Business context and reporting period
HP Inc. filed this Form 10-K for the fiscal year ended October 31, 2015; fiscal Q4 ended that date. The filing reports the pre-separation Hewlett-Packard Company, including the businesses later spun off. On November 1, 2015, HP distributed Hewlett Packard Enterprise (HPE) shares to stockholders. From that date, HP’s continuing business comprises primarily Personal Systems and Printing. Historical consolidated results therefore are not a direct guide to HP’s post-separation scale.
Financial performance and liquidity
Unless otherwise indicated, amounts are in U.S. dollars. Fiscal-year figures are for the years ended October 31.
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $103.4 billion | $111.5 billion | -7.3% (-2.1% constant currency) |
| Gross profit / margin | $24.8 billion / 24.0% | $26.6 billion / 23.9% | Margin +0.1 percentage point |
| Operating earnings / margin | $5.5 billion / 5.3% | $7.2 billion / 6.4% | Margin -1.1 points |
| Net earnings | $4.6 billion | $5.0 billion | -9.2% |
| Diluted EPS | $2.48 | $2.62 | -5.3% |
| Operating cash flow | $6.5 billion | $12.3 billion | Down $5.8 billion |
| Cash and cash equivalents at year-end | $17.4 billion | $15.1 billion | Up $2.3 billion |
| Total debt at year-end | $24.7 billion | $19.5 billion | Up $5.1 billion |
In Q4 FY2015, revenue was $25.7 billion versus $28.4 billion a year earlier. Operating earnings were $908 million versus $1.9 billion; net earnings were $1.3 billion versus $1.3 billion. Q4 included a $733 million tax benefit, helping offset lower operating earnings.
Year-end current assets were $51.8 billion and current liabilities $42.2 billion. HP also reported $19.0 billion of available borrowing resources. The reported debt, cash, and liquidity figures are pre-separation consolidated amounts and include the businesses subsequently transferred to HPE; they should not be treated as HP’s post-spin balance sheet. HP said that, after separation, it expected approximately $8.7 billion of future debt principal payments and $2.9 billion of interest payments.
FY2015 capital spending was $3.6 billion; dividends paid were $1.25 billion and share repurchases were $2.9 billion. Cash and cash equivalents plus short- and long-term investments totaled $17.7 billion, up approximately $2.2 billion from FY2014.
Segment results
FY2015 segment revenue and segment operating margins (before specified corporate and unallocated costs, including restructuring and separation charges) were: Personal Systems, $31.5 billion and 3.4%; Printing, $21.2 billion and 18.2%; Enterprise Group, $27.9 billion and 14.3%; Enterprise Services, $19.8 billion and 5.3%; Software, $3.5 billion and 22.0%; and HP Financial Services, $3.2 billion and 10.9%. Personal Systems, Printing, Enterprise Services, Software, and HP Financial Services revenue declined; Enterprise Group revenue increased 0.7%, driven mainly by industry-standard servers and Aruba.
Material changes versus the prior comparable period
- Revenue fell 7.3%, with currency headwinds across major segments, weaker PC demand, lower printer and supplies sales, and runoff of large Enterprise Services contracts. Constant-currency revenue declined 2.1%.
- Operating earnings declined 23.9%. FY2015 included $1.26 billion of separation costs, $1.02 billion of restructuring charges, $168 million of defined-benefit settlement charges, and a $136 million data-center impairment. These items, alongside lower revenue and other factors, weighed on operating results.
- Operating cash flow fell to $6.5 billion from $12.3 billion, primarily due to weaker working-capital effects, separation payments, lower receipts from contract manufacturers and financing receivables, lower earnings, and higher prepaid and employee-benefit payments.
- Total debt rose to $24.7 billion. The increase reflected separation-related financing, including $14.6 billion of HPE notes issued before the spin, partly offset by debt repayments and maturities.
- HP acquired Aruba Networks for approximately $2.8 billion in May 2015. It also completed divestitures, including Snapfish, LiveVault, and iManage.
Outlook, management commentary, risks and unusual items
- No specific FY2016 revenue or earnings guidance is provided in the supplied filing text. Management anticipated PC market headwinds for several quarters, while citing Windows 10 and new processor transitions as possible demand catalysts. HP emphasized profitable growth, premium and mobile PCs, higher-value printing, graphics, and cost and operating-efficiency initiatives.
- The separation was expected to create annual dis-synergies of approximately $400 million to $450 million, split roughly equally between HP and HPE. HP expected approximately $180 million in separation charges and net foreign tax payments in FY2016, plus about $30 million of separation-related capital spending.
- The September 2015 restructuring plan was expected to run through FY2018, eliminate up to approximately 33,300 positions across the pre-spin businesses, and incur total estimated pre-tax charges of about $2.9 billion; HP’s estimated share was approximately $280 million. HP cautioned that expected savings might not be achieved.
- FY2015’s 3.8% effective tax rate reflected significant unusual items, including a net $1.6 billion tax benefit. The filing reports $9.98 billion of unrecognized tax benefits and $47.2 billion of indefinitely reinvested foreign earnings. Tax disputes and the tax treatment of the separation remain material uncertainties; the filing notes potential significant tax exposure if the separation’s tax-free treatment is challenged.
- Risks include intense pricing competition, PC-market contraction, printing-supplies alternatives, currency volatility, weak markets, supplier and channel dependencies, cybersecurity and execution risks, and transition risks from the separation and shared-service arrangements. HP cited pending litigation and investigations, including unresolved tax matters and copyright-levy disputes. It reported paying €68.2 million for a German printer-levy settlement; the ultimate costs of other levy matters remain uncertain.
- The auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts investors should verify
- HP’s opening post-separation balance sheet, debt allocation, cash availability, and continuing-operation results; the FY2015 consolidated figures include HPE.
- Whether HP can stabilize revenue and margins in Personal Systems and Printing amid weak demand, price competition, and currency pressure.
- Actual separation dis-synergies, FY2016 separation costs, restructuring cash outlays, and delivery of planned savings.
- The sustainability of FY2015 earnings and the unusually low effective tax rate, including deferred tax asset realizability and uncertain tax positions.
- Resolution and cash impact of tax, litigation, indemnification, and copyright-levy matters, as well as HP’s dependence on HPE under transition and other separation agreements.