HP Inc. 10-Q Summary
Business context and period. HP reported its fiscal 2019 first quarter, the three months ended January 31, 2019, compared with the three months ended January 31, 2018. HP sells personal computing products and services, printers and supplies, and related solutions through Personal Systems, Printing and Corporate Investments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Net revenue | $14,710 | $14,517 | Up 1% reported; up 2% constant currency |
| Gross profit / margin | $2,612 / 17.8% | $2,582 / 17.8% | Margin flat |
| Earnings from operations / margin | $926 / 6.3% | $913 / 6.3% | Operating earnings up about 1% |
| Earnings before taxes | $900 | $905 | Down slightly |
| Net earnings | $803 | $1,938 | Prior period included substantial tax-reform benefits |
| Diluted EPS | $0.51 | $1.16 | Down from a tax-distorted comparison |
| Operating cash flow | $862 | $996 | Down $134, mainly due to working-capital activities |
| Cash and cash equivalents | $3,367 | $5,166 at Oct. 31, 2018 | Quarterly decrease of $1,799 |
| Debt | $5,003 | $5,987 at Oct. 31, 2018 | Current and long-term borrowings combined |
| Cash dividends declared per share | $0.32 | $0.28 | Increased year over year |
HP ended the quarter with current assets of $18,936 and current liabilities of $24,199. It had a $4.0 billion committed revolving credit facility available through March 2023 and reported compliance with its covenants. Cash flow from investing was an outflow of $318; financing was an outflow of $2,343, including $720 of share repurchases and $249 of dividends paid.
Segments and material changes
- Personal Systems: Revenue was $9,657, up 2.3%; operating earnings were $410, up 22.4%, and operating margin increased to 4.2% from 3.5%. Notebook growth and higher average selling prices helped, while desktop component constraints contributed to a 3.0% decline in unit volume.
- Printing: Revenue was $5,056, down 0.4%; operating earnings rose 2.8% to $821, with margin increasing to 16.2% from 15.7%. Supplies revenue fell 2.5% amid demand weakness; hardware and services partly offset the decline.
- Apogee acquisition: HP acquired the office-printing services group on November 1, 2018, for $489 million of consideration. The preliminary allocation included $375 million of goodwill and $300 million of amortizable intangible assets.
- Tax comparison: Q1 FY2018 included $1.1 billion of net discrete tax benefits related primarily to U.S. tax reform. The current-quarter effective tax rate was 10.8%, versus negative 114.1% a year earlier. This makes the decline in reported net earnings and EPS a poor indicator of the change in underlying operating performance.
Outlook, commentary, risks and unusual items
- Management said internally generated cash flow, cash balances and access to capital markets should cover expected near-term cash outlays. The filing does not provide a specific revenue, earnings or EPS forecast for the next quarter or fiscal year.
- HP’s strategy emphasizes profitable PC growth, premium and convertible notebooks, device-as-a-service, contractual printing and managed print services, graphics and 3D printing. Management noted expected declines in PC-client and home-printing markets.
- Disclosed headwinds and risks include component availability, rising commodity and logistics costs, foreign-exchange volatility, tariffs and broader macroeconomic and trade uncertainty, pricing competition, and dependence on third parties. HP sources most A4 and part of its A3 laser printer engines and toner cartridges from Canon.
- The Fiscal 2017 restructuring plan was expected to result in 4,500–5,000 employee exits by the end of FY2019 and approximately $700 million in aggregate pretax charges. HP estimated about $240 million of future cash payments for cost-savings plans.
- HP adopted the new revenue standard in Q1 FY2019. Against prior accounting, adoption reduced reported quarterly revenue and operating earnings by $36 million and net earnings by $29 million; the opening accumulated-deficit adjustment was $212 million. HP also expects adoption of the new lease standard in FY2020 to materially affect its balance sheet.
- HP disclosed an unrecognized-tax-benefit balance of $7.8 billion, with up to $1.5 billion potentially affecting the effective tax rate if realized. Tax-authority proceedings and other litigation remain uncertain. HP recorded no gain for its approximately $3.0 billion Oracle jury award, which is under appeal and may take years to resolve.
- A newly acquired Apogee subsidiary had processed two low-value toner-service calls for a U.S.-sanctioned bank under a legacy contract. HP said Apogee terminated the contract and HP disclosed the transactions to relevant authorities.
Important facts for investors to verify
- Whether Personal Systems growth and margin improvement can persist despite component constraints, and whether Supplies demand stabilizes.
- Cash conversion and liquidity trends, including the drivers of the cash decline and the effects of buybacks, dividends and acquisition spending.
- How much of the earnings comparison reflects operating performance versus the prior-year tax benefit, and the effects of tax audits and uncertain tax positions.
- Progress and remaining costs of the restructuring plan, and whether expected savings are achieved without disrupting operations.
- Developments in the Oracle appeal, Indian customs proceedings and other material contingencies, as well as final purchase accounting for Apogee.