HP Inc. Q2 FY2021 Form 10-Q Summary
Business context and reporting period
HP reported its unaudited second quarter and six-month results for the period ended April 30, 2021. The company sells personal computers and related products, printers and supplies, and related services through its Personal Systems, Printing, and Corporate Investments segments. Comparisons are year over year; the prior-year period was affected by COVID-19-related supply disruptions and weaker demand.
Financial performance
| Metric | Three months ended April 30, 2021 | Six months ended April 30, 2021 |
|---|---|---|
| Net revenue | $15.877 billion; up 27.3% | $31.523 billion; up 16.4% |
| Gross margin | 21.7%, versus 20.0% | 21.5%, versus 19.8% |
| Operating earnings / margin | $1.362 billion / 8.6% | $2.683 billion / 8.5% |
| Net earnings | $1.228 billion, versus $764 million | $2.296 billion, versus $1.442 billion |
| Diluted EPS | $0.98, versus $0.53 | $1.81, versus $0.99 |
| Operating cash flow | $2.468 billion for the six months, versus $775 million |
Higher revenue reflected strong demand for notebooks, supplies, and consumer printing, including demand associated with remote work and learning. Management attributed gross-margin improvement primarily to pricing and fewer promotions, partly offset by higher costs and product-mix effects. Six-month R&D expense rose 33.5% and SG&A rose 14.1%, mainly due to investment, variable compensation, and go-to-market initiatives.
- Personal Systems: Q2 revenue was $10.555 billion, up 27.0%; segment operating earnings were $710 million and margin was 6.7%. Notebook revenue grew strongly, while desktop revenue declined.
- Printing: Q2 revenue was $5.323 billion, up 28.0%; segment operating earnings were $951 million and margin was 17.9%, versus 13.2%. Growth spanned supplies, consumer, and commercial printing.
Liquidity, debt, and capital allocation
At April 30, 2021, HP had $3.424 billion in cash and cash equivalents, compared with $4.864 billion at October 31, 2020. Total borrowings were approximately $6.1 billion, down from $6.2 billion; the weighted-average borrowing rate was 3.9%. Current liabilities of $28.029 billion exceeded current assets of $20.091 billion by approximately $7.9 billion. HP said cash, operating cash flow, borrowing capacity, and credit facilities should be sufficient for foreseeable needs.
For the six months, investing activities used $315 million, including $252 million of capital expenditures; financing activities used $3.593 billion. HP repurchased $3.0 billion of shares and paid $489 million in dividends. It had approximately $9.7 billion remaining under repurchase authorizations. Management said it expected to continue repurchases of at least $1.0 billion per quarter in coming quarters, absent higher-return opportunities. On May 26, HP replaced its prior revolving facilities with a new $5.0 billion, five-year sustainability-linked credit facility.
Changes, outlook, risks, and unusual items
- Revenue, earnings, and margins increased substantially year over year, but comparisons benefited from COVID-19-related weakness and supply disruption in Q2 FY2020. Notebook demand and consumer printing were particularly strong; component and logistics constraints remained.
- HP recorded $128 million of discrete tax benefits in Q2, including $89 million related to an internal reorganization. The six-month effective tax rate was 12.7%, versus 15.4% a year earlier. These items contributed to reported earnings; the filing provides no numerical revenue or earnings guidance.
- The Fiscal 2020 restructuring plan is expected to reduce headcount by approximately 7,000–9,000 through fiscal 2022. HP estimates approximately $1.0 billion of total pre-tax charges and approximately $0.4 billion of future cash payments.
- Management cited pandemic uncertainty, component availability, supply-chain and logistics disruption, competitive pressures, pricing and product-mix shifts, and potential supplier concentration. HP sources most A4 and some A3 laser printer engines and toner cartridges from Canon.
- HP disclosed ongoing litigation and investigations, including printer-supplies authentication matters, patent claims, and securities litigation. HP said it had adequate provisions and that a material loss beyond amounts recognized was not reasonably possible as of April 30, 2021; outcomes remain uncertain. No potential Oracle litigation award was recorded.
- Subsequent events included a June 1, 2021 cash payment of $411 million for the acquisition of HyperX, subject to customary adjustments. HP also reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether PC and printing demand, pricing, and margin gains persist as pandemic-driven demand and prior-year comparison effects change.
- Whether component constraints, logistics disruption, and strategic inventory purchases affect HP’s ability to fulfill demand and manage working capital.
- How much reported earnings benefited from discrete tax items and whether the effective tax rate is sustainable.
- Cash generation relative to substantial share repurchases, dividends, debt maturities, restructuring payments, and the HyperX acquisition.
- Developments in material legal matters, tax audits and uncertain tax positions, and the Canon supply relationship.