Hewlett Packard Enterprise Company (HPE) — FY2019 Form 10-K
Reporting period: Fiscal year ended October 31, 2019. Amounts are U.S. dollars; financial figures are in billions unless stated otherwise. This is an annual filing, not a standalone fourth-quarter report.
Business context
HPE sells enterprise computing, storage, networking and related services, and provides customer financing. Its reported segments were Hybrid IT, Intelligent Edge, Financial Services and Corporate Investments. The company continued its HPE Next restructuring and strategic shift toward edge-to-cloud and subscription, pay-per-use and as-a-Service offerings. It acquired supercomputer maker Cray in September 2019 for approximately $1.5 billion.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change or context |
|---|---|---|---|
| Revenue | $29.14 | $30.85 | Down 5.6% reported; down 4.3% constant currency |
| Gross profit / margin | $9.49 / 32.6% | $9.23 / 29.9% | Margin up 2.7 percentage points |
| Operating earnings from continuing operations | $1.27 | $1.74 | Down 26.6%; margin 4.4% versus 5.6% |
| Net earnings | $1.05 | $1.91 | Down 45.0% |
| Diluted EPS | $0.77 | $1.23 | Continuing-operations EPS was $0.77 versus $1.30 |
| Operating cash flow | $4.00 | $2.96 | Up $1.03 |
| Cash, cash equivalents and restricted cash | $4.08 | $5.08 | Down $1.01 |
| Total debt | $13.82 | $12.14 | Up $1.68; weighted-average interest rate 4.1% |
Capital investment in property, plant and equipment was $2.86 billion, with $0.60 billion of sale proceeds. Operating cash flow less gross capital investment was approximately $1.14 billion (calculated from reported figures). Current assets of $15.14 billion were below current liabilities of $19.16 billion; the resulting current ratio was approximately 0.79. HPE reported $10.39 billion of available borrowing resources, including a $4.75 billion revolving credit facility with no borrowings outstanding.
Revenue by segment: Hybrid IT $22.83 billion (down 6.8%); Intelligent Edge $2.84 billion (down 2.8%); Financial Services $3.58 billion (down 2.5%); Corporate Investments $0.51 billion (down 6.6%). Hybrid IT operating margin improved to 12.3% from 10.2%; Intelligent Edge fell to 3.3% from 9.5%; Financial Services rose to 8.5% from 7.8%.
Material changes and unusual items
- Revenue contracted after FY2018 growth, mainly due to weaker Hybrid IT compute and server demand, lower China revenue, storage market softness and unfavorable currency. Intelligent Edge product sales also weakened, with management citing sales execution issues in North America.
- Gross margin improved on lower commodity costs, cost controls and a more favorable product mix. However, operating earnings declined, with higher R&D spending and acquisition-related charges offsetting part of the gross-margin improvement.
- Acquisition, disposition and other related charges rose to $757 million, primarily reflecting a one-time arbitration settlement. HPE paid DXC $668 million, including interest, after an arbitration award; the matter is closed.
- FY2019 net income included a $504 million tax provision, compared with a $1.74 billion tax benefit in FY2018. Prior-year results included substantial discrete tax benefits related mainly to pre-separation tax settlements. FY2019 also included $377 million of tax-indemnification adjustment income; comparisons of net earnings are therefore affected by significant tax items.
- HPE repurchased 150 million shares for approximately $2.2 billion and paid $608 million in dividends. The quarterly dividend was increased to $0.12 per share in Q4.
Outlook, commentary and risks
The filing provides no quantified company-wide revenue or earnings guidance. Management said HPE Next was expected to continue through FY2020, with further workforce, IT-infrastructure and other restructuring costs partly offset by real-estate sale proceeds. HPE planned to report new segments effective November 1, 2019: Compute; HPC & MCS; Storage; and Advisory & Professional Services.
Management highlighted cloud migration and lower demand for traditional hardware, competitive and pricing pressure, execution challenges, currency movements, and the costs and cash-flow effects of transitioning to as-a-Service models. Other material risks include dependence on third-party and single-source suppliers, cybersecurity and data-protection incidents, international and trade-policy uncertainty, and tax assessments. Approved restructuring plans were expected to require approximately $597 million of future cash payments, including $380 million in FY2020. Deferred tax assets totaled $10.0 billion gross, offset by an $8.2 billion valuation allowance.
HPE disclosed ongoing litigation and tax matters, including Oracle’s appeal of a judgment in favor of HPE in a copyright case and an appeal in the Network-1 patent matter. HPE said it had recorded adequate provisions and did not consider a material loss beyond recognized amounts reasonably possible as of year-end. The financial-statement audit opinion was unqualified; management and the auditor also reported effective internal control over financial reporting, with Cray excluded from the internal-control assessment.
Important facts for investors to verify
- Whether the revenue decline and Intelligent Edge sales-execution issues improved after FY2019, and whether Hybrid IT demand and margins stabilized.
- How much of earnings and operating cash flow reflects recurring operations versus tax settlements, the DXC arbitration payment and other unusual items.
- Progress and remaining costs of HPE Next, including the expected $597 million of restructuring cash payments and delivery of anticipated savings.
- Debt maturities, refinancing needs and liquidity, particularly the rise in short-term debt and the effect of acquisition and shareholder-return spending.
- Cray integration and returns, the as-a-Service transition’s effect on capital needs and cash flow, and the status of material tax and legal contingencies.