HP Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2017. HP reports Personal Systems, Printing and Corporate Investments; the former Hewlett Packard Enterprise businesses are presented as discontinued operations.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $13.06B | $11.89B | $38.13B | $35.73B |
| Gross profit / margin | $2.43B / 18.6% | $2.17B / 18.3% | $7.06B / 18.5% | $6.71B / 18.8% |
| Operating earnings / margin | $955M / 7.3% | $1.12B / 9.4% | $2.63B / 6.9% | $2.89B / 8.1% |
| Net earnings | $696M | $783M | $1.87B | $2.00B |
| Diluted EPS | $0.41 | $0.45 | $1.09 | $1.15 |
| Cash from operations | Not stated for the quarter | $3.00B | $2.55B |
Q3 revenue increased 9.8% year over year (10.9% on a constant-currency basis), while net earnings fell 11.1%. Nine-month revenue rose 6.7% (7.6% constant currency), but net earnings declined 6.9%. Q3 gross margin improved 0.3 percentage points; the nine-month margin decreased 0.3 points. Q3 operating earnings were pressured by higher SG&A, including the absence of a prior-year divestiture gain and increased field selling costs.
- Personal Systems: Q3 revenue increased 11.9% to $8.40B, led by notebooks; operating earnings fell 6.0% to $313M and margin declined to 3.7% from 4.4%. Nine-month revenue rose 10.6% to $24.29B.
- Printing: Q3 revenue increased 6.2% to $4.70B, primarily on supplies growth, while operating earnings fell 10.0% to $813M and margin declined to 17.3% from 20.4%. Nine-month revenue rose 1.6%, but operating earnings fell 5.5%.
Cash, debt and liquidity
At July 31, cash and cash equivalents were $6.97B, compared with $6.29B at October 31, 2016. Current assets were $21.44B and current liabilities $22.06B. Total borrowings were approximately $7.81B, including $1.06B current borrowings and $6.74B long-term debt; commercial paper outstanding was $936M. HP maintained a $4.0B revolving credit facility through April 2019 and reported compliance with its covenants.
For the first nine months, operating cash flow was $3.00B; investing activities used $1.72B and financing activities used $595M. Operating cash flow increased $449M year over year, primarily due to working-capital management. Investing outflow included purchases of available-for-sale investments and derivative collateral. HP repurchased $911M of shares and paid $673M in dividends during the period. Stockholders’ deficit was $4.34B.
Outlook, risks and unusual items
- Management said internally generated cash, cash balances and capital-market access should cover expected near-term outlays. No specific revenue, earnings or EPS guidance is provided in the filing text.
- HP expected to close its $1.05B acquisition of Samsung’s printer business in the fourth quarter of calendar 2017, subject to regulatory approval and customary conditions.
- Management cited PC and home-printing market headwinds, currency weakness in some markets, rising memory and other commodity costs, competitive pricing in Printing, and uncertainty related to Brexit. HP also identified reliance on Canon for laser printer engines and toner cartridges; it anticipated renewal of its longstanding agreement.
- The Fiscal 2017 restructuring plan is expected to run through fiscal 2019, with estimated pre-tax charges of $350M–$500M and 3,000–4,000 employee departures. HP reported $249M of restructuring and other charges for the nine-month period.
- HP recorded $40M of acquisition-related charges in Q3 and $76M for the nine months. A $3.0B jury award against Oracle remains under appeal; HP recorded no gain, and recovery is uncertain and could take years.
- HP reported $10.9B of unrecognized tax benefits, of which up to $3.9B could affect its effective tax rate if realized, and $239M accrued for tax interest and penalties. The filing also describes tax-sharing obligations with Hewlett Packard Enterprise.
- HP stated that disclosure controls were effective, that internal controls had no materially impactful changes during the quarter, and that risk factors had not materially changed from its 2016 Form 10-K.
Investor verification priorities
- Assess whether revenue growth can translate into improved operating profitability, particularly given Printing’s lower operating margin and Personal Systems’ cost pressures.
- Verify the impact of memory costs, foreign exchange, competitive pricing and supplies trends on future margins and cash conversion.
- Track Samsung acquisition approvals, closing timing, purchase obligations and expected integration costs or benefits.
- Monitor commercial paper and total debt, working-capital movements, and the company’s planned return of 50%–75% of annual free cash flow to shareholders.
- Follow the Oracle appeal and material tax, litigation and restructuring developments; the Oracle award is not recognized in reported results.