Analyzing and Interpreting Restructuring Costs and Effects Hewlett-Packard, Inc.

ID: 2541579 • Letter: A

Question

Analyzing and Interpreting Restructuring Costs and Effects
Hewlett-Packard, Inc., reports the following footnote disclosure (excerpted) in its 2010 10-K relating to its restructuring programs.

Fiscal 2010 Acquisitions: On July 1, 2010, HP completed the acquisition of Palm and initiated a plan to restructure the operations of Palm, including severance for Palm employees, contract cancellation costs and other items.

The total expected cost of the plan is $46 million.

On April 12, 2010, HP completed the acquisition of 3Com. In connection with the acquisition, HP's management approved and initiated a plan to restructure the operation of 3Com, including severance costs and costs to vacate duplicative facilities.

The total expected cost of the plan is $42 million.

In fiscal 2010, HP recorded restructuring charges of approximately $18 million.

Fiscal 2010 ES Restructuring Plan: On June 1, 2010, HP's management announced a plan to restructure its enterprise services business. The total expected cost of the plan that will be recorded as restructuring charges is approximately $1.0 billion, including severance costs to eliminate approximately 9,000 positions and infrastructure charges. For fiscal 2010, a restructuring charge of $650 million was recorded primarily related to severance costs. As of October 31, 2010, approximately 2,100 positions have been eliminated.

Fiscal 2009 Restructuring Plan: In May 2009, HP's management approved and initiated a restructuring plan to structurally change and improve the effectiveness of several businesses. The total expected cost of the plan is $292 million in severance-related costs associated with the planned elimination of approximately 5,000 positions. As of October 31, 2010, approximately 4,200 positions had been eliminated.

Fiscal 2008 HP/EDS Restructuring Plan: In accordance with the acquisition of EDS on August 26, 2008, HP's management approved and initiated a restructuring plan to combine and align HP's services businesses, eliminate duplicative overhead functions and consolidate and vacate duplicative facilities. The restructuring plan is expected to be implemented over four years at a total expected cost of $3.4 billion.

The adjustments to the accrued restructuring expenses related to all of HP's restructuring plans described above for the twelve months ended October 31, 2010 were as follows:

(a) Which of the following in NOT an example of a common non-cash charge associated with corporate restructuring activities?

Inventory revaluations

Fixed-asset write-downs

Impairment charges on intangible assets

Severance paid to employees

(b) Using the financial statement effects template, show the effects on financial statements of the (1) 2010 restructuring charge of $1,138 million, and (2) 2010 cash payment of $1,316 million.

Use negative signs with your answers, when appropriate.

Balance Sheet (in $ millions)

Income Statement

(in millions) Balance
October 31, 2009 Fiscal year
2010 charges
(reversals) Cash payments Non-cash
settlements
& other adjustments Balance
October 31, 2010 Fiscal 2010 acquisitions $ -- $ 64 $ (20) $ -- $ 44 Fiscal 2010 ES Plan: Severance -- 630 (55) 45 620 Infrastructure -- 20 (6) (10) 4 Total 2010 ES Plan -- 650 (61) 35 624 Fiscal 2009 Plan 248 (5) (177) (9) 57 Fiscal 2008 HP/EDS Plan: Severance 747 236 (873) (35) 75 Infrastructure 419 193 (185) (19) 408 Total 2008 HP/EDS Plan 1,166 429 (1,058) (54) 483 Total restructuring plan $ 1,414 $ 1,138 $ (1,316) $ (28) $ 1,208

Explanation / Answer

Part (a):

Out of the above the severance paid to employees is the only payment which is made in cash. Otherwise all the other expenses are non-cash charge associated with corporate restructuring activities. Thus, the severance paid to employees is not an example of common non-cash charge associated with corporate restructuring.

Part (b):

Balance sheet

Transaction

Cash asset

Non-cash asset

Liabilities

Contributed capital

Earned capital

(1,138.00)

(1,316.00)

Explanations:

Transaction (1):

The 2010 restructuring charge of $1,138 million is a non-cash charge thus, the charge will result in reduction on non-cash asset and subsequently the charge will be written off against the balance in retained earnings thus, the earned capital will also reduce by the equal amount.

Transaction (2):

2010 cash payment of $1,316 million will obviously reduce the cash asset by that amount and subsequently the earned capital will also be reduced by the equal amount as the cash payment itself is a charge which will reduce the profit of the business, i.e. the earned capital.