HP Inc. FY2019 Form 10-K Summary
Business context and reporting period
HP Inc. is a global provider of personal computing products and printing hardware, supplies, solutions and services. Its reportable segments are Personal Systems, Printing and Corporate Investments. This 10-K covers the fiscal year ended October 31, 2019; the fourth fiscal quarter ended on that date.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $58.756 billion | $58.472 billion |
| Gross profit / gross margin | $11.170 billion / 19.0% | $10.669 billion / 18.2% |
| Operating earnings / margin | $3.877 billion / 6.6% | $3.831 billion / 6.6% |
| Net earnings | $3.152 billion | $5.327 billion |
| Diluted EPS | $2.07 | $3.26 |
| Cash from operations | $4.654 billion | $4.528 billion |
| Cash and cash equivalents at year-end | $4.537 billion | $5.166 billion |
| Total debt at year-end | $5.1 billion | $6.0 billion |
Net cash used in investing activities was $438 million and net cash used in financing activities was $4.845 billion. Capital expenditures were $671 million. The company reported a $1.193 billion stockholders’ deficit, so its debt-to-equity ratio is not a conventional measure of leverage. Current assets were $20.177 billion versus current liabilities of $25.293 billion.
Material changes versus the prior comparable period
- Revenue rose 0.5% year over year, or 2.0% in constant currency. Personal Systems revenue increased 2.7% to $38.694 billion; Printing revenue declined 3.6% to $20.066 billion.
- Personal Systems operating earnings increased to $1.898 billion from $1.402 billion, and segment operating margin rose to 4.9% from 3.7%, with lower supply-chain costs and higher average selling prices cited as contributors.
- Printing operating earnings decreased to $3.202 billion from $3.314 billion; margin edged up to 16.0% from 15.9%. Supplies revenue fell 4.8%, primarily due to demand weakness; Consumer Hardware revenue fell 6.7%.
- Consolidated gross margin improved by 0.8 percentage points, primarily reflecting Personal Systems improvement. Operating earnings increased modestly, but net earnings fell 40.8% and diluted EPS fell 36.5%.
- The net earnings comparison was materially affected by tax and other items: FY2018 included a $2.314 billion income-tax benefit, while FY2019 included a $629 million benefit. FY2019 also had $1.354 billion of net interest and other expense, including charges related to tax indemnifications and termination of the tax matters agreement with Hewlett Packard Enterprise.
- Operating cash flow rose slightly. HP repurchased $2.405 billion of stock and paid $970 million in dividends; cash declined by $629 million over the year.
Outlook, management commentary, risks and unusual items
- Management emphasized profitable growth in Personal Systems and investment in services, digital capabilities, contractual printing, Graphics and 3D printing. It cited competitive pricing, expected declines in PC client and home-printing markets, weaker printing demand in some geographies, currency volatility and trade-related headwinds.
- HP’s Fiscal 2020 restructuring plan, approved in September 2019, is intended to simplify and optimize operations through fiscal 2022. HP expects global headcount reductions of approximately 7,000–9,000 and estimates about $1.0 billion in pre-tax charges. The filing does not provide a quantified savings target. Future restructuring cash payments were estimated at about $1.0 billion, including $418 million expected in FY2020.
- HP stated that internally generated cash flow, cash balances and capital-market access were expected to cover near-term cash needs. It maintained a $4.0 billion revolving credit facility available through March 2023 and had $6.5 billion remaining under share-repurchase authorizations at year-end.
- Notable risks include intense competition and price pressure; declining supplies revenue and non-original supplies; dependence on suppliers and certain single-source components, including Canon for specified laser printer engines and toner cartridges; tariffs and international trade uncertainty; currency exposure; channel and inventory management; cybersecurity; and tax, regulatory and litigation uncertainty.
- FY2019 included approximately $1.3 billion of net discrete income-tax benefits, including $1.0 billion related to audit settlements. The tax benefit significantly affects reported earnings and may not recur at a similar level.
- HP disclosed multiple legal matters, including patent and printer-supplies disputes and ongoing tax and employment matters. A previously awarded approximately $3.0 billion Oracle litigation judgment remained on appeal; HP had recorded no gain for the potential recovery. The filing also identifies Xerox’s acquisition proposal as a risk-related stock-price factor.
- HP adopted the new revenue-recognition standard using the modified retrospective method; the adoption increased opening accumulated deficit by $212 million, net of tax. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management reported internal controls were effective.
Important facts for investors to verify
- Whether Personal Systems growth and improved margins can continue, and whether Printing Supplies’ revenue decline stabilizes.
- The realization, timing and cash costs of the Fiscal 2020 restructuring plan, including workforce reductions and any eventual savings.
- The sustainability of earnings and cash generation excluding discrete tax benefits and tax-indemnification charges.
- Current liquidity, debt maturities and capital returns, particularly given the stockholders’ deficit and ongoing repurchases and dividends.
- Developments in material litigation, tax audits and indemnification matters, and the outcome of the Oracle appeal and Xerox proposal.