HP Inc. 10-Q Summary
Reporting period: First quarter of fiscal 2016, three months ended January 31, 2016. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
HP completed the separation of Hewlett Packard Enterprise (HPE) on November 1, 2015, distributing approximately 1.8 billion HPE shares to HP shareholders. HP’s continuing business comprises Personal Systems, Printing and Corporate Investments. HPE’s historical results are reported as discontinued operations, so comparisons with the prior-year quarter are affected by the separation and do not represent the same business scope.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net revenue | $12,246 | $13,858 |
| Gross profit / margin | $2,285 / 18.7% | $2,685 / 19.4% |
| Continuing operating earnings / margin | $928 / 7.6% | $1,118 / 8.1% |
| Continuing earnings | $650 | $770 |
| Net earnings, including discontinued operations | $592 | $1,366 |
| Diluted EPS | $0.33 | $0.73 |
| Operating cash flow | $(108) | $744 |
- Revenue declined 11.6% year over year, or 4.9% on a constant-currency basis. Products revenue fell to $11,732 from $13,356; services revenue was $514 versus $502.
- Personal Systems revenue fell 12.8% to $7,467 and operating earnings fell 24.4% to $229; segment operating margin was 3.1% versus 3.5%.
- Printing revenue fell 17.0% to $4,642 and operating earnings fell 25.0% to $787; segment operating margin was 17.0% versus 18.8%.
- Continuing-operations effective tax rate was 22.0%, compared with 22.7%. Q1 included $54 of net discrete tax benefits.
Cash, debt and liquidity
- Cash and cash equivalents were $3,688 at January 31, compared with $7,584 at October 31, 2015. The quarter’s cash-flow statement reports a $10,375 net cash transfer to HPE in connection with the separation.
- Cash used in investing activities was $111, including $120 of capital expenditures. Cash used in financing was $13,526, including the HPE transfer, repayment of $2,155 of debt, $797 of share repurchases and $221 of dividends paid.
- Debt was approximately $6.7 billion, down from $8.9 billion at October 31, after HP repaid $2.1 billion of notes. Weighted-average borrowing rates were 4.1% at quarter-end and 3.7% at October 31.
- HP reported $4.0 billion of commercial-paper capacity and $881 of uncommitted credit lines; it was in compliance with credit-facility covenants. Management said cash, expected operating cash flow and capital-market access should cover near-term needs.
- Current assets were $15,155 and current liabilities $16,761; HP reported a stockholders’ deficit of $4,909. These balance-sheet comparisons are substantially affected by the HPE separation and transfer of assets and liabilities.
- HP repurchased 68 million shares for approximately $0.8 billion and had $1.2 billion remaining under its repurchase authorization. Dividend declared per share was $0.25, down from $0.32.
Changes, outlook and notable items
- Management attributed revenue pressure to foreign-exchange headwinds, weak demand, competitive pricing and economic slowdown. International revenue fell 14.8%; U.S. revenue fell 4.9%.
- Management cited extended PC refresh cycles, excess channel inventory in some regions and continued PC-market headwinds for the next several quarters. It also expected ongoing printer-demand and pricing pressure, including aggressive pricing by Japanese competitors. HP described a gradual long-term PC-market recovery as possible, citing its product roadmap and Windows 10 and Intel Skylake transitions.
- HP’s fiscal 2015 cost-saving plan targets approximately $300 million of pre-tax charges and about 3,000 employee exits by the end of fiscal 2016. On February 24, 2016, HP announced acceleration of the plan and expected approximately $300 million of future cash payments through fiscal 2016. HP also expected about $200 million of separation-related cash payments during the remainder of fiscal 2016.
- Discontinued operations recorded a $58 loss, primarily reflecting separation costs, versus $596 of earnings in the prior-year quarter, when HPE operations were included.
- Tax matters remain significant: unrecognized tax benefits were $9.3 billion, while HP identified approximately $2.3 billion of recorded liabilities and related interest and penalties for uncertain tax positions. IRS proposals for certain earlier tax years could reduce tax benefits by approximately $445 million if sustained. HP said it believes its tax positions are supportable.
- Other disclosed matters include copyright-levy proceedings, a patent dispute with Memjet, Indian customs-duty proceedings with demands and penalties, and Autonomy-related investigations and litigation. HP said it had recorded adequate provisions and did not consider a material loss in excess of recognized amounts reasonably possible as of January 31, while noting litigation outcomes are inherently uncertain.
- Management cited foreign exchange, macroeconomic conditions, competition, execution of strategy, supply-chain and channel management, product transitions, and litigation and tax matters among risks. The filing reported no material change in risk factors from the prior annual report and no material change in market-risk exposure.
Investor verification priorities
- Review the post-separation reporting basis and distinguish HP continuing operations from HPE discontinued operations when comparing periods.
- Track whether Personal Systems and Printing revenue and margins stabilize amid currency, demand and pricing pressures.
- Assess recurring operating cash generation against reduced quarter-end cash, separation-related outflows, capital returns and debt obligations.
- Monitor execution, cash costs and savings from the accelerated restructuring and separation activities.
- Review developments in tax audits and indemnifications with HPE, and material litigation, including the India customs and Autonomy matters.