HP Boosts Its Q3 Guidance and Its Expected Restructuring Charge
Hewlett-Packard just dropped a bit of a mixed bag of a press release. The headline is that it now expects its earnings in Q3 to be higher than what it previously gave. It had given a range of 94 cents to 97 cents per share as its expected quarterly profit. It now says it expects to earn $1 a share.
But it also boosted what it expects to lay out in restructuring charges. Remember that HP is going through the process of laying off 27,000 people over three years, about 9,000 of whom are expected to go this year. It now says it expects to incur between $1.5 billion and $1.7 billion in restructuring charges in fiscal 2012. The main reason is that HP employees are responding to the voluntary retirement program at a higher rate than expected.
There’s also going to be an $8 billion impairment charge to its services business, the IT services unit, essentially for the company formerly known as EDS, which HP acquired in 2008 for about $14 billion under former CEO Mark Hurd. CEO Meg Whitman has been complaining about troubles in this unit for awhile now, saying mostly that it’s going to have to focus on fewer, more profitable deals than on a large number of lower-margin ones. Expect a lot of attention on this business in the coming year, as Whitman’s turnaround program gets underway in earnest.
Overall, it looks like Whitman and her team, including longtime CFO Cathie Lesjak, are using this quarter — which was expected to be a tough one, given all the mishegas that has come from HP’s competitors — to take a lot of bitter financial medicine all at once. Shareholders seem to like it. HP shares are rallying by more than 3 percent, after about five minutes of trading in New York, to $19.53. This comes after a 5 percent rally during the pre-market session, when HP shares briefly traded for more than $20 a share.
There were also some executive moves, most of them in Enterprise Services, hence my reference to the mixed bag. Here they are:
- John Visentin, who had been appointed to run Enterprise Services under former CEO Léo Apotheker, is leaving. Visentin was an IBM veteran whom Big Blue had sued after he jumped to HP. He also replaced that unit’s longtime head Ann Livermore, who was herself often mentioned as a candidate for CEO. Livermore was pushed out of that job last June, but was offered a seat on the board of directors.
- Mike Nefkens, currently head of Enterprise Services for Europe, will replace Visentin.
- Jean-Jacques Charhon, CFO in the Enterprise Services business, has been promoted to that unit’s COO.
I’ll have more as I go through it. The release is below:
PALO ALTO, CA–(Marketwire -08/08/12)- HP (HPQ) today announced that it has appointed Mike Nefkens, currently senior vice president and general manager of HP Enterprise Services (ES) — EMEA, to lead HP ES on an acting basis. John Visentin, who previously ran HP ES, will be leaving the company to pursue other interests.
HP also announced today that Jean-Jacques (JJ) Charhon, senior vice president and chief financial officer of HP ES, was appointed chief operating officer for HP ES. Charhon will focus on increasing customer satisfaction and improving service delivery efficiency, which will help drive profitable growth.
Nefkens will be responsible for driving growth and innovation for HP’s applications, business processing and outsourcing services. Nefkens has led successful customer IT transformations for some of HP’s largest services accounts. Prior to joining Electronic Data Systems (EDS), he spent 10 years with Holland Chemical International NV, where he held several executive positions in Mexico, Nicaragua, Venezuela and the western United States. Nefkens will report to Meg Whitman, president and chief executive officer, HP.
Charhon joined HP in 2010 as vice president of Finance for the Personal Systems Group. He brings a decade of services experience in the technology sector from both General Electric (GE) and HP. At GE, he held a number of global leadership roles. In his new position, Charhon will report to Nefkens.
These appointments are designed to drive profitable growth, service innovation and client satisfaction for the Services business.
Q3 FY12 non-GAAP outlook
HP is increasing its previously provided third quarter fiscal 2012 non-GAAP earnings per share (EPS) outlook to approximately $1.00 per share, up from a previous range of $0.94 to $0.97.
Third quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs related primarily to the amortization and impairment of purchased intangible assets, goodwill impairment charges, restructuring charges and acquisition-related charges.
Q3FY12 GAAP outlook
Services goodwill impairment charge
HP expects to record a non-cash pre-tax charge for the impairment of goodwill within its Services segment of approximately $8 billion in the third quarter of its fiscal 2012.
The impairment review stems from the recent trading values of HP’s stock, coupled with market conditions and business trends within the Services segment. Under accounting rules, when indicators of potential impairment are identified, companies are required to conduct a review of the carrying amounts of goodwill and other long-lived assets to determine if an impairment exists.
HP does not expect this estimated goodwill impairment charge to result in any future cash expenditures or otherwise affect the ongoing business or financial performance of its Services segment.
HP also updated the amount of the pre-tax charge it expects to record in the third quarter of fiscal 2012 in relation to its restructuring program announced on May 23, 2012. The change is primarily driven by a higher than anticipated acceptance rate under its early retirement program and faster than expected implementation of the workforce reduction program. Accordingly, HP now expects to record a pre-tax charge of approximately $1.5 billion to $1.7 billion, an increase from its previous estimate of approximately $1 billion, in its third quarter of fiscal 2012 that will be included in its GAAP financial results.
Given the expected impairment charge associated with the Services segment and the expected increased charge associated with the restructuring program, HP now expects third quarter fiscal 2012 GAAP EPS to be in the range of ($4.31) to ($4.49) including the GAAP tax impact on the impairment.
HP did not provide an updated outlook for the full year fiscal 2012.