Sunday, June 3, 2012

HP Reports Solid Earnings, Restructuring, Layoffs, Goodwill Charge

HP ($HPQ) reported QE April 2012 financial results on May 23.

CEO Meg Whitman had a really busy day with both earnings and restructuring announcements. Since last summer, this is actually (and sadly) par for the course with HP as restructuring is announced, amended, and then reorganized. HP valiantly attempts to redefine itself. The Gist: quarterly earnings were amazingly solid for HP and a new multi-year restructuring plan is now in effect. In addition, HP recently launched new laptops, workstations, and printers which were showcased in Shanghai, China.

HP quarterly net income was $1.59 billion, resulting in a surprisingly solid earnings per share of $0.98 Non-GAAP and $0.80 GAAP. This is not only very good, but almost a miracle on Planet HP. Analysts estimates were $0.91 Non-GAAP and HP's outlook was $0.88 to $0.91. The HP GAAP outlook was $0.68 to $0.71. Well done (for this quarter)! CEO Whitman stated, "We are making progress in our multi-year effort to make HP simpler, more efficient and better for customers, employees, and shareholders. This quarter we exceeded our previously provided outlook and are executing against our strategy, but we still have a lot of work to do."

Now to the Life Gets Tough portion of this earnings review. The restructuring includes an 8% workforce reduction or 27,000 employees "exiting" HP by FYE October 2014. The overall annualized savings of the restructuring is ultimately projected to be $3.0 to $3.5 billion. "HP expects to use the savings to boost investment in innovation around its three areas of strategic focus: cloud, big data and security, as well as in other segments that offer attractive growth potential".

However, there are expenses associated with all of this new restructuring and redefining. The restructuring charges in the next 2 quarters are expected to be $1.7 billion and apparently $1.0 billion of this will be charged-off this next quarter. That leaves about $700 million for the quarter after that. Okay, that gets us through FYE October 2012. In the next 2 subsequent fiscal years, through FYE October 2014, another $1.8 billion in restructuring charges is projected.

Oh yes, there's more! This is a good one. You remember HP acquired Compaq in 2002? And of course you realize Compaq isn't what Compaq used to be back in the good old days? Younger people might even ask: What is a Compaq and what does it do? There is some goodwill, a premium on the acquisition of Compaq, sitting on HP's books. "HP has commenced an asset impairment analysis to determine the current value of the Compaq trade name acquired in 2002. Based on the preliminary results of that analysis, HP expects to record an impairment charge of up to approximately $1.2 billion that will be included in its GAAP financial results for its third fiscal quarter. There will be no cash impact associated with the impairment charge."

To summarize, GAAP net income and earnings per share is going to take a hit in the near-term until these anticipated "annualized savings" kick in. Get ready. Non-GAAP EPS will fare much better. Ultimately, the restructuring theory is thus: long-term good with short-term and intermediate-term pain on deck.

HP Summary QE April 2012 (GAAP) Financial performance was stronger than projected QoQ and dropped YoY as expected. Total revenues increased QoQ and decreased YoY. Earnings per share, cash flow per share, operating income, net income, gross margin, operating margin, and net margin all were up QoQ but down YoY. Debt continues high at $30.1B and 23.5% of total assets. The outlook for QE July is encouraging for Non-GAAP but GAAP will taking a beating and be near break-even. Financial position continues as acceptable, with adequate capital, adequate liquidity, but high debt.

HP Income Statement QE April 2012 (GAAP) HP reported total revenues of $30.69 billion, net income of $1.59 billion, and earnings per share of $.80. From the prior quarter QE January 2012, these were +2%, +9%, and +10%, respectively. From the prior year QE April 2011, these were -3%, -31%, and -24%, respectively. Gross margin, operating margin, and net margin were up QoQ but down YoY at 23.3%, 7.2%, and 5.2%, respectively. Cash flow from operations of $1.24 was up QoQ and down YoY. The operating expense ratio of 16.1% is just above the historical average (16.1%).

HP Balance Sheet QE April 2012 (GAAP) HP's total assets increased to $127.7 billion. This is below the all-time high of $129.5 billion for the QE October 2011. The capital to assets ratio of 32.7% is adequate and above recent multi-year lows. The current ratio of 38.9% is just above the prior quarter multi-year low (38.5%). The return on assets of +4.12% is yet another multi-year low and dismal. Total debt of $30.1 billion is lower and 23.6% of total assets. This is just below the prior quarter multi-year high (24.4%) and any further increases would be of concern.

HP Outlook (GAAP & Non-GAAP) QE July 2012 For the third quarter of fiscal 2012, HP estimates non-GAAP diluted EPS to be in the range of $0.94 to $0.97 and GAAP diluted EPS to be in the range of $0.00 to $0.03. Third quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.94 per share, related primarily to the amortization and impairment of purchased intangible assets, restructuring charges, and acquisition-related charges.

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