Business context and reporting period
HP Inc.’s Form 10-K covers the fiscal year ended October 31, 2016; the fourth quarter ended that date. HP reports Personal Systems, Printing and Corporate Investments. Hewlett Packard Enterprise (HPE) was spun off on November 1, 2015, so HP’s continuing business is now primarily personal computing and printing. Prior-period comparisons and cash flows are affected by the separation and discontinued-operations presentation.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $48.238 billion | $51.463 billion |
| Gross profit / margin | $8.998 billion / 18.7% | $9.939 billion / 19.3% |
| Continuing operating earnings | $3.549 billion | $3.920 billion |
| Continuing net earnings | $2.666 billion | $3.718 billion |
| Net earnings, including discontinued operations | $2.496 billion | $4.554 billion |
| Diluted EPS, continuing operations | $1.53 | $2.02 |
| Cash from operating activities | $3.230 billion | $6.490 billion |
| Cash and cash equivalents at year-end | $6.288 billion | $7.584 billion |
| Total debt at year-end | $6.836 billion | $8.871 billion |
FY2016 fourth-quarter revenue was $12.512 billion, continuing net earnings were $513 million, and diluted continuing-operations EPS was $0.30. Year-end current assets were $18.468 billion versus current liabilities of $18.808 billion. Stockholders’ equity was negative $3.889 billion, primarily reflecting the $32.5 billion net-asset transfer associated with the HPE separation. HP paid $858 million in dividends and repurchased $1.161 billion of shares during FY2016.
Material changes versus the prior comparable period
- Revenue declined 6.3% year over year, or 2% on a constant-currency basis. U.S. revenue rose 1.7%, while revenue outside the U.S. fell 10.4%.
- Personal Systems revenue decreased 4.9% to $29.987 billion; operating margin improved to 3.8% from 3.2%. Commercial notebook growth was offset by declines in desktops and consumer notebooks.
- Printing revenue fell 14.0% to $18.260 billion; operating margin declined to 17.1% from 17.7%. Supplies revenue fell 15.1%, with demand, pricing, currency and the changed supplies sales model contributing.
- Gross margin decreased by 0.6 percentage points, mainly due to unfavorable currency effects. SG&A declined 19%, partly reflecting cost reductions and a $401 million gain on software-asset divestitures.
- Continuing net earnings fell despite higher pretax earnings, as the effective tax rate rose to 29.1% from negative 5.3%; FY2015 included substantial one-time tax benefits.
- Operating cash flow was lower, but the prior-year figure includes discontinued operations and is not directly comparable after the separation. FY2016 financing cash outflow included a $10.375 billion transfer to HPE, debt redemption, dividends and share repurchases.
Outlook, commentary, risks and unusual items
- Management cited ongoing PC-market and home-printing declines, weak demand, competitive pricing, currency headwinds and macroeconomic uncertainty, including Brexit. It emphasized premium and mobile PCs, commercial printing, managed print services, graphics, A3 and 3D printing, and operational efficiencies. The filing does not provide a clear numerical revenue or earnings forecast.
- The October 2016 restructuring plan is expected to run through FY2019, incur $350 million–$500 million in pretax charges and result in 3,000–4,000 employee exits.
- HP agreed to acquire Samsung’s printer business for $1.05 billion, subject to regulatory review and other closing conditions; the transaction was expected to close within 12 months of the September 2016 agreement.
- HP recorded a $179 million defined-benefit settlement charge after pension lump-sum payments. It also recognized a $401 million gain from divestitures of certain software assets to OpenText.
- HP won a $3.0 billion jury verdict against Oracle, but recorded no gain; Oracle sought a new trial and stated it would appeal. Any recovery is subject to appeal and sharing with HPE under the separation agreement.
- Tax uncertainty is significant: unrecognized tax benefits were $10.858 billion, and HP disclosed ongoing audits and litigation. The tax matters agreement with HPE includes indemnification receivables of $1.6 billion, whose ultimate amount depends on unresolved matters.
- Key risks include execution of restructuring and strategy, pricing and demand pressure, foreign exchange exposure, reliance on suppliers including Canon for certain printer components, channel and inventory management, cybersecurity, legal proceedings, and the performance of HPE under separation-related agreements. HP reported effective internal control over financial reporting and received unqualified audit opinions.
Important facts for investors to verify
- How much of the revenue and margin decline reflects underlying unit demand versus currency, competitive pricing and the supplies sales-model transition.
- Whether restructuring savings materialize and how the $350 million–$500 million estimated charges and workforce reductions affect execution and cash flow.
- The comparability of cash flow and balance-sheet figures across the HPE separation, including the use of prior-year discontinued-operations data.
- Developments in tax audits, the $10.858 billion of unrecognized tax benefits, and the recoverability and timing of HPE indemnification payments.
- The outcome and timing of the Oracle appeal, the Samsung printer-business acquisition review, and material litigation or regulatory proceedings.