HP Inc. Form 10-Q Summary
Business context and reporting period
Quarter ended April 30, 2016. HP reports personal computing, printing and related products and services through Personal Systems, Printing and Corporate Investments. HP completed the separation of Hewlett Packard Enterprise (HPE) on November 1, 2015; HPE’s historical results are presented as discontinued operations. Accordingly, consolidated year-over-year comparisons are affected by the separation and are not fully comparable.
Key financial metrics
Amounts are in millions of dollars except per-share data. Three-month and six-month periods ended April 30, 2016 are compared with the corresponding 2015 periods.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Continuing net revenue | $11,588 | $12,977 | $23,834 | $26,835 |
| Gross profit / margin | $2,250 / 19.4% | $2,562 / 19.7% | $4,535 / 19.0% | $5,247 / 19.6% |
| Earnings from continuing operations | $841 | $997 | $1,769 | $2,115 |
| Continuing net earnings | $660 | $733 | $1,310 | $1,503 |
| Total net earnings, including discontinued operations | $629 | $1,011 | $1,221 | $2,377 |
| Diluted EPS, continuing operations | $0.38 | $0.40 | $0.75 | $0.81 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,467 | $2,208 |
- Q2 revenue fell 10.7% year over year, or 5.4% in constant currency; first-half revenue fell 11.2%, or 5.1% in constant currency. Management cited currency, weak demand and competitive pricing.
- Q2 continuing net earnings declined about 10%; reported total net earnings fell more sharply, reflecting discontinued operations’ $31 million loss versus $278 million earnings a year earlier. First-half discontinued operations recorded an $89 million loss versus $874 million earnings.
- Q2 gross margin contracted 0.3 percentage points; first-half gross margin contracted 0.6 points. Q2 continuing-operations earnings margin was 7.3%, compared with 7.7%.
- Personal Systems Q2 revenue was $6,990, down 9.9%; operating margin rose to 3.5% from 2.9%. Printing revenue was $4,637, down 15.8%; operating margin declined to 17.3% from 17.8%.
- At April 30, cash and cash equivalents were $4,636; current assets were $15,385 and current liabilities $16,862. Long-term debt was $6,708 and short-term borrowings $64. Stockholders’ equity was a deficit of $4,786.
- Six-month investing cash outflow was $255; financing cash outflow was $14,009, including a $10,375 cash transfer to HPE, $2,158 of debt payments, $1,102 of share repurchases and $434 of dividends. Cash fell by $12,797 to $4,636, largely reflecting the separation and debt repayment.
Material changes and management commentary
- Both segments faced revenue declines. Personal Systems’ Q2 unit volume fell 9%, with commercial notebook growth partly offsetting weaker desktops and consumer notebooks. Printing printer unit volume fell 16%; supplies, commercial hardware and consumer hardware all declined.
- Management attributed gross-margin pressure mainly to currency and competitive pricing in Printing, partly offset by favorable commodity costs, product mix and pricing in Personal Systems.
- SG&A decreased 18.4% in Q2, reflecting lower pre-separation overhead, cost-saving measures, favorable currency and the software-asset divestiture. Restructuring charges rose to $100 million in Q2 from $7 million.
- HP says soft PC demand, extended refresh cycles, macroeconomic weakness and currency depreciation are likely to remain market headwinds for the next several quarters. Printing faces weak demand and aggressive competitor pricing. Management’s stated priorities include product innovation, operational efficiency, improved go-to-market execution and shifting product mix toward higher-value offerings.
- HP expects up to $250 million in future cash payments through fiscal 2016 for the Fiscal 2015 cost-saving plan, and approximately $150 million of separation-cost payments in the remainder of fiscal 2016. The plan’s aggregate pre-tax charges are estimated at up to $300 million.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance is provided in the supplied filing text. HP says operating cash flows, cash balances and access to capital markets are expected to cover near-term cash needs; it also notes liquidity and borrowing costs could be affected by business, market or credit-rating conditions.
- The HPE separation materially changed the company’s scale and balance sheet. HP transferred $22.2 billion of net assets and $10.4 billion of cash to HPE, and completed a final net cash transfer of $526 million. Comparisons with the prior balance sheet and cash flows should account for this transaction.
- Tax matters remain significant: HP reported $9.3 billion of unrecognized tax benefits, of which up to $3.2 billion could affect its effective tax rate if realized; the MD&A reports $2.2 billion of recorded liabilities and related interest and penalties for uncertain tax positions. HP also recorded an $883 million net tax-indemnification receivable from HPE; outcomes and timing depend on unresolved matters.
- Legal matters include ongoing Autonomy-related investigations and litigation, India customs-duty proceedings with claims and penalties, and intellectual-property disputes. HP stated that it had recorded adequate provisions and that, as of April 30, it did not consider a material loss in excess of recognized amounts reasonably possible; litigation outcomes remain uncertain.
- HP completed the U.S. portion of a divestiture of certain software assets to OpenText for $170 million; completion in other jurisdictions was expected in Q3, subject to customary conditions. HP also announced a voluntary phased-retirement program and recorded $29 million in related charges.
- A $4.0 billion committed revolving credit facility is available through April 2, 2019; HP reported covenant compliance. Uncommitted borrowing resources were $843 million. The filing says market-risk exposure had not changed materially since October 31, 2015.
Most important facts for investors to verify
- Assess revenue and margin trends on a continuing-operations basis, including constant-currency performance and the segment-specific declines.
- Separate the effects of the HPE spin-off, cash transfer and discontinued operations from underlying operating and cash-flow trends.
- Review the trajectory and cash requirements of restructuring and separation costs, and whether cost savings offset ongoing revenue pressure.
- Monitor liquidity, debt, share repurchases and the substantial tax indemnification and uncertain-tax-position exposures.
- Track developments in Autonomy-related matters, India customs proceedings and other litigation, including any changes to recorded provisions or indemnification arrangements.