HP announces earnings, plans to spend $15 billion to buy back shares
Facing an increasingly hostile takeover pitch from Xerox Holdings, HP Inc. used its quarterly earnings announcement to offer a “multi-year strategic and financial value creation plan” to deliver improved financial results by 2022. The cross-company plan will include billions in “sustained cost actions” and a $16 billion capital return program over three years.
Under the plan, HP says it will generate:
- $4.7 billion to $5.1 billion of non-GAAP operating profit in fiscal 2022;
- $10.7 billion to $11.7 billion of cumulative free cash flow in fiscal 2020 through fiscal 2022; and
- $1.2 billion structural cost reductions in fiscal 2022 with flow through to non-GAAP operating profit of approximately $650 million.
“HP is out of the gate strong in Q1, with outstanding earnings and a robust plan to create significant value for shareholders,” says Enrique Lores, president and CEO, HP Inc. “Our three-year financial targets reflect a company at the top of its game, combining the industry’s best innovation with disciplined cost management and aggressive capital returns to support a compelling investment in both the short and long term.”
Lores added, “Our commitment to HP shareholders is unwavering and it’s abundantly clear the revised Xerox proposal meaningfully undervalues HP, creates significant risk and compromises the future of our company.”
As part of HP’s value creation plan for shareholders, HP’s Board of Directors has authorized a capital return program that will target the return of capital of approximately $16 billion to HP shareholders during fiscal 2020 to fiscal 2022, representing about half of HP’s current market capitalization, and has also increased its total share repurchase authorization to $15 billion, up from the $5 billion share repurchase authorization announced in October 2019.
HP response to Xerox Proposal: “Flawed Value Exchange, Irresponsible Capital Structure, Overstated Synergies”
HP said it “believes there is merit in industry consolidation which is why it acquired Samsung Printing in 2017,” but the revised Xerox proposal “meaningfully undervalues HP, creates significant risk, and compromises HP’s future.” In HP’s view, the Xerox proposal:
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Exchanges HP stock for cash and Xerox stock at a fundamentally flawed value exchange that does not compensate HP shareholders for the value of HP executing on its strategic plan and transfers value from HP shareholders to Xerox shareholders;
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Uses HP’s balance sheet as transaction consideration and creates an irresponsible capital structure that would jeopardize the future value of the combined company and constrain its ability to invest in growth and innovation; and
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Overstates the potential synergies by including HP’s existing plans for independent cost reductions and productivity gains.
HP isn’t against a Xerox/HP merger, but wants to create a plan that is “additive” to its strategy, the company said.
Icahn “buy HP myself.”
According to an HP filing yesterday, activist investor Carl Icahn told HP’s then-Chief Executive Officer Dion Weisler on Aug. 12, that he might consider buying HP Inc. himself if the printer maker didn’t pursue a combination with Xerox. Icahn had just taken a 4.2% stake in HP at the time and argued an HP-Xerox combination would provide about $3.5 billion in cost cuts and revenue enhancements (since downgraded to $2 billion.)
The HP filing offers details about the back and forth between HP and Xerox since merger talks started in the second half of 2019; in HP’s view, Xerox made numerous overtures for HP to buy Xerox. The discussions started in 2018 as a joint business venture.
For example, HP wrote that, on Sept. 4, 2019, Weisler and Xerox CEO John Visentin had a breakfast meeting where Visentin stated Xerox’s Board believed “Xerox was out of organic growth opportunities and must either grow through a strategic acquisition or be acquired.” In the filing, the two companies are so to be engaged in an extensive back-and-forth prior to Xerox launching its bid.
Also yesterday, HP said it was temporarily expanding its board to 13 members with the addition of NXP Semiconductors NV CEO Richard Clemmer. The company recommends against voting for Xerox’s proposed 11-person slate.
The HP financial report is listed below:
HP Inc. Reports Fiscal 2020 First Quarter Results
| ● | First-quarter GAAP diluted net earnings per share (“EPS”) of $0.46, above the previously provided outlook of $0.39 to $0.42 per share |
| ● | First-quarter non-GAAP diluted net EPS of $0.65, above the previously provided outlook of $0.53 to $0.56 per share |
| ● | First-quarter net revenue of $14.6 billion, down 0.6% from the prior-year period |
| ● | First-quarter net cash provided by operating activities of $1.3 billion, free cash flow of $1.1 billion |
| ● | First-quarter returned $0.9 billion to shareholders in the form of share repurchases and dividends |
| HP Inc. fiscal 2020 first-quarter financial performance | ||||||||||||||
| Q1 FY20 | Q1 FY19 | Y/Y | ||||||||||||
| GAAP net revenue ($B) | $ | 14.6 | $ | 14.7 | (0.6 | )% | ||||||||
| GAAP operating margin | 5.9 | % | 6.3 | % | (0.4 | ) pts | ||||||||
| GAAP net earnings ($B) | $ | 0.7 | $ | 0.8 | (15.6 | )% | ||||||||
| GAAP diluted net EPS | $ | 0.46 | $ | 0.51 | (9.8 | )% | ||||||||
| Non-GAAP operating margin | 8.1 | % | 6.9 | % | 1.2 | pts | ||||||||
| Non-GAAP net earnings ($B) | $ | 1.0 | $ | 0.8 | 18.2 | % | ||||||||
| Non-GAAP diluted net EPS | $ | 0.65 | $ | 0.52 | 25.0 | % | ||||||||
| Net cash provided by operating activities ($B) | $ | 1.3 | $ | 0.9 | 49.1 | % | ||||||||
| Free cash flow ($B) | $ | 1.1 | $ | 0.7 | 66.6 | % | ||||||||
Notes to table
Information about HP Inc.’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below.
Net revenue and EPS results
HP Inc. and its subsidiaries (“HP”) announced fiscal 2020 first-quarter net revenue of $14.6 billion, down 0.6% (up 0.5% in constant currency) from the prior-year period.
First-quarter GAAP diluted net EPS was $0.46, down from $0.51 in the prior-year period and above the previously provided outlook of $0.39 to $0.42. First-quarter non-GAAP diluted net EPS was $0.65, up from $0.52 in the prior-year period and above the previously provided outlook of $0.53 to $0.56. First-quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax adjustments of $278 million, or $0.19 per diluted share, related to restructuring and other charges, acquisition-related charges, amortization of intangible assets, non-operating retirement-related (credits)/charges, and tax adjustments.
“Our Q1 results reflect a business that is strong and getting stronger. Our non-GAAP EPS growth of 25% was significantly above our guided range, driven by tremendous execution against our strategic priorities,” said Enrique Lores, President and CEO, HP Inc. “This is a team at the top of its game, combining the industry’s best innovation with disciplined execution and cost management to deliver for our shareholders. We have great confidence in our plans and are raising our full-year earnings outlook.”
Asset management
HP’s net cash provided by operating activities in the first quarter of fiscal 2020 was $1.3 billion. Accounts receivable ended the quarter at $4.9 billion, down 5-days quarter over quarter to 30 days. Inventory ended the quarter at $4.9 billion, down 3-days quarter over quarter to 38 days. Accounts payable ended the quarter at $12.8 billion, down 9 days quarter over quarter to 98 days.
HP generated $1.1 billion of free cash flow in the first quarter. Free cash flow includes net cash provided by operating activities of $1.3 billion adjusted for net investment in leases of $34 million and net investment in property, plant and equipment of $198 million.
HP’s dividend payment of $0.1762 per share in the first quarter resulted in cash usage of $0.3 billion. HP also utilized $0.7 billion of cash during the quarter to repurchase approximately 33.8 million shares of common stock in the open market. As a result, HP returned 84% of its first quarter free cash flow to shareholders. HP exited the quarter with $4.5 billion in gross cash, which includes cash and cash equivalents and short-term investments of $0.3 billion included in other current assets.
Fiscal 2020 First quarter segment results
- Personal Systems net revenue was up 2% year over year (up 4% in constant currency) with a 6.7% operating margin. Commercial net revenue increased 7% and Consumer net revenue decreased 7%. Total units were up 4% with Notebooks units up 2% and Desktops units up 7%.
- Printing net revenue was down 7% year over year (down 6% in constant currency) with a 16.0% operating margin. Total hardware units were down 10%. Commercial hardware revenue was down 1% and Consumer hardware revenue was down 13%. Supplies net revenue was down 7% (down 7% in constant currency).
Outlook
For the fiscal 2020 second quarter, HP estimates GAAP diluted net EPS to be in the range of $0.46 to $0.50 and non-GAAP diluted net EPS to be in the range of $0.49 to $0.53. Fiscal 2020 second quarter non-GAAP diluted net EPS estimates exclude $0.03 per diluted share, primarily related to restructuring and other charges, acquisition-related charges, defined benefit plan settlement charges, amortization of intangible assets, non-operating retirement-related (credits)/charges, tax adjustments and the related tax impact on these items.
For fiscal 2020, HP is updating its estimate of GAAP diluted net EPS to be in the range of $2.03 to $2.13 and revises its previous estimate of non-GAAP diluted net EPS to be in the range of $2.33 to $2.43. Fiscal 2020 non-GAAP diluted net EPS estimates exclude $0.30 per diluted share, primarily related to restructuring and other charges, acquisition-related charges, defined benefit plan settlement charges, amortization of intangible assets, non-operating retirement-related (credits)/charges, tax adjustments and the related tax impact on these items.