HP Inc. (Hewlett-Packard Company) — FY2010 Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2010. This is an annual report, not a standalone fourth-quarter filing; the filing also provides unaudited quarterly results. HP is a global provider of personal computers, printing and imaging, enterprise hardware and software, IT services, and financing.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $126.0 billion | $114.6 billion |
| Gross profit / gross margin | $29.9 billion / 23.8% | $27.0 billion / 23.6% |
| Operating earnings / operating margin | $11.5 billion / 9.1% | $10.1 billion / 8.8% |
| Net earnings / net margin | $8.8 billion / 7.0% | $7.7 billion / 6.7% |
| Diluted EPS | $3.69 | $3.14 |
| Cash from operations | $11.9 billion | $13.4 billion |
Revenue increased 10.0% as reported (8.3% at constant currency); net earnings rose about 14%. Gross margin improved 0.2 percentage points. Cash from operations declined by approximately $1.5 billion, principally reflecting increased receivables and payments for operating liabilities.
At year-end, cash and cash equivalents were $10.9 billion, total debt was $22.3 billion (including $7.0 billion short-term and $15.3 billion long-term), and available borrowing resources were reported at $13.8 billion. The debt-equity ratio increased to 0.55x from 0.39x. Current assets were $54.2 billion and current liabilities $49.4 billion. Capital spending on property, plant and equipment was $4.1 billion; net cash used in investing was $11.4 billion, including $8.1 billion for acquisitions. HP repurchased $11.0 billion of shares and paid $771 million in dividends.
Fourth-quarter snapshot: Revenue was $33.3 billion, operating earnings $3.3 billion, net earnings $2.5 billion, and diluted EPS $1.10. In the comparable FY2009 quarter, these were $30.8 billion, $3.1 billion, $2.4 billion, and $0.99, respectively.
Segments and changes versus prior year
| Segment | FY2010 revenue | Revenue change | Operating margin |
|---|---|---|---|
| Services | $34.9 billion | +0.7% | 16.1%, up from 14.5% |
| Enterprise Storage and Servers | $18.7 billion | +21.4% | 12.9%, up from 9.9% |
| HP Software | $3.6 billion | +0.4% | 21.2%, up from 19.1% |
| Personal Systems Group | $40.7 billion | +15.4% | 5.0%, up from 4.7% |
| Imaging and Printing Group | $25.8 billion | +7.3% | 17.1%, down from 18.0% |
| HP Financial Services | $3.0 billion | +14.0% | 9.2%, up from 7.7% |
PSG was the largest contributor to consolidated revenue growth; ESS growth was led by industry-standard servers. Services revenue was nearly flat, but efficiency gains and EDS synergies lifted its margin. IPG revenue recovered, while its margin fell as hardware gained mix relative to higher-margin supplies. The prior-year comparison reflects a sharp FY2009 downturn: consolidated revenue declined 3.2% in FY2009, with broad weakness in PCs, servers, and printing.
Outlook, management commentary, risks and unusual items
- Management said year-end cash and anticipated operating cash flow were sufficient for expected FY2011 cash outlays. The supplied filing text does not provide a clear consolidated revenue or EPS forecast.
- Strategy emphasized operational efficiency and investment in cloud computing, virtualization, networking, security, mobility, and emerging markets. HP completed acquisitions including 3Com, Palm, 3PAR, and ArcSight; it reported 11 acquisitions in FY2010 and $9.4 billion aggregate purchase price allocations.
- FY2010 restructuring charges were $1.1 billion. A new enterprise-services plan was expected to cost about $1.0 billion and eliminate approximately 9,000 positions. HP estimated about $2.1 billion of future cash expenditures for approved restructuring plans, including approximately $1.4 billion in FY2011.
- Other material risks include intense pricing competition, economic and IT-spending uncertainty, reliance on suppliers and contract manufacturers, product transitions and quality, foreign currency exposure, cybersecurity and data protection, acquisition integration, and pension and tax estimates. Approximately 65% of revenue came from outside the United States.
- Contingencies included ongoing German, U.S. and SEC investigations into alleged bribery and other misconduct related to a Russia government transaction; HP said it was cooperating. Indian authorities alleged customs-duty underpayments of about $370 million plus penalties, among other notices; HP intended to contest them. Copyright-levy disputes and inkjet-printer class actions also remained; proposed settlements in several inkjet cases awaited final court approval.
- CEO leadership changed during 2010: Léo Apotheker became CEO in November, following Catherine Lesjak’s interim service. Ernst & Young issued unqualified opinions on the financial statements and internal control; management and the auditor reported effective internal control over financial reporting.
Investor verification priorities
- Reconcile the operating-cash-flow decline and monitor receivables, the cash conversion cycle (21 days versus 14), and cash conversion into earnings.
- Assess the effect of acquisitions, higher debt, and continued share repurchases on leverage, liquidity, goodwill, and future amortization.
- Track delivery of the enterprise-services restructuring savings against its costs, timing, and planned workforce reductions.
- Review the outcome and potential financial exposure of the Russia-related investigations, India customs notices, copyright levies, and pending litigation.
- Check whether PC and printer growth can be sustained without further margin erosion, particularly in PSG and IPG, and whether Services can maintain margin improvement.
- Evaluate the assumptions behind pension funding, tax reserves and uncertain tax positions; HP expected approximately $817 million of pension and post-retirement contributions in FY2011.