lived Services assets; no amount was provided.
- No specific revenue or EPS guidance is provided in the filing text. HP said it intended to invest much of the savings from restructuring and operating changes in its businesses, including cloud computing, security, and information management.
- Credit agencies downgraded HP ratings in late 2011 and early 2012; Fitch maintained a negative outlook. HP said the downgrades increased borrowing costs, reduced commercial-paper market capacity, and could increase collateral requirements.
- HP reported $3.7B of gross unrecognized tax benefits and related accrued interest and penalties (including a $2.2B recorded liability, partly offset by tax assets and interest receivable in its liquidity discussion). Tax audits and disputed assessments remain unresolved.
- Significant disclosed legal and regulatory matters include Indian customs-duty orders of approximately $386.25M and $17.32M, which HP intends to appeal; U.S. and German investigations concerning alleged improper payments related to the Russia GPO transaction; and Brazilian procurement sanctions against an HP subsidiary, with enforcement stayed pending litigation. HP stated that, as of April 30, it did not consider additional material litigation losses above recorded provisions reasonably possible, while noting litigation outcomes are inherently uncertain.
Investor verification priorities
- Track whether revenue and margins stabilize in printing, PCs, ESSN, and Services, and whether Software growth extends beyond acquired revenue.
- Verify operating cash generation, working-capital trends, restructuring cash costs, and the refinancing of $1.6B of notes due during the remainder of fiscal 2012.
- Assess delivery of the 27,000-person restructuring, expected savings, and the announced Compaq impairment; monitor any further Services asset impairment.
- Follow credit-rating outlooks, commercial-paper access, borrowing costs, and HP’s substantial debt and international cash-position constraints.
- Monitor outcomes and potential cash exposure from Indian customs cases, the Russia GPO investigations, Brazilian proceedings, tax audits, and other litigation.