01—Abstract
Summary
Summary of the 10-K filed December 14, 2011. Cited figures are marked; the original filing is the authoritative source.
Hewlett-Packard Company reported fiscal 2011 (year ended October 31, 2011) net revenue of $127.2 billiona, up 1.0% from $126.0 billion in fiscal 2010, with earnings from operations of $9.68 billion (7.6% of revenue) versus $11.48 billion a year earlier, and net earnings of $7.07 billion, or $3.32 per diluted share, compared with $8.76 billion and $3.69 in fiscal 2010.
The decline in profitability reflected an $885 millionb impairment of goodwill and purchased intangibles tied to the decision to wind down the webOS device business, $645 million of restructuring charges, $182 million of acquisition-related charges, and $1.6 billion of amortization of purchased intangibles. Gross margin fell to 23.4% from 23.9%, and operating expenses rose, including selling, general and administrative expenses of $13.47 billion. Growth was led by the Enterprise Servers, Storage and Networking segment, whose revenue rose to $22.24 billion, and HP Software, which grew to $3.22 billion largely through acquisitions including Autonomy, acquired for about $11 billion.
The Personal Systems Group declined 2.9% to $39.57 billionc, and Corporate Investments posted a segment loss from operations of $1.62 billion. Cash flow from operations was $12.64 billion, while HP spent $10.5 billion on acquisitions and $10.1 billion repurchasing stock, reducing cash and cash equivalents to $8.04 billion. Total debt rose to $30.6 billion from $22.3 billion, and debt-to-equity increased to 0.79x from 0.55x.
Investors should note the credit rating downgrades: Standard & Poor's cut HP's long-term rating to BBB+ on November 30, 2011, and Fitch cut its rating to A on December 2, 2011, with Moody's review for possible downgrade ongoing. The filing states these actions increased borrowing costs and reduced commercial paper market capacity. The filing also describes ongoing investigations related to the Foreign Corrupt Practices Act, a substantial India customs duty dispute of about $370 milliond, and multiple securities and derivative lawsuits.
02—Key points
Key Highlights
- Net revenue of $127.2 billion in fiscal 2011, up 1.0% from fiscal 2010; revenue fell 0.9% on a constant currency basis.
- Net earnings of $7.07 billion, or $3.32 per diluted share, down from $8.76 billion and $3.69 in fiscal 2010.
- Earnings from operations of $9.68 billion, down from $11.48 billion, including an $885 million goodwill and intangible impairment tied to the webOS wind-down.
- Enterprise Servers, Storage and Networking grew revenue 9.3% to $22.24 billion, and HP Software grew 17.9% to $3.22 billion, aided by acquisitions.
- Cash and cash equivalents fell to $8.04 billion, with $10.5 billion spent on acquisitions and $10.1 billion on share repurchases.
- Total debt rose to $30.6 billion from $22.3 billion, and Standard & Poor's and Fitch downgraded HP's long-term ratings in late 2011.
- Approximately 65% of net revenue came from outside the United States, and the company had about 349,600 employees as of October 31, 2011.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, HP kept $0.06.
- Revenue$127.25B100.0%
- Cost of revenue−$65.17B51.2%
- Gross profit$62.08B48.8%
- Operating costs−$52.40B41.2%
- Operating income$9.68B7.6%
- Interest, other & tax−$2.60B2.0%
- Net income$7.07B5.6%
Where FY2011 revenue went
$127.25B- Cost of revenue: $65.17B, 51% of revenue
- Other operating costs: $35.57B, 28% of revenue
- Net income: $7.07B, 5.6% of revenue
- R&D: $3.25B, 2.6% of revenue
- SG&A: $13.58B, 11% of revenue
- Interest, other & tax: $2.60B, 2.0% of revenue
Kept 5.6% as net incomeNet income $7.07B · 5.6%Interest, other & tax $2.60B · 2.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed December 14, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $127.25B$126.03B | +1.0% |
| Cost of Revenue | $65.17B$65.06B | +0.2% |
| Gross Profit | $62.08B$60.97B | +1.8% |
| R&D Expenses | $3.25B$2.96B | +10.0% |
| SG&A Expenses | $13.58B$12.82B | +5.9% |
| Operating Expenses | $117.57B$114.55B | +2.6% |
| Operating Income | $9.68B$11.48B | −15.7% |
| Interest Expense | $522.00M$417.00M | +25.2% |
| Net Income | $7.07B$8.76B | −19.3% |
| EPS (Basic) | $3.38$3.78 | −10.6% |
| EPS (Diluted) | $3.32$3.69 | −10.0% |
| Shares Outstanding (Basic) | 2.09B2.32B | −9.7% |
| Shares Outstanding (Diluted) | 2.13B2.37B | −10.3% |
05—Questions
Frequently Asked Questions
Why did HP's earnings decline in fiscal 2011 despite higher revenue?
Earnings from operations fell to $9.68 billion from $11.48 billion. The filing attributes this mainly to an $885 million impairment of goodwill and purchased intangible assets related to the wind-down of the webOS device business, $645 million of restructuring charges, $182 million of acquisition-related charges, and higher amortization of purchased intangibles of $1.61 billion. Gross margin also declined to 23.4% from 23.9%, and selling, general and administrative expenses rose to $13.47 billion.
How did HP's credit ratings change, and what did the filing say about the impact?
Standard & Poor's downgraded HP's long-term rating to BBB+ and short-term rating to A-2 on November 30, 2011. Fitch downgraded its long-term rating to A on December 2, 2011, and remains under negative outlook. Moody's rating of A2 has been under review for possible downgrade since October 28, 2011. The filing states the downgrades increased borrowing costs, reduced commercial paper market capacity, and may require additional collateral under some derivative contracts, though HP said it has no rating downgrade triggers that would accelerate material debt maturities.
What drove the increase in HP's debt and how did it affect leverage?
Total debt increased to $30.6 billion from $22.3 billion, and long-term debt rose to $22.55 billion from $15.26 billion. The filing attributes the increase primarily to investments in acquisitions and share repurchases, including the issuance of $11.6 billion of U.S. dollar global notes. The debt-to-equity ratio rose to 0.79x from 0.55x, and HP issued another $3 billion of global notes on December 9, 2011.
What major acquisition did HP complete in fiscal 2011, and how was it accounted for?
HP's largest fiscal 2011 acquisition was Autonomy Corporation plc, an infrastructure software provider, with an acquisition-date fair value consideration of $11 billion. HP recorded approximately $6.6 billion of goodwill and $4.6 billion of amortizable purchased intangible assets, amortized over a weighted-average life of 8.8 years. HP owned about 99% of Autonomy as of October 31, 2011 and expected to acquire 100% before the end of the first quarter of fiscal 2012. Results are reported in the HP Software segment.
What significant legal and regulatory matters does the filing disclose?
The filing discloses several matters, including an investigation by the German Public Prosecutor's Office, the U.S. Department of Justice, and the SEC into the Russia GPO transaction and potential Foreign Corrupt Practices Act violations. HP's Indian subsidiary received customs duty show cause notices seeking about $370 million plus penalties, and HP has deposited about $16.7 million with the authorities. Copyright levy proceedings in Europe, several inkjet printer class actions, and multiple stockholder lawsuits are also described. HP believes it has adequate provisions and valid defenses, but says outcomes are uncertain.
06—Continue