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HP shares fall amid profit scrutiny

Shares in Hewlett-Packard head south after a cash-flow disclosure in an SEC filing raises new concerns about the company's most recent earnings report.

Shares of Hewlett-Packard fell as much as 8.9 percent on Thursday, after disclosures raised new concerns about the company's most recent earnings report.

In documents filed late Wednesday with the Securities and Exchange Commission, HP said that it had overstated the amount of cash generated from its operations by $144 million during its most recent quarter. In addition, as first reported by CNET, the filing revealed that a new accounting method, which helped Hewlett-Packard's PC business turn a $33 million operating profit, would have given premerger HP a $26 million profit in its PC business if it had been used the previous year.

That shift in accounting had already come under fire from analysts who said the move overstated the profitability of HP's individual operating units. In its latest quarterly earnings report, HP changed the way it accounted for bonuses and also moved some costs, including research and development expenses, out of the individual business units.

HP's stock headed south on Thursday, with the stock trading as low as $14.18 despite a market that was posting strong gains overall. With the drop, HP shares reached their lowest point since Oct. 25 before recovering somewhat. Shares of HP were trading recently at $15.00, off 57 cents, or 3.7 percent.

Amid the drop, HP released a statement addressing both the cash flow and segment accounting issues, saying it regretted the cash flow mistake and the confusion it had caused among investors.

"As part of our normal controls process in preparation for our official 10-Q filing, we discovered an accounting classification error," Bob Wayman, HP's chief financial officer, said in a statement. HP said it was reviewing the procedures it uses in preparing its initial earnings reports.

As for the performance of its PC unit, HP noted, as it had on Wednesday, that although the new accounting method would have given premerger HP a profit in its PC unit a year ago, the PC units of HP and Compaq combined would have produced a loss of $52 million in the year-ago quarter. HP also noted that the $33 million operating profit in the most recent quarter represented a $101 million improvement from the immediately preceding quarter.

"By every measure, this represents real profitability and real performance improvement," Wayman said in the statement.

Commenting on the fact that HP posted a wider-than-expected drop in overall company revenue last quarter, Wayman noted that for the calendar fourth quarter, HP would have had a 9 percent sequential gain. HP uses noncalendar quarters, with its most recently ended quarter running through Jan. 31. "One month into the company's second fiscal quarter, revenue for the combined company is up 3 percent year over year," Wayman said.

In a research report Thursday, Banc of America Securities analyst Joel Wagonfeld said HP's latest revelation "further underscores our longstanding concerns about visibility."

Referring to the cash flow issue, Wagonfeld said, "After a quarter where we questioned the motives behind adjusting the expense reallocation among business segments, we do not believe this additional shift in numbers will be well received by investors. We do, however, give the company credit in that they proactively alerted us to this change."

Wagonfeld said some of his premerger concerns have shown up in HP's recent financial results. "Some of the items that we feared upon completion of the merger are now beginning to show early signs of emerging, such as revenue weakness and visibility/quality of earnings," he said.

Others analysts dismissed the latest issues. Buckingham Research Group analyst Jay Stevens called the cash flow misstatement an "embarrassment," but said it was not a reason to sell the stock.

Merrill Lynch analyst Steven Milunovich said in a research note Thursday that his research team examined the rest of HP's financial statement and found nothing else amiss.

"We applied our usual screens to identify reversals of accounting accruals, such as restructuring reserves and other items, (but found) no indication of earnings manipulation," he said. Still, Milunovich said the cash-flow error comes at an unfortunate time for HP.

"While we believe it was an honest mistake. The timing is bad, given investor jitters over segment accounting," Milunovich said.