HP Inc. Form 10-Q Summary
Business context and reporting period
HP Inc. is a global provider of personal computers, printing products and related services. This unaudited filing covers the three and six months ended April 30, 2017, the second quarter and first half of fiscal 2017. Reported results exclude the former enterprise, software, services and financing businesses separated into Hewlett Packard Enterprise in November 2015. HP reports Personal Systems, Printing and Corporate Investments segments.
Financial performance and liquidity
- Revenue: Q2 revenue was $12.385 billion, up 6.9% year over year (7.2% in constant currency). First-half revenue was $25.069 billion, up 5.2% (6.1% constant currency).
- Profit and margins: Q2 continuing-operations earnings were $559 million versus $660 million; diluted EPS from continuing operations was $0.33 versus $0.38. Gross margin was 19.2%, down 0.2 percentage points. Operating earnings were $818 million (6.6% of revenue), versus $841 million (7.3%). First-half continuing-operations earnings were $1.170 billion versus $1.310 billion; diluted EPS was $0.68 versus $0.75. First-half gross margin was 18.5%, down 0.5 percentage points.
- Segments: Q2 Personal Systems revenue rose 9.6% to $7.662 billion; operating earnings were $244 million. Printing revenue rose 2.3% to $4.743 billion; operating earnings were $825 million. For the first half, Personal Systems revenue rose 9.9%, while Printing revenue declined 0.6% and its operating earnings declined 3.0%.
- Cash flow: First-half operating cash flow was $1.222 billion, down from $1.477 billion. Investing used $241 million; financing used $1.046 billion, including $609 million of share repurchases and $451 million of dividends paid. Cash declined $65 million to $6.223 billion.
- Balance sheet and debt: At April 30, cash was $6.223 billion, total assets $28.686 billion, and stockholders’ deficit $3.955 billion. Short- and long-term borrowings totaled approximately $6.8 billion, broadly unchanged from October 31, 2016; weighted-average borrowing rate was 4.2%. HP had a $4.0 billion revolving credit facility available through April 2, 2019 and reported compliance with its covenants.
Material changes versus the prior comparable period
- Revenue growth was led by Personal Systems, notably notebooks; Q2 Printing also grew, with higher printer unit volumes and supplies revenue.
- Profitability weakened despite revenue growth: Q2 continuing-operations earnings and diluted EPS declined, and gross margin contracted. HP cited unfavorable mix, higher Personal Systems commodity costs and foreign-exchange impacts; Print operational improvements partly offset these pressures.
- First-half operating cash flow declined by $255 million, primarily because of lower cash generated from working-capital activities. Inventory days of supply rose to 43 from 34 a year earlier.
- Q2 interest and other expense increased to $64 million from $5 million, partly because the prior-year period included a reversal of interest previously accrued for a legal contingency.
Outlook, commentary, risks and unusual items
- HP provided no numerical revenue or earnings guidance in the supplied filing text. Management said it expects cash, operating cash generation and capital-market access to cover near-term cash needs.
- Management cited a flat PC market, consumer-printing challenges, competitive pricing, currency headwinds, memory-cost increases, and uncertainty over whether the PC market can absorb price increases. Brexit-related market, currency and macroeconomic uncertainty and reliance on Canon for laser printer engines and toner were also noted.
- The Fiscal 2017 restructuring plan is expected to run through fiscal 2019, with estimated aggregate pre-tax charges of $350–$500 million and 3,000–4,000 employee exits. HP expects $336–$486 million of future cash payments for cost-savings plans through fiscal 2021. Q2 included $52 million of manufacturing-consolidation asset impairment charges.
- HP expected its acquisition of Samsung’s printer business for $1.05 billion to close in the second half of 2017, subject to regulatory approval and other conditions. In May 2017, HP entered into an agreement resulting in $770 million of purchase obligations due within two years.
- HP’s $3.0 billion jury award against Oracle remained under appeal; HP recorded no related gain and said recovery and amount were uncertain. Other disclosed matters include Indian customs-duty proceedings, employment and printer-firmware class actions, Autonomy-related litigation and investigations, and environmental matters. HP said it had recorded adequate provisions and did not consider a material loss above recognized amounts reasonably possible as of April 30, 2017.
- Tax matters are significant: HP reported a $1.6 billion tax-indemnification receivable from Hewlett Packard Enterprise, $10.8 billion of unrecognized tax benefits, and approximately $1.8 billion of recorded liabilities and related interest and penalties for uncertain tax positions. Timing and outcomes of tax resolutions remain uncertain.
- HP said risk factors had not materially changed since its 2016 Form 10-K; disclosure controls were effective and no material change in internal control was reported.
Most important facts for investors to verify
- Whether revenue growth translates into margin and earnings recovery as commodity costs, product mix and foreign exchange evolve.
- Working-capital and operating-cash-flow trends, especially inventory levels and supplier payment terms.
- Restructuring charges, employee exits, cash payments and realized savings versus management’s estimates.
- Progress and final cost of the Samsung printer-business acquisition, including closing conditions and integration effects.
- Outcomes and potential cash impacts of the Oracle appeal, Indian customs proceedings and tax matters; the Oracle award is not recognized in the reported financial statements.