HP Inc. Q1 FY2017 10-Q Summary
Reporting period: Three months ended January 31, 2017; unaudited. HP’s continuing business comprises Personal Systems, Printing and Corporate Investments following the November 2015 separation of Hewlett Packard Enterprise.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net revenue | $12.684 billion | $12.246 billion |
| Gross profit / margin | $2.248 billion / 17.7% | $2.285 billion / 18.7% |
| Earnings from continuing operations before taxes | $775 million | $834 million |
| Net earnings from continuing operations | $611 million | $650 million |
| Total net earnings | $611 million | $592 million |
| Diluted EPS | $0.36 | $0.33 |
| Cash from operating activities | $767 million | $(102) million |
| Cash and cash equivalents, period end | $6.331 billion | $6.288 billion at Oct. 31, 2016 |
- Revenue rose 3.6% year over year, or 4.9% on a constant-currency basis. U.S. revenue increased 7.6% to $4.6 billion; international revenue rose 1.4% to $8.1 billion.
- Operating earnings from continuing operations were $856 million, down from $928 million. Gross margin fell 1.0 percentage point to 17.7%, mainly due to unfavorable mix, Personal Systems component-cost increases and currency effects.
- Effective tax rate was 21.2%, versus 22.0%. The prior-year quarter included $58 million of discontinued-operations losses; Q1 FY2017 had no such loss.
- Operating cash flow improved by $869 million year over year, primarily from working-capital management. Capital expenditures were $101 million. Investing cash outflow was $86 million; financing cash outflow was $638 million, including $386 million of share repurchases and $227 million of dividends paid.
Segments and changes versus prior year
- Personal Systems: Revenue increased 10.1% to $8.224 billion; operating earnings rose to $313 million from $229 million, and operating margin improved to 3.8% from 3.1%. Unit volume rose 8.0% and average selling prices increased 2%; Notebook and Workstation growth led the increase.
- Printing: Revenue declined 3.4% to $4.483 billion; operating earnings fell to $716 million from $787 million, and operating margin decreased to 16.0% from 17.0%. Supplies revenue fell 3%; printer unit volume rose 6%, while printer ASPs declined 7%.
- HP’s first-quarter reporting realignment moved a portion of LaserJet printers from Commercial to Consumer within Printing; it did not change previously reported consolidated results.
Liquidity, debt and capital allocation
- At January 31, 2017, current assets were $17.775 billion and current liabilities were $18.587 billion. Total borrowings were approximately $6.8 billion, including $100 million of short-term borrowings and $6.688 billion of long-term debt.
- HP had a $4.0 billion committed revolving credit facility available through April 2, 2019, was in compliance with its covenants, and reported $950 million available under uncommitted credit lines. Management said cash, operating cash flows and capital-market access were expected to cover near-term outlays.
- HP repurchased 27 million shares for approximately $386 million and had about $3.5 billion remaining under repurchase authorizations. The declared dividend was $0.27 per share, versus $0.25 a year earlier.
Outlook, management commentary and risks
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management described continued PC-market and home-printing declines, macroeconomic and currency headwinds, competitive pricing pressure in Printing, and challenges to business-model and sales execution.
- HP plans to pursue premium and mobile PCs, business and graphics printing, contractual offerings such as Managed Print Services and Instant Ink, and 3D printing. It is investing in 3D printing and continuing cost-saving and operational-efficiency efforts.
- The Fiscal 2017 restructuring plan is expected to run through FY2019, cost $350 million to $500 million pre-tax, and result in 3,000 to 4,000 employee exits. HP expects $355 million to $505 million of future cash payments for cost-saving plans through FY2021.
- HP agreed to acquire Samsung Electronics’ printer business for $1.05 billion; closing was expected in the second half of 2017, subject to regulatory approval and customary conditions.
- HP reported an approximately $3.0 billion jury award against Oracle, but Oracle appealed. HP recorded no gain; any recovery is uncertain, could take years, and would be shared with Hewlett Packard Enterprise under the separation agreement.
- Tax matters remain significant: HP disclosed $10.8 billion of unrecognized tax benefits, of which up to $3.8 billion could affect its effective tax rate if realized, and a $1.6 billion net tax-indemnification receivable from Hewlett Packard Enterprise. HP also noted joint tax liabilities and uncertainty around resolution and payment timing.
- Other exposures include ongoing litigation and investigations, environmental obligations, product warranties and dependence on third-party suppliers, including Canon for laser printer engines and toner cartridges. Management said risk factors had not materially changed since the FY2016 10-K and that disclosure controls were effective.
Important facts for investors to verify
- Whether Personal Systems growth and improved operating margin can persist, and whether Printing supplies revenue and margins stabilize.
- How much of operating cash-flow improvement reflects durable operating performance versus working-capital timing.
- Execution, employee impacts, charges and cash payments under the Fiscal 2017 restructuring plan.
- Samsung acquisition approval, timing, integration and expected financial contribution.
- Outcome and timing of the Oracle appeal, and potential recovery after the contractual sharing arrangement.
- Developments in uncertain tax positions, the tax-indemnification receivable and associated liabilities with Hewlett Packard Enterprise.