HP Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2019. Unaudited consolidated results; dollar amounts are in millions except per-share data.
Business context and results
HP sells personal computing devices, printers, supplies, and related services through Personal Systems, Printing, and Corporate Investments. Q2 revenue was essentially flat year over year, while six-month revenue rose modestly. Q2 net earnings were lower than the prior-year period, which included unusually large tax benefits and other favorable items.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net revenue | $14,036 | $14,003 | $28,746 | $28,520 |
| Gross margin | 19.4% | 19.3% | 18.6% | 18.5% |
| Operating earnings | $928 | $906 | $1,854 | $1,819 |
| Net earnings | $782 | $1,058 | $1,585 | $2,996 |
| Diluted EPS | $0.51 | $0.64 | $1.02 | $1.81 |
| Operating cash flow | Not separately reported for quarter | $1,723 | $2,046 |
Segments and material changes
- Personal Systems: Q2 revenue increased 1.8% to $8,921; operating earnings rose 17.0% to $385 and operating margin increased to 4.3% from 3.8%. Commercial revenue grew, while Consumer revenue declined; higher average selling prices and lower supply-chain costs supported profitability.
- Printing: Q2 revenue declined 2.4% to $5,116, with Supplies and Consumer Hardware weakness partly offset by Commercial Hardware growth, including Apogee. Operating earnings were nearly unchanged at $839, and margin improved to 16.4% from 16.0%.
- For the six months, revenue grew 1% reported and 2% in constant currency. In Q2, revenue was flat reported and increased 2% in constant currency. Foreign exchange was a headwind.
- Q2 net earnings declined despite slightly higher operating earnings, principally because Q2 2018 included a $671 million tax-indemnification adjustment and a $126 million debt-extinguishment loss within interest and other, net, as well as substantial tax benefits. FY2018 six-month net earnings also included unusually large tax benefits from tax reform and audit resolutions.
Cash, debt, and capital allocation
- At April 30, cash and cash equivalents were $3,556, compared with $5,166 at October 31, 2018. Current assets were $18,285 and current liabilities $23,203.
- Total debt was approximately $5,039, comprising $290 of short-term borrowings and $4,749 of long-term debt, versus approximately $5,987 at October 31, 2018. The reported weighted-average borrowing rate was 4.7%.
- Six-month operating cash flow was $1,723, down from $2,046, primarily due to working-capital movements. Investing used $22; financing used $3,311. Cash fell $1,610 over the period.
- HP repurchased $1,411 of shares and paid $494 in dividends during the six months. Approximately $2.5 billion remained authorized for repurchases at quarter-end.
- HP reported a $4.0 billion committed revolving credit facility available through March 2023 and compliance with its financial covenants. Management stated that cash, operating cash generation, and capital-market access were expected to cover near-term needs.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cited forecast declines in PC-client and home-printing markets, competitive pressure, evolving sales channels, tariffs and trade uncertainty, foreign-exchange volatility, component availability, and commodity costs.
- HP expects to complete its Fiscal 2017 restructuring plan by FY2019, with 4,500–5,000 employee exits and estimated aggregate pre-tax charges of about $700 million. It expected approximately $207 million of future cash payments for cost-savings plans.
- Unrecognized tax benefits totaled $7.8 billion; HP believed up to $6.4 billion could be reduced within 12 months, although timing and cash consequences were uncertain. Recorded liabilities and related interest and penalties for uncertain tax positions were about $1.4 billion.
- HP acquired the Apogee group on November 1, 2018 for approximately $489 million; preliminary allocation included $375 million goodwill and $300 million amortizable intangible assets.
- HP disclosed an appeal in the Oracle litigation involving a prior $3.0 billion jury award to HP. Recovery is uncertain, no gain was recorded, and any recovery would be shared with Hewlett Packard Enterprise under specified terms.
- A legacy Apogee contract involved small transactions with sanctioned Bank Sepah International shortly after acquisition, totaling £72.49 (reported as $92.78). HP terminated the contract and said it was making disclosures to relevant authorities.
- HP stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Key investor verification points
- Assess whether PC growth and improved Personal Systems margins can persist amid consumer demand weakness and component-supply risks.
- Track Printing Supplies revenue, printer volumes and pricing, and the extent to which Commercial Hardware growth depends on Apogee.
- Separate ongoing earnings and tax rates from prior-year tax-reform, audit-settlement, and indemnification items when comparing periods.
- Monitor operating cash flow, working-capital trends, cash balances, debt, and continued share repurchases and dividends.
- Review developments in tax audits and uncertain tax positions, restructuring cash costs, and the Oracle appeal; the filing does not establish a certain recovery or final liability outcome.