HP Inc. (Hewlett-Packard Company) — FY2009 Form 10-K
Reporting period: Fiscal year ended October 31, 2009. This is an annual report, not a standalone fourth-quarter filing. HP is a diversified global technology company spanning services, servers and storage, software, PCs, printing, and customer financing. The 2008 EDS acquisition materially affects year-over-year comparisons, particularly in Services.
Financial performance
| Metric | FY2009 | FY2008 |
|---|---|---|
| Net revenue | $114.6 billion | $118.4 billion |
| Gross profit / gross margin | $27.0 billion / 23.6% | $28.7 billion / 24.2% |
| Operating earnings / margin | $10.1 billion / 8.8% | $10.5 billion / 8.8% |
| Net earnings | $7.7 billion | $8.3 billion |
| Diluted EPS | $3.14 | $3.25 |
| Operating cash flow | $13.4 billion | $14.6 billion |
| Cash and cash equivalents at year-end | $13.3 billion | $10.2 billion |
| Total debt at year-end | $15.8 billion | $17.9 billion |
- Revenue declined 3.2% reported, but increased 1.3% on a constant-currency basis; HP attributed the reported decline largely to the global slowdown and unfavorable currency, especially the dollar’s movement against the euro.
- Gross margin fell 0.6 percentage points. Operating margin held at 8.8%, while net earnings declined about 8% and diluted EPS about 3%.
- Cash from operations less property, plant and equipment investment was approximately $9.7 billion ($13.4 billion less $3.7 billion). Cash increased $3.1 billion during the year.
- Current assets were $52.5 billion and current liabilities $43.0 billion. Short-term debt fell to $1.9 billion from $10.2 billion, while long-term debt rose to $14.0 billion from $7.7 billion, reflecting a shift from short-term to long-term funding. HP reported $18.1 billion of available borrowing resources.
- HP repurchased $5.1 billion of stock and declared $0.32 per share in dividends. The board authorized a further $8.0 billion buyback on November 19, 2009.
Segment results and material changes
- Services: Revenue rose 65.4% to $34.7 billion, primarily because of EDS, acquired in August 2008; operating margin increased to 14.5% from 12.0%. On HP’s combined comparison including EDS for the full prior year, Services revenue fell 11.5%, while operating margin improved to 14.5% from 8.2%.
- Enterprise Storage and Servers: Revenue fell 20.8% to $15.4 billion; operating margin declined to 9.9% from 13.3%, reflecting weak demand, price competition, and product mix.
- HP Software: Revenue fell 15.4% to $3.6 billion, but operating margin increased to 19.1% from 11.8%, helped by cost controls and a more favorable support and services mix.
- Personal Systems Group: Revenue fell 16.5% to $35.3 billion; operating margin decreased to 4.7% from 5.6%. Unit volumes rose slightly, but average selling prices declined.
- Imaging and Printing Group: Revenue fell 18.9% to $24.0 billion; operating margin improved to 18.0% from 15.4%, mainly through cost control and a stronger supplies mix despite weaker hardware demand.
- HP adopted new multiple-deliverable revenue accounting standards for FY2009. The adoption increased reported revenue by $255 million and net earnings by $55 million; quarterly results were restated.
Outlook, commentary, risks, and unusual items
- HP provided no specific consolidated FY2010 revenue or earnings guidance in the supplied filing text. Management said cash balances were sufficient for expected FY2010 outlays and described continued efficiency, restructuring, investment in growth markets, and efforts to leverage its product and services portfolio.
- HP expected approximately $820 million in FY2010 pension and post-retirement funding, and approximately $1.9 billion of future cash restructuring expenditures, including about $1.1 billion in FY2010.
- FY2009 restructuring charges were $640 million. The FY2009 product-business plan targeted about 5,000 position eliminations; approximately 2,100 had been eliminated by year-end. The EDS-related plan had eliminated more than 19,000 positions by year-end, with further costs expected.
- In November 2009, HP agreed to acquire 3Com for $7.90 per share in cash, an enterprise value of approximately $2.7 billion, subject to approvals; closing was expected in FY2010’s second quarter.
- Key risks include prolonged economic weakness, competitive pricing and margin pressure, foreign-exchange movements, supplier and channel-partner dependence, execution and profitability of long-term IT services contracts, EDS integration, restructuring execution, cybersecurity and business interruptions, tax uncertainty, and litigation.
- Notable contingencies include ongoing European copyright-levy disputes, the Sky litigation against EDS with plaintiffs claiming damages above £700 million (a decision was expected in January 2010), and HP’s appeal of a Cornell patent judgment. HP stated that it had provided reserves it believed adequate, but adverse outcomes could materially affect results or cash flows.
- Other items to monitor include the $1.3 billion recorded liability for uncertain tax positions and substantial pension underfunding reflected in the balance sheet. HP reported no goodwill impairment in its FY2009 annual test. The auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Separate underlying operating trends from EDS acquisition effects and currency impacts, particularly in Services and reported revenue.
- Assess whether Services margin gains and cost savings can persist as comparable revenue declined and restructuring continues.
- Track demand, pricing, and margins in PCs, printing supplies, servers, and storage, including the durability of FY2009 inventory reductions.
- Review the timing and cash requirements of restructuring, pension contributions, debt maturities, and the proposed 3Com acquisition alongside buyback plans.
- Follow developments in tax audits and legal matters, especially the Sky case, copyright levies, and the Cornell appeal; the filing does not establish their eventual outcomes.