HP Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020; unaudited. HP sells personal-computing products, printers and supplies, and related services. Its reportable segments are Personal Systems, Printing and Corporate Investments. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 FY2020 | Prior-year period / comparison |
|---|---|---|
| Net revenue | $14.618 billion | $14.710 billion; down 1% reported, up 1% constant currency |
| Gross profit / margin | $2.872 billion / 19.6% | $2.612 billion / 17.8% |
| Earnings from operations / margin | $865 million / 5.9% | $926 million / 6.3% |
| Net earnings | $678 million | $803 million |
| Diluted EPS | $0.46 | $0.51 |
| Operating cash flow | $1.285 billion | $862 million |
| Cash and cash equivalents | $4.205 billion at January 31 | $4.537 billion at October 31, 2019 |
| Total borrowings | $4.855 billion | $5.137 billion at October 31, 2019 |
Capital spending was $198 million. Investing activities used $498 million and financing activities used $1.119 billion; cash decreased $332 million during the quarter. HP attributed the year-over-year increase in operating cash flow mainly to working-capital management. At January 31, current assets were $17.477 billion and current liabilities were $23.867 billion. HP also had a $4.0 billion committed revolving credit facility available through March 2023 and reported compliance with its financial covenants.
Material changes and segment performance
- Personal Systems: Revenue rose 2.4% to $9.892 billion (3.8% constant currency). Segment operating earnings increased 61.5% to $662 million; operating margin expanded to 6.7% from 4.2%. Commercial revenue grew 7.5%, while consumer revenue fell 6.5%. Management cited lower supply-chain costs, partly offset by lower average selling prices and increased investment.
- Printing: Revenue fell 6.6% to $4.724 billion (5.8% lower constant currency); segment operating earnings declined 8.2% to $754 million, with margin at 16.0% versus 16.2%. Supplies revenue declined 6.9% and printer unit volume fell 10.4%. Management cited weaker demand and competitive pressure.
- Consolidated gross margin improved 1.8 percentage points, primarily on higher Personal Systems margins and lower supply-chain costs. Consolidated operating earnings nevertheless declined, with restructuring charges rising to $291 million from $55 million and R&D and SG&A spending also increasing.
Outlook, management commentary and risks
- The filing provides no quantitative revenue or earnings guidance. HP said it expected current cash, operating cash flow, borrowings and available facilities to fund operations, planned capital spending, debt service, benefit funding, repurchases and dividends.
- HP’s Fiscal 2020 Plan is intended to simplify its operating model and reduce costs through fiscal 2022. It targets a reduction of approximately 7,000–9,000 employees and about $1.0 billion of pretax charges. HP expected approximately $1.0 billion of future cash payments for restructuring plans, including $477 million in fiscal 2020.
- On February 22, 2020, the Board increased the share-repurchase authorization to $15.0 billion and announced a target to return approximately $16.0 billion through repurchases and dividends in fiscal 2020–2022. HP expected to repurchase at least $8.0 billion of shares in the 12 months following its 2020 annual meeting.
- After quarter-end, Xerox commenced an unsolicited offer on March 2, 2020, consisting of $18.40 cash and 0.149 Xerox shares for each HP share. HP’s Board recommended that shareholders reject the offer. HP warned of significant related costs, management distraction, potential litigation and uncertainty. HP also adopted a shareholder rights plan with a 20% ownership trigger; the rights were scheduled to expire February 20, 2021.
- HP identified declining PC-client and home-printing markets, pricing and competitive pressures, foreign-exchange and tariff headwinds, and distribution and inventory-management challenges. It noted that it sources most A4 and part of its A3 laser-printer engines and toner cartridges from Canon.
- HP said the novel coronavirus outbreak could disrupt its operations and those of manufacturing partners and suppliers through facility closures, quarantines, and travel or logistics restrictions. HP expected the impact to be temporary but said its duration and broader effects were uncertain.
- Contingencies include a pending appeal of a roughly $3.0 billion Oracle judgment in HP’s favor; HP has not recognized the potential recovery. HP stated it had recorded adequate provisions for litigation and that, as of January 31, it was not reasonably possible that material losses exceeded recorded amounts. Gross unrecognized tax benefits were $975 million.
Important facts for investors to verify
- Whether the Printing and supplies revenue declines continue, and whether Personal Systems margin gains persist amid pricing pressure.
- How much of the quarter’s stronger operating cash flow reflects sustainable performance versus working-capital timing.
- Restructuring execution, total cash costs, workforce reductions and whether anticipated savings materialize.
- The financial and operational effects of the Xerox offer, proxy contest, rights plan and announced capital-return targets.
- The duration and business impact of COVID-19-related supply-chain and operating disruptions, which were uncertain at the filing date.
- Developments in material legal and tax matters, including the Oracle appeal and uncertain tax positions.