Analyzing and Interpreting Restructuring Costs and Effects (LO2)

Hewlett-Packard, Inc., reports the following footnote disclosure (excerpted) in its 2012 10-K relating

to its 2012 restructuring program.

Fiscal 2012 Restructuring Plan On May 23, 2012, HP adopted a multi-year restructuring

plan (the 2012 Plan) designed to simplify business processes, accelerate innovation and

deliver better results for customers, employees and stockholders. HP estimates that it will

eliminate approximately 29,000 positions in connection with the 2012 Plan through scal year

2014, with a portion of those employees exiting the company as part of voluntary enhanced

early retirement (EER) programs. HP expects to record aggregate charges of approximately

$3.7 billion through the end of HPs 2014 scal year as accounting recognition criteria are met.

Of that amount, HP expects approximately $3.1 billion to relate to the workforce reductions and

the EER programs and approximately $0.6 billion to relate to other items, including data center

and real estate consolidation. Due to uncertainties associated with attrition and the acceptance

rates of future international EER programs, the total expected headcount reductions could vary

as much as 15% from our estimates. We could also experience similar variations in the total

expense of the 2012 Plan.

HP recorded a charge of approximately $2.1 billion in the scal year of 2012 relating to the

2012 Plan. This amount included costs for EER plans in the United States and Canada of $41

million of stock-based compensation expense for accelerated vesting of stock-based awards

held by participating EER employees and a special termination benet (STB) expense of $126

million. As of October 31, 2012, HP had eliminated approximately 11,700 positions as part

of the 2012 Plan. The $2.1 billion charge also includes $105 million for data center and real

estate consolidation, of which $56 million related to asset impairments. The cash payments

associated with the 2012 Plan are expected to be paid out through scal 2015.

Fiscal 2010 Acquisitions In connection with the acquisitions of Palm, Inc. (Palm) and

3Com Corporation (3Com) in scal 2010, HPs management approved and initiated plans

to restructure the operations of the acquired companies, including severance for employees,

contract cancellation costs, costs to vacate duplicative facilities and other items. The total

expected combined cost of the plans is $101 million, which includes $33 million of additional

restructuring costs recorded in the fourth quarter of scal 2011 in connection with HPs decision

to wind down the webOS device business. The Palm and 3Com plans are now closed with no

further restructuring charges anticipated. The unused accrual in the amount of $13 million was

credited to restructuring expense in scal year 2012.

Fiscal 2010 Enterprise Services Business Restructuring Plan On June 1, 2010, HPs

management announced a plan to restructure its ES business, which includes the ITO and ABS

business units. The multi-year restructuring program includes plans to consolidate commercial

data centers, tools and applications. The total expected cost of the plan that will be recorded as

restructuring charges is approximately $1.0 billion, and includes severance costs to eliminate

approximately 8,200 positions and infrastructure charges. During the rst quarter of scal 2012,

HP reduced the severance accrual by $100 million and recognized additional infrastructure

related charges of $104 million. The majority of the infrastructure charges were paid out during

scal 2012 with the remaining charges expected to be paid out through the rst half of scal 2015.

The adjustments to the accrued restructuring expenses related to all of HPs restructuring plans

described above for the twelve months ended October 31, 2012, were as follows:

In millions

Fiscal 2012 plan

Severance and EER

Balance, October 31^st 2011------

Fiscal year 2012 charges-$ 1985

Cash payment $(315)

Other adjustment and non cash settlement $(1073)

Balance, October 31^st 2012 $ 597

Infrastructure and other

Balance, October 31^st 2011------

Fiscal year 2012 charges-$ 105

Cash payment $(26)

Other adjustment and non cash settlement (68)

Balance, October 31^st 2012 11

Total 2012 plan

Balance, October 31^st 2011------

Fiscal year 2012 charges-2090

Cash payment (341)

Other adjustment and non cash settlement (1141)

Balance, October 31^st 2012 608

Fiscal 2010 acquisition

Balance, October 31^st 2011- 59

Fiscal year 2012 charges- (13)

Cash payment (27)

Other adjustment and non cash settlement (9)

Balance, October 31^st 2012 10

Fiscal 2010 ES Plan

Severance

Balance, October 31^st 2011- 493

Fiscal year 2012 charges- (100)

Cash payment (146)

Other adjustment and non cash settlement (20)

Balance, October 31^st 2012 227

Infrastructure

Balance, October 31^st 2011- 3

Fiscal year 2012 charges- 176

Cash payment (141)

Other adjustment and non cash settlement (37)

Balance, October 31^st 2012 1

Total ES Plan

Balance, October 31^st 2011- 496

Fiscal year 2012 charges- 76

Cash payment (287)

Other adjustment and non cash settlement (57)

Balance, October 31^st 2012 228

Fiscal 2009 plan

Balance, October 31^st 2011-----

Fiscal year 2012 charges- 7

Cash payment (9)

Other adjustment and non cash settlement 2

Balance, October 31^st 2012 ------

(In millions)

Fiscal 2008 HP/EDS Plan

Severance

Balance, October 31^st 2011 ------

Fiscal year 2012 charges- 5

Cash payment (5)

Other adjustment and non cash settlement -------

Balance, October 31^st 2012 --------

Infrastructure

Balance, October 31^st 2011- 258

Fiscal year 2012 charges- 101

Cash payment (171)

Other adjustment and non cash settlement (7)

Balance, October 31^st 2012 181

Total HP/EDS Plan

Balance, October 31^st 2011- 258

Fiscal year 2012 charges- 106

Cash payment (176)

Other adjustment and non cash settlement (7)

Balance, October 31^st 2012 181

Total restructuring plans

Balance, October 31^st 2011-$ 813

Fiscal year 2012 charges-$ 2266

Cash payment $(840)

Other adjustment and non cash settlement $(1212)

Balance, October 31^st 2012 $1207

Required

a. Briey describe the companys 2012 restructuring program. Provide two examples of common

noncash charges associated with corporate restructuring activities.

b. Using the nancial statement effects template, show the effects on nancial statements of the (1)

2012 restructuring charge of $2,266 million, and (2) 2012 cash payment of $840 million.

c. Assume that instead of accurately estimating the anticipated restructuring charge in 2012, the

company overestimated them by $30 million. How would this overestimation affect nancial

statements in (1) 2012, and (2) 2013 when severance costs are paid in cash?

d. The company reports that the total charges will amount to $3.7 billion. What is the effect on the

2012 income statement from this restructuring? Why do investors care to know the total charge if it

does not impact current-period earnings?