HP company
Website: WWW.SEC.gov
10-K Annual Report for year ending December 31, 2016, filed December 15, 2016
QUESTION 1
What 3 items of important information does the income statement reveal about the
financial performance of the company over the last three years?
Decrease in revenue in the last three years
Most of HPQ revenue comes from sales of the computers products commonly laptops. Over
the last three years from 2014 to 2016, the revenue of HPQ Company has been going down.
From 2014 to 2015, the revenue reduced by 7.3% while in 2015 to 2016 by 53%. Reduction
of revenue is as a result of the separation of HP into two individual public trading companies
i.e. HPQ and HP Inc. This can also be as a result of an increase in the cost of production.
However, since the operating expense reduced in 2016 by 72% as compared to 2014, this
means that the business was undergoing a reduction in production.
Operating income reduced by a large margin in 2016
In 2014, the operating income of HPQ was 7.131 billion, in 2015, 7.185 billion and 2016,
5.471 billion. Changes in 2016 are equal to 24%. This can be attributed to the reduction of
production capacity evident in reduced operation expense by 72% which was a result of the
separation of HPQ from HP Company. Besides that, the overall net income of the company
has reduced since 2014. In 2015, net income reduced by 42% while in 2016, it reduced by
1.5%. This clear indication that the company is improving drastically as it tries to manage its
expenses.
Earnings per share reduced
The quality of shareholder’s income reduced from 2014 to 2016. Despite that the diluted
earnings per share from 2014 to 2015 remains constant, meaning that the value of investors in
those two years remained unchanged. However, in 2016, the diluted earnings per share
reduced from 2.62 to 2.48. This can be attributed to the reduced operation by the company
hence has resulted in a reduction in overall income. When overall income is reduced, we
expect the shareholders to experience the same as they are required to share both returns and
failure of the company. In 2015, the company separated, and that also lead to the division of
stock and capitalization value. The distribution of share is the main reason for the reduction
of diluted earnings per share.
HP INC (HPQ) CashFlowFlag INCOME
STATEMENT
Fiscal year ends in October. USD in millions
except per share data.
2014-
10
2015-
10
2016-
10
Revenue 111454 103355 48238
Cost of revenue 84839 78596 39240
Gross profit 26615 24759 8998
Operating expenses
Research and development 3447 3502 1209
Sales, General and administrative 13353 12353 3840
Restructuring, merger and acquisition 1619 1017 205
Other operating expenses 1011 2416 195
Total operating expenses 19430 19288 5449
Operating income 7185 5471 3549
Other income (expense) -628 -739 212
Income before taxes 6557 4732 3761
Provision for income taxes 1544 178 1095
Net income from continuing operations 5013 4554 2666
Net income from discontinuing ops -170
Other
Net income 5013 4554 2496
Net income available to common shareholders 5013 4554 2496
Earnings per share
Basic 2.66 2.51 1.44
Diluted 2.62 2.48 1.43
Weighted average shares outstanding
Basic 1882 1814 1730
Diluted 1912 1836 1743
EBITDA 11519 9532 3881
Question 2
What 3 items of important information does the balance sheet reveal about the financial
position of the company over the last two years?
Large part of long-term asset was sold in 2016
73% reduced the total asset in 2016. Gross property and plant equipment were reduced by
77% attributed to a great reduction of total assets. The manufacturing part of this plant is the
largest part of the long-term assets assigning 58% of non-current assets. Probably, this might
be purely sales of long-term assets, but it is a separation of entities hence resulting in a
reduction of holding by the parent company. That is why we have focused on HPQ.
Company can meet its current liability
Despite the reduction of both current asset and liability in the last two years, the current
assets are always higher than a liability. In 2016, the current asset was valued at 18.468
billion as compared to 18.808 billion of liability. Therefore, the company has a positive
current ratio. In 2016 the current asset reduced by 64% while the current liability reduced by
55%. This means that in 2015, the company was able to pay its current liability easier than in
2016 since the current asset has reduced drastically as compared to liability. The fact that this
is a manufacturing plant, the current assets should be greater than liability all the time since it
means it is credit worth.
Shareholders owes money
The shareholder equity as at 2016 was a negative value i.e. 3.889 billion. This is an indication
that if the company will be sold today and all debt paid what will remain for shareholder will
be a negative value. In application, this cannot be true since it contains accumulated losses
which only exist on paper. Common stock as at 2015 was 18 million, but since then the
company has bought back one million common stock making it remain with 17 million as at
2016. This outcome can be attributed to the reduction of revenue as a result of reduced
production rate. Therefore, to keep the stock high, the company might have chosen to buy
back from those who were willing to sell theirs after separation of HP company.
HP INC (HPQ) CashFlowFlag BALANCE SHEET
Fiscal year ends in October. USD in millions except per
share data.
2014-
10
2015-10 2016-10
Assets
Current assets
Cash
Cash and cash equivalents 15133 17433 6288
Total cash 15133 17433 6288
Receivables 13832 13363 4114
Inventories 6415 6485 4484
Deferred income taxes 2754 2242
Prepaid expenses 4518 4116 1087
Other current assets 7493 8148 2495
Total current assets 50145 51787 18468
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 26252 26475 6084
Accumulated Depreciation -14912 -15385 -4348
Net property, plant and equipment 11340 11090 1736
Goodwill 31139 32941 5622
Intangible assets 2128 2014
Deferred income taxes 740 871 254
Other long-term assets 7714 8179 2930
Total non-current assets 53061 55095 10542
Total assets 10320
6
106882 29010
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 3486 2885 78
Accounts payable 15903 15956 11103
Taxes payable 3286 3201 986
Accrued liabilities 14917 13950 5722
Deferred revenues 6143 6199 919
Total current liabilities 43735 42191 18808
Non-current liabilities
Long-term debt 16039 21780 6758
Deferred taxes liabilities 1124 295 1116
Deferred revenues 3931 4373 865
Pensions and other benefits 6379 5630 2705
Minority interest 396 383
Other long-term liabilities 4871 4462 2647
Total non-current liabilities 32740 36923 14091
Total liabilities 76475 79114 32899
Stockholders' equity
Common stock 18 18 17
Additional paid-in capital 3430 1963 1030
Retained earnings 29164 32089 -3498
Accumulated other comprehensive income -5881 -6302 -1438
Total stockholders' equity 26731 27768 -3889
Total liabilities and stockholders' equity 10320
6
106882 29010
Question 3
3) Can you identify the major sources of funding used by the company from the
information presented in the company's annual report? Please look at the Statement of
Cash Flows, formerly called the Source and Uses of Funds Statement.
The common part in the statement of cash flow includes net income, net cash provided by
operating activities, net cash from investment activities and net change in cash and
equivalent. Net cash provided by operating activities was $3.230 billion. Net income
contributes 77% of this amount. Account payable also provides a larger amount to income
from operating activities i.e. 29%. Sales of investments and also the maturity of an
investment is another source of capital for this company. The sales and maturity amount to
133 million. The net cash used for investment activity was 48 million in 2016. Expenditure
on investment was 433 million which the value of net investments is nine times. The net cash
in financing activity was 14.423 billion. Others financing activities contributed 71% of
14.423 billion. Net change in cash was negative amounting to 11.145 billion USD. The
negative net change means that after deducting all the costs, the company will not remain
with liquid cash but debt.
Therefore, the source of income in this business is the net income and sale of
investment/maturity since they are the positive values. Besides that, the net cash used in
investment activity is positive hence it contributes to the company’s income.
HP INC (HPQ) Statement of CASH FLOW
Fiscal year ends in October. USD in millions except per
share data.
2014-
10
2015-
10
2016-
10
Cash Flows From Operating Activities
Net income 5013 4554 2496
Depreciation & amortization 4334 4061 332
Investment/asset impairment charges
Deferred income taxes -34 -700 401
Stock based compensation 560 709 182
Accounts receivable 2017 572 565
Inventory -580 -330 -291
Accounts payable 1912 31 928
Income taxes payable 310 -137 106
Other working capital -3107 -4549 -1645
Other non-cash items 1908 2279 156
Net cash provided by operating activities 1233
3
6490 3230
Cash Flows From Investing Activities
Investments in property, plant, and equipment -3853 -3603 -433
Property, plant, and equipment reductions 843 424 6
Acquisitions, net -43 -2398 468
Purchases of investments -1086 -259 -126
Sales/Maturities of investments 1347 302 133
Other investing activities
Net cash used for investing activities -2792 -5534 48
Cash Flows From Financing Activities
Debt issued 2875 20758 4
Debt repayment -6037 -15867 -2188
Common stock issued 297 371 48
Common stock repurchased -2728 -2883 -1161
Excess tax benefit from stock based compensation 58 145 6
Dividend paid -1184 -1250 -858
Other financing activities 148 70 -10274
Net cash provided by (used for) financing activities -6571 1344 -14423
Net change in cash 2970 2300 -11145
Cash at beginning of period 1216
3
15133 17433
Cash at end of period 1513
3
17433 6288
Free Cash Flow
Operating cash flow 1233
3
6490 3230
Capital expenditure -3853 -3603 -433
Free cash flow 8480 2887 2797
Question 4
4) Who is responsible for
a) the issuance, and
b) the content
of the company financial statements? (Note: this information may be difficult to find.
Look for statements by management and the independent auditing firm.)
Looking at the company proxy statement as at 2017, I realized that issuance and content are
part of financial and risk management. This department is managed by a chief financial
officer of HPQ who is currently Cathie Lesjak. Cathie role includes accounting, financial
planning, business decision and support, tax, audit, risk management, treasury and investor
relations. Other key stakeholders in the management of company issuance and content
include the president of HPQ, Dion Weisler and chief operating officer, Jon Flaxman. Other
directors can also contribute in the management of this area since most of the time it requires
the collaboration of all executive members. The role of the Executive can be found at HPQ
website as well as in the 10-k statement. The role and their signatures are found on page 148
of this file.
http://www8.HPQ.com/us/en/HPQ-information/executive-team/team.html#cathie-lesjak
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Question 5
5) What assurance, if any, is there that the financial statements are in compliance with
GAAP, and are free of material misstatements?
On page 52 of the 10-K statement provide a report of the independent audit firm, Ernst &
Young LLP which provide reasonable assurance that the information provided is not biased.
On page 54, the auditor offers a conclusion on their reporting suggesting that “In our opinion,
Hewlett-Packard Enterprise Company and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of October 31, 2016, based on the COSO
criteria.” Besides that, the financial statement was audited by standards of the Public
Company Accounting Oversight Board (United States).
Besides that, the statement indicated that the consolidated balance sheets of HPQ Company
and subsidiaries as of October 31, 2016 and 2015, and the related consolidated and combined
statements of earnings, comprehensive income, cash flows and stockholders' equity for each
of the three years in the period ended October 31, 2016 of Hewlett-Packard Enterprise
Company and subsidiaries and our report dated December 15, 2016 expressed an unqualified
opinion thereon. Ernst & Young LLP signed this statement on 15th December 2016.
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Question 6
6) Of what use, if any, are the notes to the financial statements? Give an example of
something learned from the footnotes of your company.
Notes give additional information about an element in the financial statement. This
information improves understanding about the concept presented by providing additional
information that is left out in main reporting documents such as balance sheet and income
statements.
For example, note 11 talks about the evaluation procedure that the company used to come up
with their fair value. This is found on page 101 to 105. Note 6 on page 85 give more
information about taxation. This includes tax amount paid on state government and the
federal government. On the other hand, note four on page 74 talking about retirement and
post-retirement benefits.
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Question 7
7) What can you learn from the Business Section of the 10-K? Give two facts learn
from reading this section.
This section gives the general business structure and history of this company. It suggests that
the company traces its origin back in 1939 when William a Hewlett and David Packard
formed a partnership deal. The company describes itself as the leading technology company
that enables customers to go further, faster. On November 1, 2015, HP Co. Separated into
HPQ and HPE. to effect spin-off, the holder of HP Inc. stocks received additional one stock
of HP Enterprise Company. The separation made the HPE get 50.1% of the total parent
company which is equivalent to 8.8 billion USD. The separation and distribution agreement
contained several aspects including taxation, real estate, transition, employees and
information technology agreement. This section also contains strength opportunities,
employees and risk factors of the organization. Some of the risk that the management has
identified includes foreign exchange risks, market risks, and industry-specific risks.
HP business is divided into numerous section such as rese5ravch and development, products
and services, sales and marketing and manufacturing. The business is also managed by an
experienced professional who has been in the industry for many years. All managerial stuff
and above 45 years old.
The fact learns from the business part of this statement is that the information provided must
be accurate and reflect the true picture about the company. Besides that, the information
provided should help the investor to make unbiased, informed decision before purchasing the
shares. This section runs from page 4 to 10.
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Question 8
8) What can you learn from the Management Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)? Give two facts learned from reading
this section.
Management discussion is classified as item 7 in a 10-k statement. This section begins with
how the HP co. was separated and how much each subsidiary received. The separation will
ensure that the HPE receives 8.8 billion even though it is valued at 6.3 billion USD. This is
approximately 50.1% of the total parent company.
The company also suggests in this section with proof that they account for a transaction with
accepted standards set by the government. The company also follow the reasonable procedure
in offering warrants, revenue recognition, and employee’s benefits.
The section also concentrated on comparing the operation activities in 2015 and 2016. For
example, in 2016, the company experienced revenue reduction of 6.3% which is attributed to
weak demand across Europe. Despite that, net revenue in the USA region increased by 2.6%
in 2016. The gross margin also decreased by 0.6% in 2016. The amortization of intangible
assets decreased by 86 million and 27 million in 2016 and 2015 respectively. The tax rate in
2016 was greater than in 2015 i.e. 29.1% and (5.3%) respectively. The debt rate of the
company was higher in 2016 as compared to 2015. The weight of debt in 2016 was given a
weight of 4.2% while in 2015 3.7%. This means that the company borrows more every year.
This section also talks about the risks affecting the company. In this case, they include
foreign exchange risks and interest rate. The performance of the company cannot be
attributed to being overall bad especially when we remove the aspect of separation. The
performance in 2014, is not better than that of 2015 but t6hey are nearly the same. One aspect
that seems too drawn back the company is the issue of debt and equity financing. We can see
that in 2015, the company accessed more debt. This can be attributed to separation which
leads to it having little equity financing hence it need more money to finance its operation,
and debt financing might be seen as the best alternative.
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