HP Inc. — FY2018 Form 10-K Summary
Business context and reporting period
HP Inc. is a global provider of personal computers, printers, printing supplies, and related services. Its reportable segments are Personal Systems, Printing, and Corporate Investments. The filing covers the fiscal year ended October 31, 2018; it also reports the three months ended October 31, 2018 as fiscal Q4.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $58.472 billion | $52.056 billion |
| Gross profit / margin | $10.669 billion / 18.2% | $9.578 billion / 18.4% |
| Operating earnings from continuing operations | $4.064 billion | $3.519 billion |
| Net earnings | $5.327 billion | $2.526 billion |
| Diluted EPS | $3.26 | $1.48 |
| Cash from operating activities | $4.528 billion | $3.677 billion |
| Cash and cash equivalents at year-end | $5.166 billion | $6.997 billion |
| Total debt at year-end | $5.987 billion | $7.819 billion |
Revenue increased 12.3% year over year, or 10.1% on a constant-currency basis. Personal Systems revenue rose 13.0% to $37.661 billion; Printing revenue rose 11.1% to $20.805 billion. Segment operating margins were 3.7% for Personal Systems (up from 3.6%) and 16.0% for Printing (down from 16.8%).
Fiscal Q4 revenue was $15.366 billion, operating earnings were $1.047 billion, net earnings were $1.451 billion, and diluted EPS was $0.91. For Q4 FY2017, the corresponding reported figures were $13.927 billion, $890 million, $660 million, and $0.39.
Operating cash flow improved by $851 million year over year, primarily due to higher operating earnings and working-capital management. Investing cash outflow was $716 million; financing cash outflow was $5.643 billion, including $2.557 billion of share repurchases and $899 million of dividends paid. HP repurchased approximately $1.85 billion of debt principal and ended the year with about $3.9 billion of remaining share-repurchase authorization. Cash plus marketable debt securities was approximately $5.9 billion against $6.0 billion of debt.
Material changes, outlook, and risks
- Net earnings included a significant tax benefit: HP reported a $2.314 billion tax benefit and a negative 76.8% effective tax rate. Fiscal 2018 tax benefits included TCJA-related effects, $1.5 billion from tax-audit settlements, and $601 million from valuation-allowance releases. These items materially affect year-over-year earnings comparability.
- Interest and other expense was $1.051 billion, including a $676 million adjustment to tax-indemnification receivables and a $126 million loss on debt extinguishment. HP’s Samsung printer-business acquisition closed in November 2017 for approximately $1.051 billion and contributed to Printing revenue, expenses, and amortization.
- Management emphasized profitable PC growth, premium devices, and expansion of contractual services, managed printing, Graphics, and 3D printing. It cited PC component availability, higher commodity and logistics costs, and competitive pricing as current challenges. The filing provides no specific quantitative FY2019 revenue or earnings guidance.
- The amended restructuring plan was expected to result in 4,500–5,000 employee exits by the end of FY2019, with estimated aggregate pretax charges of approximately $700 million. HP expected about $286 million of future cash payments for cost-savings plans through FY2019.
- Key risks include intense competition and pricing pressure; supply constraints and reliance on certain single-source suppliers, including Canon for many laser printer engines and toner cartridges; currency volatility; tariffs and trade tensions, particularly between the U.S. and China; and macroeconomic uncertainty.
- HP reported $1.3 billion of recorded liabilities, interest, and penalties for uncertain tax positions, and $7.8 billion of unrecognized tax benefits. The filing also describes ongoing litigation and investigations. HP’s approximately $3.0 billion Oracle jury award was under appeal and had not been recorded as an asset or earnings; any eventual recovery is to be shared with Hewlett Packard Enterprise under the separation arrangements.
- After year-end, HP paid $422 million in connection with its acquisition of Apogee, a U.K. office-equipment dealer. The filing states the amount remained subject to customary adjustments.
Important facts for investors to verify
- How much of FY2018 earnings growth is sustainable after separating recurring operations from tax benefits, audit settlements, and other unusual items.
- Whether Personal Systems growth and pricing can offset component, commodity, and logistics cost pressures, and whether Printing can stabilize its declining operating margin.
- Cash generation and capital allocation, including the effect of repurchases, dividends, debt repayment, and the Apogee acquisition on liquidity.
- Final tax-reform accounting, future transition-tax cash payments, and outcomes of tax audits and other uncertain tax positions.
- Developments in material litigation and contingencies, especially the unrecorded Oracle award and the pending India customs proceedings.