Question 1
The factor that would be interesting to an investor is the decline in revenue. The management of the company has reported a decline in revenue from the year 2012, resulting from a contraction in the overall PC market as well as competitive pricing pressures. These causes negatively impacted the performance of the company’s major segments. The factor would be interesting to the investor since the primary objective of investors is to maximise their returns. A decline in revenues indicates that the business is experiencing challenges that if not addressed, may have an adverse effect of the future profitability and growth of the company (Stittle & Wearing, 2008). Revenues have a direct impact on the net earnings of the company.
Net revenue declined 6.7% (decreased 5.5% on a constant currency basis) in fiscal 2013 compared to fiscal 2012 due primarily to revenue declines of approximately 10%, 8%, 5% and 3% in our Personal Systems, ES, EG and Printing segments, respectively. These revenue declines reflect a series of revenue growth challenges that impacted each of our segments to varying degrees. The primary challenges included: a significant contraction in the overall PC market, which impacted Personal Systems; weak public sector spending and enterprise IT demand, particularly in Europe, which impacted the ES and EG segments; competitive pricing pressures in the enterprise and PC markets, which impacted both the EG and Personal Systems segments; and unfavorable currency impacts and volume declines in supplies, which impacted the Printing segment (Page 41).
Question 2
The fact that the company has addressed challenges of decline in revenues through innovation would be of interest to investors. It is reported that revenue declines have moderated, and the company has begun to reap the benefits from its investment in production innovation. It would be interesting to investors since it indicates that the company’s future earnings will improve. As its future revenues are expected to increase as a result of investment in product innovation, shareholders of HP will experience an increase in their returns.
During fiscal 2013, we continued to address these challenges by driving innovation across the company, improving operations, aligning our cost structure and rebuilding our balance sheet. As a result of these efforts, revenue declines have begun to moderate as we reap the early benefits of our investments in product innovation, as decreasing costs driven by our restructuring efforts have begun to align to our revenue trajectory, as our enterprise services business has begun to become more predictable, and as our business performance has begun to improve in our printing business due to our focus on key initiatives such as Ink in the Office, Managed Print Services and Ink Advantage (Page 42)
Question 3
Members of the Board of Directors (Pages 4-5 & pages 169 -170)
- Margaret C. Whitman President and Chief Executive Officer
- Catherine A. Lesjak Executive Vice President and Chief Financial Officer
- Jeff T. Ricci Vice President and Controller (Principal Accounting
Officer).
- Marc L. Andreessen Director
- Rajiv L. Gupta Director
- Shumeet Banerji Director
- Raymond J. Lane Director
- Robert R. Bennett Director
- Ann M. Livermore Director
- Raymond E. Ozzie Director
- James A. Skinner Director
- Gary M. Reiner Director
- Patricia F. Russo Director
- Ralph V. Whitworth Director
Question 4: Risk factors
- Competitive pressures (Page 18): HP Company faces stiff competition from in all its segments from other firms in the market. With increased competition, the company’s earnings may decline due to high expenditures on product promotion and product development. HP spends a lot on innovation (research and development) thereby putting pressure on its revenues.
- Economic uncertainties (page 19): The Company’s revenue, gross margin and expenses are affected by economic factors that influence the demand for computer hardware. Such factors include per capita income, interest rates, inflation among others. Changes in these factors may negatively impact the company’s revenues.
- Reliance on third party suppliers (page 22): HP relies on third party suppliers for the supply of components required to manufacture computer hardware. The suppliers may fail to supply the right quantity and quality of components in a timely manner. In such cases, HP will be unable to meet the demand by its customers.
Question 5: Method of depreciation
HP computes depreciation on property, plant and equipment using the straight-line or accelerated methods (page 90).
Depreciation is computed using straight-line or accelerated methods over the estimated useful lives of the assets. Estimated useful lives are five to 40 years for buildings and improvements and three to 15 years (page 90).
Question 6: Revenue recognition
HP derives net revenue primarily from the sale of products and services. The following revenue recognition policies define the manner in which HP accounts for sales transactions.
HP recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable, and collectibility is reasonably assured. Additionally, HP recognizes hardware revenue on sales to channel partners, including resellers, distributors or value-added solution providers at the time of delivery when the channel partners have economic substance apart from HP, and HP has completed its obligations related to the sale. HP generally recognizes revenue for its stand-alone software sales to channel partners upon receiving evidence that the software has been sold to a specific end user (Page 85).
Question 7: Inventory cost flow assumption
HP uses First-in, First-out basis of valuing inventory and reports it at the lower of cost or market.
HP values inventory at the lower of cost or market. Cost is computed using standard cost which approximates actual cost on a first-in, first-out basis. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolete or impaired balances (page 90).
Question 8
- Cash and cash equivalents (page 82)
Current year: $12,163 million
Prior year: $11,301 million
- Accounts payable (page 82)
Current year: $14,019 million
Prior year: $13,350 million
- Retained earnings (page 82)
Current year: $25,563 million
Prior year: $21,521 million
- Net income (loss) (page 80)
Current year: $5,113 million
Prior year: ($12,650) million
7. Financial statements
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
As of October 31
2013 2012
In millions, except
par value
ASSETS
Current assets:
Cash and cash equivalents $12,163 $ 11,301
Accounts receivable 15,876 16,407
Financing receivables 3,144 3,252
Inventory 6,046 6,317
Other current assets 13,135 13,360
Total current assets 50,364 50,637
Property, plant and equipment 11,463 11,954
Long-term financing receivables and other assets 9,556 10,593
Goodwill 31,124 31,069
Intangible assets 3,169 4,515
Total assets $105,676 $108,768
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and short-term borrowings $ 5,979 $ 6,647
Accounts payable 14,019 13,350
Employee compensation and benefits 4,436 4,058
Taxes on earnings 1,203 846
Deferred revenue 6,477 7,494
Accrued restructuring 901 771
Other accrued liabilities 12,506 13,500
Total current liabilities 45,521 46,666
Long-term debt 16,608 21,789
Other liabilities 15,891 17,480
Commitments and contingencies
Stockholders’ equity:
HP stockholders’ equity
Preferred stock, $0.01 par value (300 shares authorized; none issued) — —
Common stock, $0.01 par value (9,600 shares authorized; 1,908 and 1,963
shares issued and outstanding, respectively) 19 20
Additional paid-in capital 5,465 6,454
Retained earnings 25,563 21,521
Accumulated other comprehensive loss (3,778) (5,559)
Total HP stockholders’ equity 27,269 22,436
Non-controlling interests 387 397
Total stockholders’ equity 27,656 22,833
Total liabilities and stockholders’ equity $105,676 $108,768
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Accumulated
Common Stock
Additional Other Total HP Non
Shares Par Value Capital Earnings (Loss) Income Equity Interests Total
In millions, except number of shares in thousands
Balance October 31, 2010 2,203,898 $22 $11,569 $ 32,695 $(3,837) $ 40,449 $332 $ 40,781
Net earnings 7,074 7,074 7,074
Other comprehensive income 339 339 339
Comprehensive income 7,413 7,413
Issuance of common stock in connection
with employee stock plans and other . . 45,461 1 751 752 752
Repurchases of common stock (258,853) (3) (6,296) (3,669) (9,968) (9,968)
Tax benefits from employee stock plans . . 128 128 128
Cash dividends declared (834) (834) (834)
Stock-based compensation expense 685 685 685
Changes in non-controlling interest 47 47
Balance October 31, 2011 1,990,506 $20 $ 6,837 $ 35,266 $(3,498) $ 38,625 $379 $ 39,004
Net loss (12,650) (12,650) (12,650)
Other comprehensive loss (2,061) (2,061) (2,061)
Comprehensive loss (14,711) (14,711)
Issuance of common stock in connection
with employee stock plans and other . . 39,068 682 1 683 683
Repurchases of common stock (66,736) (1,525) (101) (1,626) (1,626)
Tax deficiency from employee stock plans . (175) (175) (175)
Cash dividends declared (995) (995) (995)
Stock-based compensation expense 635 635 635
Changes in non-controlling interest 18 18
Balance October 31, 2012 1,962,838 $20 $ 6,454 $ 21,521 $(5,559) $ 22,436 $397 $ 22,833
Net earnings 5,113 5,113 5,113
Other comprehensive income 1,781 1,781 1,781
Comprehensive income 6,894 6,894
Issuance of common stock in connection
with employee stock plans and other . . 22,950 210 (2) 208 208
Repurchases of common stock (77,905) (1) (1,550) 5 (1,546) (1,546)
Tax deficiency from employee stock plans . (149) (149) (149)
Cash dividends declared (1,074) (1,074) (1,074)
Stock-based compensation expense 500 500 500
Changes in non-controlling interest (10) (10)
Balance October 31, 2013 1,907,883 $19 $ 5,465 $ 25,563 $(3,778) $ 27,269 $387 $ 27,656
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
For the fiscal years ended October 31
2013 2012 2011
In millions, except per share amounts
Net revenue:
Products $72,398 $ 77,887 $ 84,757
Services 39,453 42,008 42,039
Financing income 447 462 449
Total net revenue 112,298 120,357 127,245
Costs and expenses:
Cost of products 55,632 59,468 65,167
Cost of services 30,436 32,600 31,945
Financing interest 312 317 306
Research and development 3,135 3,399 3,254
Selling, general and administrative 13,267 13,500 13,577
Amortization of intangible assets 1,373 1,784 1,607
Impairment of goodwill and intangible assets — 18,035 885
Restructuring charges 990 2,266 645
Acquisition-related charges 22 45 182
Total operating expenses 105,167 131,414 117,568
Earnings (loss) from operations 7,131 (11,057) 9,677
Interest and other, net (621) (876) (695)
Earnings (loss) before taxes 6,510 (11,933) 8,982
Provision for taxes (1,397) (717) (1,908)
Net earnings (loss) $ 5,113 $ (12,650) $ 7,074
Net earnings (loss) per share:
Basic $ 2.64 $ (6.41) $ 3.38
Diluted $ 2.62 $ (6.41) $ 3.32
Weighted-average shares used to compute net earnings (loss) per
share:
Basic 1,934 1,974 2,094
Diluted 1,950 1,974 2,128
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the fiscal years ended October 31
2013 2012 2011
In millions
Cash flows from operating activities:
Net earnings (loss) $5,113 $(12,650) $ 7,074
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 4,611 5,095 4,984
Impairment of goodwill and intangible assets — 18,035 885
Stock-based compensation expense 500 635 685
Provision for doubtful accounts 61 142 81
Provision for inventory 275 277 217
Restructuring charges 990 2,266 645
Deferred taxes on earnings (410) (711) 166
Excess tax benefit from stock-based compensation (2) (12) (163)
Other, net 443 265 (46)
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable 530 1,687 448
Financing receivables 484 (418) (675)
Inventory (4) 890 (1,252)
Accounts payable 541 (1,414) 275
Taxes on earnings 417 (320) 610
Restructuring (904) (840) (1,002)
Other assets and liabilities (1,037) (2,356) (293)
Net cash provided by operating activities 11,608 10,571 12,639
Cash flows from investing activities:
Investment in property, plant and equipment (3,199) (3,706) (4,539)
Proceeds from sale of property, plant and equipment. 653 617 999
Purchases of available-for-sale securities and other investments (1,243) (972) (96)
Maturities and sales of available-for-sale securities and other
investments 1,153 662 68
Payments in connection with business acquisitions, net of cash
acquired (167) (141) (10,480)
Proceeds from business divestiture, net — 87 89
Net cash used in investing activities (2,803) (3,453) (13,959)
Cash flows from financing activities:
Repayment of commercial paper and notes payable, net (154) (2,775) (1,270)
Issuance of debt 279 5,154 11,942
Payment of debt (5,721) (4,333) (2,336)
Issuance of common stock under employee stock plans 288 716 896
Repurchase of common stock (1,532) (1,619) (10,117)
Excess tax benefit from stock-based compensation 2 12 163
Cash dividends paid (1,105) (1,015) (844)
Net cash used in financing activities (7,943) (3,860) (1,566)
Increase (decrease) in cash and cash equivalents 862 3 ,258 (2,886)
Cash and cash equivalents at beginning of period 11,301 8,043 10,929
Cash and cash equivalents at end of period $12,163 $ 11,301 $ 8,043
Supplemental cash flow disclosures:
Income taxes paid (net of refunds) $1,391 $ 1,750 $ 1,134
Interest expense paid . 837 856 451
References
Stittle, J., & Wearing, B. (2008). Financial Accounting. Los Angeles: SAGE Publications.
