HP Inc. 2018 Q2 Form 10-Q Summary
Business context and reporting period
HP Inc. reported unaudited results for the three and six months ended April 30, 2018. HP sells personal computers and related products and services, and printing hardware, supplies and services. Its reporting segments are Personal Systems, Printing and Corporate Investments. The November 2017 acquisition of Samsung’s printer business is included in Printing.
Key financial metrics
| Metric | Three months ended April 30, 2018 | Six months ended April 30, 2018 |
|---|---|---|
| Net revenue | $14.003 billion; up 13.1% year over year (9.9% constant currency) | $28.520 billion; up 13.8% (11.4% constant currency) |
| Gross profit / margin | $2.702 billion / 19.3%, versus 19.2% | $5.284 billion / 18.5%, unchanged |
| Operating earnings / margin | $964 million / 6.9%, versus $818 million / 6.6% | $1.937 billion / 6.8%, versus $1.674 billion / 6.7% |
| Pretax earnings | $83 million | $988 million |
| Net earnings / diluted EPS | $1.058 billion / $0.64 | $2.996 billion / $1.81 |
| Operating cash flow | Not reported separately for the quarter | $2.046 billion, versus $1.222 billion |
Segment results, quarter: Personal Systems revenue was $8.762 billion, up 14.5%, and operating earnings were $331 million, up 35.7%. Printing revenue was $5.241 billion, up 10.9%, and operating earnings were $839 million, up 2.3%. Printing’s operating margin fell to 16.0% from 17.3%; Personal Systems’ rose to 3.8% from 3.2%.
At April 30, 2018, cash and cash equivalents were $4.247 billion, down from $6.997 billion at October 31, 2017. Current assets were $19.433 billion and current liabilities $23.127 billion. Short-term borrowings were $1.617 billion and long-term debt $4.494 billion; total borrowings were approximately $6.1 billion, compared with $7.8 billion at fiscal year-end. HP had a $4.0 billion revolving facility available through March 2023, an additional $1.5 billion facility available through November 2018, and $1.0 billion of commercial paper outstanding.
Material changes versus prior comparable periods
- Quarterly revenue growth was broad-based, led by Personal Systems notebooks and desktops and Printing supplies and commercial hardware; favorable currency movements also contributed.
- Operating earnings increased, but pretax earnings fell to $83 million from $754 million, principally as interest and other expense rose to $881 million from $64 million. The current-quarter amount included a $671 million adjustment to tax indemnification receivables and a $126 million debt-extinguishment loss.
- Net earnings rose despite lower pretax earnings because HP recorded a $975 million income tax benefit, versus a $195 million tax provision a year earlier. Six-month tax benefit was $2.008 billion, versus a $359 million provision.
- Cash flow from operations improved year over year. Investing used $1.102 billion, including $1.020 billion for the Samsung printer acquisition; financing used $3.694 billion, including $2.026 billion of debt payments, $1.263 billion of share repurchases and $457 million of dividends.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or EPS guidance is stated in the provided filing text. Management said operating cash flow, cash balances and capital-market access were expected to cover near-term cash needs.
- Management cited flat PC and home-printing markets, competitive pricing, higher memory and logistics costs, and uncertainty about passing cost increases to customers. Printing also faces commodity-cost pressure and depends on Canon for most A4 and some A3 laser printer engines and toner cartridges.
- HP’s board amended the Fiscal 2017 restructuring plan on May 26, 2018: expected employee exits increased to approximately 4,500–5,000 by fiscal 2019 from about 4,000, and estimated aggregate pretax charges rose to approximately $700 million from $500 million. HP expected approximately $346 million of future cash payments for cost-savings plans through fiscal 2019.
- Tax reform accounting remained provisional. HP reported a provisional $3.1 billion gross transition-tax estimate, expected to offset more than half with tax attributes and elect payment over eight years. It also recorded substantial tax benefits from audit and litigation resolutions; the final impact of tax reform could differ materially from estimates. Unrecognized tax benefits were $8.0 billion, and HP said up to $6.4 billion could be reduced within 12 months, with associated gain contingencies resulting in a net release of $822 million.
- HP reported an approximately $3.0 billion jury award against Oracle, but the award was under appeal and no gain was recorded. HP said any recovery would be shared with Hewlett Packard Enterprise under the separation agreement.
- Other legal matters include copyright-levy proceedings, employment class actions, India customs-duty proceedings and printer-firmware litigation. HP stated it had recorded adequate provisions and did not believe a material loss above amounts recognized was reasonably possible as of April 30, 2018; litigation outcomes remain uncertain.
- HP reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported net income and EPS reflects recurring operations versus discrete tax benefits, including audit settlements and provisional tax-reform accounting.
- The final tax-reform measurement, transition-tax cash payments and possible changes in deferred-tax assets, liabilities and valuation allowances.
- Whether revenue growth and segment profitability persist as commodity, logistics and competitive pricing pressures affect margins, particularly in Printing.
- Cash requirements for share repurchases, dividends, debt maturities, restructuring and the Samsung integration, alongside HP’s reduced cash balance and current-liability position.
- Outcomes and potential financial effects of the Oracle appeal and other litigation, and the revised restructuring plan’s cost, timing and expected savings.